HAWAIIAN ELECTRIC INDUSTRIES, INC. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing covers HEI and its subsidiaries, principally Hawaiian Electric’s regulated utilities and American Savings Bank (ASB). Unless noted, financial figures below are consolidated HEI amounts; dollar amounts are in millions.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $831.2 | $867.7 | $2,412.0 | $2,536.8 |
| Operating income | $90.1 | $91.7 | $243.1 | $246.9 |
| Net income attributable to common stock | $48.2 | $47.7 | $122.5 | $124.8 |
| Diluted EPS | $0.48 | $0.49 | $1.23 | $1.29 |
| Dividend per common share | $0.31 | $0.31 | $0.93 | $0.93 |
Consolidated operating margin was approximately 10.8% in Q3 and 10.1% for the nine months, compared with approximately 10.6% and 9.7%, respectively, in 2012. These ratios are calculated from reported operating income and revenue.
For the nine months, cash from operations was $246.7, investing cash flow was negative $363.4, and financing cash flow was positive $112.1. Capital expenditures were $247.4. Cash and cash equivalents were $215.0 at September 30, versus $219.7 at year-end 2012.
At September 30, HEI reported total assets of $10.43 billion and shareholders’ equity of $1.66 billion. Non-bank short-term borrowings were $131.3 million and non-bank long-term debt was $1.42 billion; other bank borrowings were $239.6 million. Deposit liabilities of $4.31 billion are bank funding, not conventional corporate debt. HEI had a $125 million revolving credit facility, undrawn at quarter-end. The utilities separately reported $1.15 billion of long-term debt and $73.2 million of short-term borrowings, with a $175 million undrawn credit facility.
Material changes and segment trends
- Utilities: HEI electric-utility revenue declined about 5% in the first nine months, primarily reflecting lower fuel prices and lower kilowatt-hour sales. Utility operating income fell to $186.0 million from $193.6 million; utility net income for common stock was $90.9 million versus $95.1 million. Lower fuel expense was partly offset by higher operating and maintenance costs and depreciation. Utility kilowatt-hour sales were 6.746 billion, down 124 million year over year.
- Bank: ASB’s nine-month net income increased to $45.4 million from $44.3 million. Loan-loss provision declined to $1.0 million from $9.5 million, while net interest income decreased to $131.9 million from $135.1 million. Net interest margin contracted to 3.77% from 3.98%; the efficiency ratio increased to 62% from 59%.
- HEI’s nine-month net income for common stock declined 2%, and diluted EPS declined 5%, reflecting lower operating income, lower allowance for funds used during construction, higher interest expense and a larger share count. The third-quarter net income comparison benefited in part from lower taxes.
- ASB’s loans held for investment, net, grew to $4.01 billion from $3.74 billion at year-end; deposits increased to $4.31 billion from $4.23 billion. Nonaccrual loans decreased to $50.8 million from $64.9 million at year-end. ASB sold its $25 million credit-card portfolio in August and recorded a $2.3 million gain.
Outlook, management commentary and risks
- HEI said it currently expects to maintain its dividend at the present level, subject to quarterly Board review. No specific earnings guidance is provided in the filing.
- The utilities’ 2013–2017 forecast calls for approximately $2.9 billion of net capital expenditures and annual rate-base growth of 5%–10%. Management expects a continuing gap between actual and PUC-allowed utility returns, although it expects earned ROACE to improve gradually during 2014–2016. Utility sales are expected to decline further in 2013 and 2014; 2013 O&M expense was projected at approximately 2% above 2012.
- ASB management expects its low-cost funding base and lower-risk profile to support performance relative to industry peers, while noting pressure from low interest rates, competition for deposits and changing regulation. ASB was reported as well-capitalized, with a 9.3% leverage ratio, 11.5% Tier 1 risk-based capital ratio and 12.5% total risk-based capital ratio.
- Regulatory outcomes remain important: the PUC was reviewing utility decoupling mechanisms, and Maui Electric’s final rate order reduced its approved annual revenue increase to $5.3 million from the $13.1 million interim increase and required customer refunds. A Hawaiian Electric rate-case filing was anticipated in 2014.
- Environmental compliance could require material future spending, but amounts were not determinable. The utilities faced a DOJ inquiry concerning potential Clean Air Act issues at two plants; they could not estimate any settlement. Maui Electric had a $3.6 million reserve for investigation and estimated cleanup costs at a former Molokai generation site, subject to further investigation.
- Other risks include fuel and power-supply costs, renewable-project execution and permitting, interest-rate exposure at ASB, credit quality, and the possible need to consolidate certain independent power producers if further information changes the accounting assessment. An ASB overdraft-fee class action remained at a preliminary stage, with outcome and reasonably possible loss not determinable.
Unusual items and subsequent events
- HEI recorded a $3.1 million third-quarter out-of-period income-tax benefit, including $2.7 million for the utilities, from correction of deferred-tax balances related to plant and equipment. Management said the adjustment was not material to the current or prior periods.
- In October 2013, the utilities issued $236 million of unsecured senior notes. Proceeds were used in part to redeem $166 million of revenue bonds; remaining proceeds were or will be used for capital expenditures or reimbursement of capital spending.
- HEI’s March 2013 equity forward transactions relate to 7 million shares and could provide approximately $175 million upon physical settlement. HEI anticipated physical settlement, but cash or net-share settlement was also permitted; the transactions were required to be settled by March 25, 2015.
Important facts for investors to verify
- Whether lower utility sales, fuel-cost trends and higher O&M continue to affect utility earnings and returns.
- PUC decisions on decoupling, rate cases, cost recovery and renewable projects, including the timing and amount of utility revenue recovery.
- ASB’s loan growth, credit trends, net interest margin, deposit funding costs and sensitivity to rising interest rates.
- Potential costs or outcomes from environmental matters, the DOJ inquiry and the Molokai site investigation.
- Terms, use of proceeds and effects on leverage and share count from the October utility debt issuance and eventual settlement of HEI’s equity forwards.