Business context and reporting period
Hawaiian Electric Industries, Inc. (HEI) filed a combined 10-K with Hawaiian Electric Company, Inc. for the fiscal year ended December 31, 2013. HEI is a Hawaii-based holding company whose principal businesses are regulated electric utilities and American Savings Bank (ASB). The utilities serve about 95% of Hawaii’s population; ASB is a Hawaii community bank.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| HEI revenue | $3.238 billion | $3.375 billion |
| HEI operating income | $315.4 million | $284.2 million |
| HEI net income attributable to common stock | $161.5 million | $138.7 million |
| HEI diluted EPS | $1.62 | $1.42 |
| HEI common dividend per share | $1.24 | $1.24 |
| Operating cash flow | $327.1 million | $234.5 million |
| Investing cash flow | ($563.8 million) | ($427.0 million) |
| Financing cash flow | $237.0 million | $141.9 million |
| Cash and cash equivalents at year-end | $220.0 million | $219.7 million |
| Total assets at year-end | $10.34 billion | $10.15 billion |
Utility segment: Revenue was $2.980 billion, down from $3.109 billion; net income for common stock rose to $122.9 million from $99.3 million. Return on average common equity was 8.0%. Electricity sales declined about 1.5% to 9.07 billion kWh. Utility long-term debt, net, was $1.207 billion; debt was 42.8% of utility capitalization.
Bank segment: ASB net income was $57.5 million versus $58.6 million. Net interest margin declined to 3.74% from 3.93%. Loans held for investment, net, increased 10% to $4.11 billion; nonaccrual loans fell to $48.5 million, or 1.2% of loans, from $64.9 million, or 1.7%. The allowance for loan losses was $40.1 million. ASB had $4.37 billion in deposits and $244.5 million in other borrowings at year-end; these are bank funding liabilities, not HEI parent debt.
HEI parent and liquidity: HEI had $105.5 million of commercial paper and $275 million of long-term debt, and an undrawn $125 million credit facility. Hawaiian Electric had no commercial paper outstanding at year-end and an undrawn $175 million credit facility. ASB reported about $1.1 billion of unused FHLB borrowing capacity. HEI’s dividend payout ratio was 76%.
Material changes versus the prior comparable period
- HEI common net income increased about 16% and diluted EPS about 14%; the utilities’ common net income increased about 24%. A major comparison factor was the utilities’ 2012 write-down of $40 million in project costs, approximately $24 million after tax.
- HEI revenue fell about 4%, primarily reflecting lower utility fuel prices and electricity sales, with fuel-cost adjustment mechanisms passing cost changes through to customers.
- ASB earnings edged lower as reduced net interest and noninterest income and higher operating expenses outweighed a sharp decline in loan-loss provisions. Its loan portfolio grew while nonaccrual loans and net charge-offs improved.
- Operating cash flow increased, but investing outflows also grew, primarily because of utility capital spending, loan growth, and securities activity. Utility capital expenditures were $342.5 million, compared with $310.1 million.
- HEI issued shares, including settlement of 1.3 million shares under an equity forward, increasing year-end shares outstanding to 101.3 million from 97.9 million.
Outlook, management commentary, risks and unusual items
- Management provided no specific earnings guidance. It projected relatively flat utility O&M expense in 2014 and approximately $360 million of utility net capital expenditures in 2014, within a forecast of $1.1 billion for 2014–2016. Management expected $59 million of company pension contributions in 2014.
- Management’s strategy emphasizes grid and infrastructure investment, energy efficiency, and renewable generation. The utilities reported an 18% renewable portfolio standard measure for 2013 excluding demand-side management savings and said they believed they were on track for the 2015 target. The statutory target is 40% renewable energy by 2030. The filing estimates fossil fuel oil will supply 66% of net energy generated or purchased in 2014.
- Regulatory outcomes are significant uncertainties. The PUC’s May 2013 Maui Electric rate decision approved a $5.3 million annual revenue increase, $7.8 million below the interim increase; Maui Electric recorded a $7.6 million charge and refunded customers about $9.7 million, including interest. A February 2014 PUC order also modified utility decoupling calculations and the rate applied to revenue-balancing-account balances.
- In 2013, HEI recorded a $3.1 million out-of-period income tax benefit, including $2.7 million related to the utilities; management said it was not material to current or prior periods. ASB’s credit-card portfolio sale generated a $2.3 million gain, while the sale and the Durbin Amendment reduced bank fee income.
- Environmental and legal contingencies include a Department of Justice inquiry into potential Clean Air Act permitting violations at two neighbor-island plants; the companies could not estimate any settlement. Maui Electric had a $3.6 million reserve for investigation and estimated cleanup at a former site, with final costs dependent on further investigation.
- Major risks include PUC decisions and cost recovery, renewable project timing and grid reliability, fuel and purchased-power dependence, interest-rate and credit risks at ASB, Hawaii’s economic and geographic concentration, and uninsured catastrophe exposure. Utility transmission and distribution assets, estimated to have a $6 billion replacement value, were uninsured; the utilities also lacked business-interruption insurance.
Important facts for investors to verify
- Whether utility rate cases and decoupling changes allow the utilities to recover costs and approach authorized returns; 2013 utility returns remained below allowed levels for Hawaiian Electric and Hawaii Electric Light.
- Whether the projected utility capital program, renewable projects, and 2014 funding needs remain on schedule and within budget.
- Whether ASB can sustain margins and credit quality as rates change, commercial and home-equity lending grow, and regulatory fee changes take effect.
- The eventual cost and outcome of the Clean Air Act inquiry, the former Molokai site remediation, and other environmental and regulatory matters.
- HEI’s ability to maintain its $1.24 annual dividend while funding capital investment, debt maturities, and pension obligations.