Hawaiian Electric Industries, Inc. (HEI) — Q3 2021 Form 10-Q
Business context and reporting period: Combined quarterly filing for HEI and its wholly owned electric utility subsidiary, Hawaiian Electric, for the quarter and nine months ended September 30, 2021. HEI’s businesses include the regulated electric utilities and American Savings Bank (ASB). Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| HEI revenue | $756.9 | $641.4 | $2,080.1 | $1,927.6 |
| HEI operating income | $97.3 | $99.6 | $297.2 | $230.8 |
| HEI net income attributable to common stock | $63.4 | $65.0 | $191.6 | $147.3 |
| HEI diluted EPS | $0.58 | $0.59 | $1.75 | $1.35 |
| Hawaiian Electric net income attributable to common stock | $50.3 | $60.1 | $135.6 | $126.3 |
| ASB net income | $19.3 | $12.2 | $79.1 | $41.9 |
- Period comparisons: HEI revenue rose 18% in Q3 and 8% year to date. Q3 operating income fell 2%, while nine-month operating income increased 29%. Q3 common-stock earnings declined 2%; nine-month earnings increased 30%.
- Utility results: Q3 revenue increased to $679.5 from $562.6, but operating income decreased to $75.2 from $88.5. For nine months, operating income rose to $212.0 from $200.3. Utility fuel and purchased-power costs rose substantially, with much of the cost change passed through customer recovery mechanisms.
- Bank results and margin: ASB’s nine-month earnings benefited from a $22.0 provision recovery for credit losses, versus a $39.5 provision in 2020, reflecting improved outlook and credit results. ASB net interest margin was 2.90% in Q3 and 2.94% year to date, down from 3.12% and 3.34%, respectively.
- Cash flow: HEI generated $267.2 of operating cash in the first nine months, versus $312.3 in 2020; investing used $984.8 and financing provided $596.0. Hawaiian Electric generated $198.3 of operating cash, versus $245.0; utility capital expenditures were $203.7, versus $267.5.
- Balance sheet and liquidity: HEI had $15.76 billion in assets, $227.9 cash and cash equivalents, and $2.245 billion of non-bank long-term debt at September 30. HEI also had $92 million of commercial paper outstanding. Hawaiian Electric had $1.676 billion of long-term debt, no short-term borrowings, and $36.5 cash. HEI and Hawaiian Electric had $175 million and $200 million of undrawn revolving credit capacity, respectively; combined available committed capacity net of commercial paper was approximately $283 million. ASB deposits were $8.0 billion, and its unused FHLB borrowing capacity was approximately $2.0 billion.
- Dividends: HEI increased its quarterly dividend from $0.33 to $0.34 per share in 2021. The nine-month payout ratio was 58%; management said it expected to maintain the current dividend, subject to quarterly Board review.
Material changes, outlook and risks
- Q3 utility earnings were affected by higher fuel and purchased-power costs, operating expenses and a change in the timing of revenue recognition. The timing change spreads target revenues more evenly through the year; management said annual target revenues were unchanged. Utility kWh sales rose 4.4% year over year but remained 9.2% below Q3 2019 levels.
- ASB’s loan and investment balances shifted as deposits grew: deposits increased 8% from year-end, while net loans declined 4% and investment securities increased 40%. Low rates and a flatter yield curve pressured margins. Delinquencies increased to 0.37% from 0.31% a year earlier, while annualized net charge-offs declined to 0.08% from 0.41%.
- The new performance-based regulation framework took effect June 1, 2021 and provides a five-year multi-year rate period without general rate cases. The PUC had not yet approved the utilities’ proposed 2022 revenue adjustments; the fall filing proposed $22.9 million net ARA revenues for 2022 and a separate $96.2 million net incremental amount for collection through RBA tariffs, subject to approval.
- Management expected Hawaii’s economy and tourism to improve, but noted Delta-variant uncertainty and seasonality. The utilities forecast up to $1.2 billion of net capital expenditures for 2021–2023. The utility’s stated goals include Hawaii’s 100% renewable-energy target by 2045; execution depends on project approvals, interconnection, permitting, third parties and adequate replacement capacity.
- Key utility issues include the scheduled September 2022 expiration of the AES Hawaii PPA and coal plant retirement, with replacement resources and demand-response measures still progressing. The PUC’s approval of the Hawaiian Electric credit facility extension was being sought. The PUC also required tracking of consumer costs associated with renewable-project delays.
- The utilities recorded $28.7 million of COVID-19-related regulatory assets, with recovery to be determined in a later proceeding; management considered recovery probable. Customer arrears and collection timing remained a liquidity watch item, although management said collections had not materially impaired liquidity. Approximately $39 million of utility receivables were 30 days past due; about 64% of past-due amounts were on payment plans.
- Contingencies include environmental remediation reserves of $10.4 million for the Pearl Harbor PCB matter and $2.7 million for the former Molokai generation site. The filing also describes pending disputes and regulatory proceedings, including Hu Honua and MNEP matters; management did not expect aggregate legal liabilities to be material to financial position but could not rule out period-specific effects.
- HEI’s accumulated other comprehensive loss increased to $40.1 million from $1.3 million, principally reflecting unrealized losses on available-for-sale securities. ASB said its securities remained investment grade and it did not consider the unrealized losses to represent credit losses. Both registrants reported effective disclosure controls.
Management’s outlook and forward-looking statements are subject to risks including COVID-19 and tourism trends, fuel prices, interest rates, credit quality, regulatory decisions and cost recovery, renewable-project delays, reliability and capacity constraints, severe weather, cybersecurity, and access to capital. The filing provides no company-wide numerical earnings guidance.
Important facts for investors to verify
- Whether the PUC approves proposed 2022 ARA/RBA collections and recovery of deferred COVID-19 costs.
- Whether ASB’s credit quality, allowance releases and net interest margin remain consistent with current results as economic conditions and interest rates change.
- Progress, cost and timing of renewable projects and demand-response resources relative to the AES PPA expiration and coal plant retirement.
- Utility customer arrears, payment-plan performance and cash-collection trends, alongside planned capital spending and financing needs.
- Developments in environmental reserves and pending litigation or regulatory proceedings, and the market-value sensitivity of ASB’s securities portfolio.
- HEI’s ability to sustain its dividend while funding utility investment and managing debt; the filing states the dividend expectation is subject to Board review.