HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q3 FY2023

Hawaiian Electric Industries, Inc. (HEI) — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. This combined filing covers HEI and its wholly owned utility subsidiary, Hawaiian Electric; amounts below distinguish consolidated HEI from the utility where relevant. Financial statements are unaudited.

Financial performance

HEI consolidated	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Revenue	$901.9 million	$1,042.2 million	$2,725.8 million	$2,722.9 million
Operating income	$75.1 million	$102.1 million	$261.6 million	$288.1 million
Net income attributable to common stock	$41.1 million	$62.1 million	$150.4 million	$183.8 million
Diluted EPS	$0.37	$0.57	$1.37	$1.68

Third-quarter revenue declined 13%, mainly because lower fuel costs reduced utility revenues; fuel and purchased-power costs are largely passed through to customers. Nine-month revenue was essentially flat.
Third-quarter operating income fell 26% and common-stock net income fell 34%. Nine-month operating income declined 9% and common-stock net income declined 18%, reflecting weaker utility and bank results, increased “other” losses, and the prior-year gain on sale of an equity-method investment.
Electric utility: Q3 revenue was $795.0 million, operating income $71.4 million, and common-stock net income $43.5 million, versus $956.0 million, $79.0 million, and $49.8 million, respectively, in Q3 2022. Nine-month utility revenue was $2.420 billion and common-stock net income $135.8 million, compared with $2.484 billion and $140.3 million.
American Savings Bank (ASB): Q3 net income was $11.4 million versus $20.8 million; nine-month net income was $50.1 million versus $62.1 million. Q3 net interest margin was 2.70%, down from 2.96%; nine-month NIM was 2.77%, down from 2.87%. Higher loan yields and loan growth were outweighed by sharply higher deposit and borrowing costs, credit-loss provisions, and expenses.

Cash flow, debt and liquidity

For the first nine months, HEI generated $475.1 million of operating cash flow, used $369.6 million in investing activities, and received $371.9 million from financing activities. Capital expenditures were $342.4 million.
At September 30, HEI had $667.1 million of cash and cash equivalents and $15.2 million of restricted cash. HEI’s long-term debt, excluding bank debt, was $2.945 billion; ASB had $750 million of other bank borrowings. HEI’s consolidated total assets were $16.992 billion.
Hawaiian Electric had $274.9 million of cash and cash equivalents, $2.034 billion of long-term debt including current maturities, and $5.518 billion of net property, plant and equipment. Its nine-month operating cash flow was $406.1 million and capital expenditures were $334.5 million.
After wildfire-related credit downgrades, HEI and Hawaiian Electric drew their revolving credit facilities in full: $175 million and $200 million, respectively. No committed line capacity remained available at quarter-end, and neither had commercial paper outstanding. The companies reported compliance with financial covenants.
ASB had $8.224 billion of deposits and $750 million of borrowings. Management reported approximately $1.9 billion of unused Federal Home Loan Bank capacity and approximately $3 billion of total liquidity sources. ASB was “well capitalized”; its Tier 1 leverage, common equity Tier 1, Tier 1 capital, and total capital ratios were 7.7%, 12.2%, 12.2%, and 13.3%, respectively.
HEI’s balance-sheet cash was supported in part by revolver draws; management cautioned that below-investment-grade ratings and wildfire uncertainty could constrain future financing access. Management stated that available cash and expected operating cash flow were adequate for near-term needs, while identifying additional potential liquidity measures.

Material changes and significant events

Maui windstorm and wildfires: The August 8 fires caused extensive destruction and fatalities. The cause of the later Afternoon Fire had not been determined as of the filing; HEI stated that its power lines in the ignition area had been de-energized for more than six hours. Investigations and multiple lawsuits were ongoing.
HEI reported $27.6 million of incremental wildfire-related expenses through September 30, including $10.8 million in legal expenses; the Utilities also recorded $8.0 million of wildfire-related capital costs. Hawaiian Electric said service had been restored to more than 95% of affected Maui homes and businesses, with equipment replacement continuing.
In a subsequent event announced November 8, Hawaiian Electric pledged up to $75 million to the One ‘Ohana humanitarian fund. The Utilities recorded a $75 million contribution liability and an equal insurance receivable at September 30, deeming recovery under excess liability insurance probable. The contribution is not an admission of fault. Further potential wildfire losses could not be reasonably estimated and could be material.
The company disclosed $165 million of excess liability insurance for third-party claims, potentially subject to a retention of up to $1.5 million. Separately, utility property insurance has a $500 million policy limit for specified utility-owned non-generating assets, with a $1 million retention. Timing and amount of property-insurance recoveries were not determinable.
Credit agencies downgraded HEI and Hawaiian Electric, including to below-investment-grade ratings. HEI suspended its common cash dividend after the second-quarter payment; ASB also suspended dividends to HEI. The filing cites preserving liquidity and supporting restoration and operations as the reasons.
Utility kWh sales fell 2.5% in Q3 year over year, including an 8.1% decrease on Maui. Management attributed lower use to the fires, energy efficiency and distributed resources, as well as elevated electricity prices. Decoupling limits the direct effect of sales volumes on utility revenue, though sales can affect customer rates and cash-flow timing.

Outlook, risks and contingencies

No company-wide earnings guidance or quantified full-year financial forecast is stated in the provided filing text. Management expects significant wildfire-related expenditures and says the rebuilding cost and potential liability remain uncertain. The Utilities sought PUC approval to defer certain incremental non-labor wildfire costs; approval was pending, and no such costs had been deferred as of September 30.
The Utilities expect their goal to cut generation carbon emissions 70% by 2030 to be achieved later than originally planned, citing delayed or cancelled renewable projects, supply-chain and cost pressures, and reduced financing access. They said they continue to expect to meet or exceed statutory renewable portfolio standards.
ASB reported that 87% of deposits were FDIC-insured or fully collateralized, while higher rates, core-deposit outflows, funding costs and potential recession could pressure NIM and loan quality. The bank’s securities portfolio had $350.2 million of after-tax unrealized losses in accumulated other comprehensive loss at September 30; management attributed these mainly to interest-rate changes.
Other risks include wildfire-related litigation and possible regulatory consequences; insurance adequacy and access to capital; PUC decisions on cost recovery; extreme weather; fuel-price volatility; and renewable-project delays. The PUC temporarily suspended the Utilities’ earnings-sharing mechanism in August 2023 pending further notice.

Important facts for investors to verify

Progress and findings of wildfire investigations, lawsuits, and any quantified exposure beyond the One ‘Ohana contribution; also verify whether insurance coverage and recoveries prove adequate and timely.
HEI and Hawaiian Electric liquidity, refinancing options, credit-rating developments, and the duration and implications of dividend suspensions.
PUC decisions on wildfire-cost deferrals and recovery, the One ‘Ohana fund, and other regulatory mechanisms that could affect customer rates and utility cash flows.
ASB deposit trends, funding costs, capital and liquidity ratios, securities-related losses, and loan delinquencies and credit-loss reserves.
Renewable-project execution, PUC approvals, and any further changes to emissions targets or renewable portfolio compliance expectations.