Hawaiian Electric Industries, Inc. (HEI) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. HEI is a Hawaii-based holding company with electric utility, banking (American Savings Bank, or ASB) and other businesses. The combined filing also reports Hawaiian Electric Company, Inc. (the regulated utility subsidiary) separately. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- HEI, third quarter: Revenue was $1,042.2, up 38% year over year, largely reflecting higher electric utility fuel and purchased-power costs passed through to customers. Operating income rose 5% to $102.1; net income attributable to common stock fell 2% to $62.1, or $0.57 per diluted share versus $0.58.
- HEI, nine months: Revenue was $2,722.9, up 31%; operating income declined 3% to $288.1 and common net income declined 4% to $183.8, or $1.68 per diluted share versus $1.75. The period included an $8.1 gain on sale of an equity-method investment.
- Utility results: Hawaiian Electric’s Q3 revenue rose to $956.0 from $679.5, while common net income was $49.8 versus $50.3. Nine-month revenue increased to $2,483.6 from $1,846.2 and common net income rose to $140.3 from $135.6. Q3 operating income was $79.0, up from $75.2. Higher fuel and purchased-power costs substantially increased both revenue and expense.
- Bank results: ASB Q3 net income increased to $20.8 from $19.3, helped by higher net interest income ($65.7 versus $60.3). Nine-month net income decreased to $62.1 from $79.1, mainly because the prior-year period benefited from a much larger release of credit-loss reserves and higher noninterest income. Q3 net interest margin was 2.96%, versus 2.90% a year earlier; nine-month margin was 2.87%, versus 2.94%.
- Cash flow: HEI generated $213.0 of operating cash in the first nine months, down from $267.2. Investing used $794.8, including utility capital spending and bank loan and securities investment; financing provided $449.5. Hawaiian Electric generated $124.2 from operations versus $198.3 and used $225.9 for capital expenditures.
- Liquidity and debt: At September 30, HEI had $175.3 of cash and $171.1 of nonbank short-term borrowings; nonbank long-term debt was $2,430.3. ASB had $8,258.9 of deposits, $409.0 of other bank borrowings, and approximately $1.9 billion of unused FHLB borrowing capacity. HEI and Hawaiian Electric had $175 million and $200 million, respectively, available under revolving facilities, with no facility borrowings; commercial paper outstanding was approximately $74 million and $98 million, respectively. Management said liquidity was adequate for expected needs.
- Utility capitalization and returns: Hawaiian Electric reported $1,736.7 of long-term debt including current maturities and $97.5 of short-term borrowings. Its trailing 12-month rate-making ROACE was 9.58% at Hawaiian Electric, 7.38% at Hawaii Electric Light and 8.48% at Maui Electric, compared with a 9.50% authorized return for each.
- Balance sheet and comprehensive income: HEI total assets were $16,264.9 at September 30, up from $15,822.6 at year-end 2021; shareholders’ equity declined to $2,162.9 from $2,390.9. The main drag was a $301.0 nine-month other comprehensive loss, chiefly unrealized losses on ASB’s available-for-sale securities. ASB’s after-tax unrealized securities loss in accumulated other comprehensive loss was $340.3, versus $32.0 at year-end 2021; management attributed this to interest-rate changes, not credit deterioration.
Material changes versus prior comparable periods
- Elevated fuel prices drove a sharp rise in utility revenue and fuel expense: the reported average fuel oil cost per barrel was $166.79 in Q3 2022 versus $86.77 in Q3 2021. Fuel costs are generally passed through to customers, but high bills can pressure collections and affordability.
- Utility kWh sales increased 1.0% in Q3 and 1.2% for the first nine months, reflecting economic and tourism recovery. Decoupling means sales volumes do not directly determine utility revenues, though they can affect customer rates per kWh.
- ASB’s loans held for investment, net, grew 9% from year-end to $5,617.0. Deposit liabilities rose 1% to $8,258.9, while other bank borrowings increased to $409.0 from $88.3. Higher rates lifted quarterly net interest income, but mortgage banking income and nine-month bank earnings were lower.
- Utility operating cash flow fell as fuel inventory purchases and customer receivables increased. HEI’s securities-related comprehensive loss reduced equity despite positive net income.
Outlook, risks, contingencies and unusual items
- Outlook and investment: Management expected economic conditions to remain relatively stable but cited inflation, fuel prices, higher interest rates, supply-chain challenges and recession risk. Utilities forecast up to $2.0 billion of net capital expenditures for 2022–2026: about $1.2 billion for asset replacement and modernization, $0.5 billion for climate and renewable-energy projects, and $0.3 billion for reliability.
- Rates and regulatory framework: The proposed 2023 annual revenue adjustment was $33.5 million net of the management-audit savings commitment, subject to PUC approval. HEI said it expected to maintain its quarterly dividend at $0.35 per share; the board reviews it quarterly. A $27.8 million application to recover certain deferred COVID-19 utility costs over three years was pending.
- Energy transition and reliability: The AES Hawaii coal plant ceased operations on September 1, 2022, ending the state’s last coal-fired IPP operation. The utility described contingency and demand-response measures but warned that delayed renewable projects, supply constraints, inflation, equipment issues or unexpected generation outages could impair reliability and decarbonization plans. Several renewable projects had delays; four Stage 2 projects had been declared null and void by developers. The Utilities’ target is a 70% reduction in power-generation carbon emissions by 2030 from a 2005 baseline and net-zero generation emissions by 2045 or sooner.
- Bank and market risks: Rising rates reduced the fair value of ASB’s securities and increased funding costs; deposit growth slowed, leading to greater use of borrowings. ASB transferred securities with $755 million fair value to held-to-maturity in October 2022, with $206 million of associated unrealized losses; the transfer did not affect net income. The bank said it had the intent and ability to hold them to maturity and remained well capitalized.
- Financing after quarter-end: HEI drew $110 million of private-placement notes on November 1, 2022, and a further $50 million delayed-draw tranche on October 26, primarily to refinance November debt and repay commercial paper. HEI also entered a $100 million term-loan facility on October 20, with delayed draws available through March 2023.
- Contingencies: Hawaiian Electric recorded environmental reserves of $10 million for Pearl Harbor PCB investigation/remediation and $2.6 million for the former Molokai generation site. It could not determine the outcome or potential loss in the related Molokai site lawsuit. Management did not expect pending legal proceedings, in aggregate, to materially affect financial position, but could not rule out effects on a future period’s results or liquidity. The Hu Honua PPA was denied by the PUC; an appeal was pending.
- Other unusual matters: The PUC’s revised renewable portfolio standard calculation is more demanding than the prior method; management nevertheless expected the Utilities to meet future milestones. ASB reported $4.1 million of loans unable to resume contractual payments after relief and considered delinquent at September 30. HEI reported effective disclosure controls and no material Q3 changes in internal control over financial reporting.
Important facts for investors to verify
- Whether fuel prices, customer collections and utility working-capital needs remain manageable, and whether cost recovery through regulatory mechanisms is timely.
- Whether delayed or cancelled renewable projects are replaced on schedule and whether the system maintains reliability following the AES coal plant retirement.
- PUC decisions on the 2023 revenue adjustment, COVID-19 cost recovery, renewable PPAs, and proposed utility debt and equity authorizations.
- ASB’s deposit retention, borrowing costs, loan-credit trends and capital ratios, together with the future effect of securities losses and the held-to-maturity transfer.
- HEI’s refinancing and liquidity position, capital spending plans, and ability to sustain its $0.35 quarterly dividend amid higher rates and investment requirements.
- The ultimate cost and outcome of environmental matters and litigation, including the Molokai site and Hu Honua proceedings.