HAWAIIAN ELECTRIC INDUSTRIES INC quarterly report, Q1 FY2021

Hawaiian Electric Industries, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; unaudited. HEI’s consolidated results include Hawaiian Electric, American Savings Bank (ASB), and other businesses. Comparisons are with the three months ended March 31, 2020 unless noted.

Financial results and key metrics

HEI consolidated	Q1 2021	Q1 2020	Change
Revenue	$642.9 million	$677.2 million	Down 5%
Operating income	$98.0 million	$59.7 million	Up 64%
Net income attributable to common stock	$64.4 million	$33.4 million	Up 93%
Diluted EPS	$0.59	$0.31	Up $0.28
Operating margin	15.2%	8.8%	Higher
Net margin	10.0%	4.9%	Higher

• Electric utility: Revenue was $564.9 million, down 5%; operating income rose to $69.1 million from $44.0 million, and common-stock net income rose to $43.4 million from $23.9 million. Lower fuel oil expense and O&M costs, along with higher rates, more than offset lower revenue and higher depreciation. Fuel oil expense fell $45.8 million; purchased-power expense increased $2.5 million.
• ASB: Revenue was $77.1 million, down 3.3%; net income increased to $29.6 million from $15.8 million. A $8.4 million recovery of credit-loss provision, versus a $10.4 million provision in Q1 2020, was a major contributor. Net interest margin fell to 2.95% from 3.72%, reflecting the low-rate environment.
• Cash flow: HEI generated $41.7 million from operations, versus $61.3 million. Investing used $518.0 million, principally reflecting ASB securities purchases and utility capital spending; financing provided $409.0 million, mainly from deposit growth and debt issuance. Cash and cash equivalents ended at $277.6 million, down from $341.4 million at year-end.
• Balance sheet and funding: Total assets were $15.36 billion and total liabilities $13.00 billion at March 31. HEI reported $2.23 billion of long-term debt and $100.2 million of short-term nonbank borrowings; ASB deposits were $7.75 billion and other bank borrowings $102.7 million. HEI common equity was $2.32 billion. These measures reflect materially different utility and bank funding models.
• Utility cash flow and capital: Hawaiian Electric generated $32.0 million from operations and used $68.5 million in investing, including $70.4 million of capital expenditures. Its long-term debt was $1.68 billion; it had no short-term borrowings at quarter-end. Utility capital expenditures are forecast at up to $1.2 billion for 2021–2023.
• Dividend: HEI paid $0.34 per share for the quarter after increasing the quarterly dividend by $0.01. Management said it expects to maintain the current dividend, subject to quarterly Board review.

Material changes versus the prior period

• HEI’s earnings improved substantially despite lower consolidated revenue. Utility results benefited from lower fuel costs and O&M, while ASB earnings benefited from a credit-loss provision reversal and higher mortgage banking income.
• ASB’s loan portfolio was broadly stable at $5.22 billion net, while deposits rose $358 million from year-end to $7.75 billion. The allowance for credit losses declined to $91.8 million from $101.2 million at year-end; the filing attributes this to improved economic expectations and credit performance.
• HEI’s other comprehensive income included a $45.8 million after-tax loss, principally from unrealized losses on available-for-sale securities as market conditions changed. This reduced HEI’s total comprehensive income despite higher net income.
• Electricity sales were down 4.8% year over year, and utility revenue declined. Decoupling helps separate utility revenue recovery from sales volumes, but lower sales can affect collection timing and customer price per kWh.

Outlook, management commentary, risks and unusual items

• Outlook: The filing provides no quantified HEI earnings or EPS guidance. Management expects Hawaii’s economy and utility kWh sales to improve gradually as vaccination advances and restrictions ease, while noting electricity demand remained below pre-pandemic levels. HEI warned that prolonged or worsening economic conditions could materially adversely affect 2021 results.
• Regulation and renewables: Hawaii’s new performance-based regulation framework provides a five-year rate period with no general rate cases, beginning June 1, 2021. The Utilities’ 2020 renewable portfolio standard attainment was 34.5%, above the 30% target. Renewable-project schedules, permitting, interconnection, costs, and PUC decisions remain important execution risks.
• PUC matters: The PUC’s April 2021 Kapolei Energy Storage approval included conditions that HEI said could require financial retirement of generating units. The estimated undepreciated amount of six units at the specified retirement dates was approximately $55 million, excluding asset-retirement costs; Hawaiian Electric planned to seek reconsideration and a stay. The PUC also directed tracking or recording of certain renewable-project costs tied to delayed commercial-operation dates; the Utilities challenged that order. These are post-quarter developments described in the filing.
• COVID-19 and customer balances: The Utilities recorded $22.2 million of COVID-related regulatory assets, with recovery dependent on future PUC proceedings. The customer disconnection moratorium was then scheduled through May 31, 2021. The Utilities cited possible higher receivables, bad debt, working-capital needs, and delayed cash collections.
• Liquidity and credit: HEI had $100 million of commercial paper outstanding and $150 million available under its revolver at quarter-end. Hawaiian Electric had $275 million of reported undrawn line capacity at quarter-end; its separate $75 million 364-day facility terminated April 19, 2021 and was not renewed. ASB reported about $2.0 billion of unused FHLB capacity and said it remained well capitalized, although its leverage ratio of 8.3% was below the 8.5% threshold for abbreviated community-bank leverage reporting in 2021. Ratings agencies upgraded Hawaiian Electric; S&P revised HEI’s outlook to stable from positive while affirming its ratings.
• Other contingencies and unusual items: The Utilities disclosed environmental reserves of $2.7 million for the former Molokai generation site and $9.8 million for Pearl Harbor PCB investigation/remediation. Hu Honua’s PPA approval dispute remained under appeal, with Supreme Court oral argument held April 22, 2021. Management said it did not expect pending legal matters to be material to financial position, but could not rule out material effects on a particular future period’s results or liquidity. A change in pension-asset accounting methodology took effect January 1, 2021; the company described historical effects as immaterial and recorded cumulative effects in Q1 earnings for non-utility businesses.
• Key risks: COVID-19 and Hawaii’s concentrated economy; interest-rate and securities valuation risk at ASB; loan-credit quality; regulatory recovery and rate-setting; renewable project execution and grid reliability; fuel supply and costs; access to capital; cybersecurity; environmental obligations; and severe weather, natural disasters, and wildfire exposure.

Important facts for investors to verify

• Whether ASB’s lower credit-loss allowance and provision recovery are sustainable, and how delinquencies, nonaccrual loans, charge-offs, and pandemic-related modifications evolve.
• Whether ASB can stabilize net interest margin amid low rates and changing deposit and investment yields; also monitor unrealized securities losses and interest-rate sensitivity.
• How the PUC resolves the Kapolei Energy Storage conditions, potential stranded generating-plant costs, and renewable-project delay-related requirements.
• Whether the $22.2 million of COVID-related utility regulatory assets and other deferred costs are ultimately recoverable, and how customer arrears and collections develop after the disconnection moratorium.
• Actual utility capital spending, financing needs, renewable-project milestones, and the implications of the five-year rate framework for returns and customer rates.
• Post-quarter liquidity and facility capacity after Hawaiian Electric’s $75 million revolving credit agreement expired, alongside HEI commercial paper, debt maturities, and dividend coverage.