Hawaiian Electric Industries, Inc. (HEI) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. This combined filing covers HEI and its wholly owned electric utility subsidiary, Hawaiian Electric. HEI’s principal businesses are the electric utility and American Savings Bank (ASB).
Financial performance
| HEI consolidated | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $897.2 million | $928.2 million | Down 3% |
| Operating income | $76.4 million | $93.5 million | Down 18% |
| Net income for common stock | $42.1 million | $54.7 million | Down 23% |
| Diluted EPS | $0.38 | $0.50 | Down $0.12 |
| Operating cash flow | $124.6 million | $181.0 million | Down $56.3 million |
- Electric utility: Revenue was $788.6 million, down 5%; operating income was $63.4 million, down 16%; and common-stock net income was $39.2 million, down 17%. kWh sales declined 1.5%, including a 6.3% decrease on Maui. Lower fuel costs reduced revenue and fuel expense; higher purchased-power and operating and maintenance costs partly offset the benefit.
- Bank: ASB revenue increased to $105.1 million from $93.9 million and net income rose to $20.9 million from $18.6 million. Net interest margin was 2.75%, versus 2.85% a year earlier. Higher loan yields and bank-owned life insurance income were offset in part by higher deposit and borrowing costs.
- Other segment: Operating loss widened to $12.5 million from $5.9 million. Q1 2024 included a $3.5 million impairment for fire damage at Mahipapa and weaker Pacific Current results.
- Margins and returns: The filing reports operating income but does not provide a consolidated operating-margin measure. Hawaiian Electric’s 12-month ROACE was 7.8%, down from 8.2%; each utility’s reported rate-making ROACE was below the PUC-authorized 9.5%.
- Cash and investment: HEI consolidated cash and cash equivalents were $485.2 million at March 31, versus $679.5 million at year-end. Investing activities used $5.6 million; financing activities used $310.9 million, largely reflecting lower bank deposits and borrowings. Hawaiian Electric generated $127.2 million of operating cash, spent $98.0 million on capital expenditures and ended with $129.8 million of cash.
- Debt and liquidity: HEI had $2.84 billion of long-term debt other than bank debt; $60 million was due within 12 months. Hawaiian Electric had $1.93 billion of long-term debt, with $47 million due within 12 months. HEI’s $175 million and Hawaiian Electric’s $200 million revolving facilities remained fully drawn, leaving no available committed capacity. HEI’s standalone cash was $127 million. ASB had $1.4 billion of unused FHLB borrowing capacity and $1.1 billion of unpledged securities available as collateral.
- Bank asset quality and capital: ASB’s net loans were $6.05 billion and allowance for credit losses was $71.1 million. Delinquency rates rose to 0.58% from 0.22% a year earlier; annualized net charge-offs were 0.14%. ASB remained well-capitalized, with a 12.7% common equity Tier 1 ratio.
Material changes, outlook and key risks
- The Maui windstorm and wildfires remain the dominant uncertainty. HEI and Hawaiian Electric had each been named in approximately 400 related lawsuits as of May 9, 2024. The company says a loss beyond Hawaiian Electric’s $75 million One ‘Ohana Initiative contribution is reasonably possible, but it cannot estimate the ultimate loss or range. It warns that additional losses could be material and could exceed available liquidity.
- HEI and its subsidiaries reported approximately $169 million of wildfire-related expenses from the event through March 31, 2024. Q1 wildfire-related expenses, net of insurance recoveries and approved deferrals, were $9.6 million. The Utilities had deferred $22.6 million of certain incremental costs as a regulatory asset; cost recovery remains subject to future PUC review. The filing reports $58 million of remaining excess-liability coverage and $135 million of remaining directors-and-officers coverage, while stating adequacy for future costs is uncertain.
- On May 4, 2024, HEI and the Utilities agreed to contribute up to $18.4 million through year-end 2024 toward professional-advisor costs for the State; $6.7 million was accrued at March 31. The agreement can be terminated under certain circumstances. Hawaiian Electric also contributed $75 million to the One ‘Ohana Initiative, funded by insurers, according to the filing.
- Credit ratings had been downgraded below investment grade following the fires. On March 12, 2024, S&P affirmed HEI’s and Hawaiian Electric’s B- issuer ratings and revised their outlooks to Negative. Management says the downgrades constrain access to capital markets and unsecured short-term borrowing. It believes near-term liquidity is adequate, but longer-term funding and wildfire liabilities remain uncertain. Hawaiian Electric filed for PUC approval to pursue an asset-based receivables credit facility of up to $250 million.
- HEI suspended its common dividend after the second-quarter 2023 payment; the Q1 2024 payout ratio was nil. Hawaiian Electric declared a $13 million dividend to HEI for Q1 2024. Future subsidiary dividends may be reduced or suspended.
- Hawaii Island experienced a generation shortfall and rolling outages on March 25, partly because of Hamakua Energy’s unexpected shutdown and other generator outages. The conservation request was lifted April 24 as generators returned to service. Hamakua Energy planned to install a replacement turbine in May; the delayed CT2 overhaul was expected to finish in Q3 2024. Mahipapa was also shut down after a March fire, with repairs expected to finish in Q3 2024.
- The Utilities expect their goal to cut generation carbon emissions 70% by 2030 to be achieved later than originally planned, citing renewable-project delays, higher costs and credit downgrades. They nevertheless expect to meet or exceed statutory renewable portfolio standards. The PUC accepted the Utilities’ Integrated Grid Plan in March. A Public Safety Power Shutoff program could be ready as early as July 2024; wildfire-risk measures may cause service interruptions.
- Management cited inflation, elevated fuel and operating costs, higher interest rates, capital-market access, litigation, insurance availability, and ASB deposit costs and mix as material risks. The filing provides no earnings or EPS guidance.
Important facts for investors to verify
- Developments in the wildfire investigations and litigation, the potential claims-resolution process, and whether insurance coverage or regulatory recovery will cover associated costs.
- Available liquidity, funding alternatives, credit-rating outlooks, and the timing and approval of the proposed utility receivables facility.
- Hawaiian Electric’s reliability and wildfire-mitigation progress, including generator availability, PSPS implementation, and customer impacts.
- ASB’s deposit trends, funding costs, net interest margin and loan delinquencies, including exposure in Maui and Lahaina.
- The status of utility and HEI dividends, PUC cost-recovery decisions, and the timing and costs of renewable projects and emissions targets.