Business Overview and History
Hawaiian Electric Industries, Inc. (HE) is a diversified utility holding company that provides essential energy and financial services to the people of Hawaii. With a focus on clean energy transformation, innovative banking solutions, and a commitment to the local community, HEI has navigated a complex landscape in recent years, demonstrating its resilience and adaptability.
HEI was incorporated in 1983 as a holding company, with Hawaiian Electric Company becoming its principal subsidiary. The company's roots trace back to 1891 when Hawaiian Electric Light Company was founded to provide electricity service on the island of Oahu. Over the years, Hawaiian Electric expanded its operations to serve the islands of Hawaii, Maui, Lanai, and Molokai, growing to become the state's largest electric utility.
In 1986, HEI diversified its operations by acquiring American Savings Bank, F.S.B. (ASB), which has since become one of Hawaii's largest financial institutions. Throughout the 1990s and 2000s, HEI continued to grow both its utility and banking businesses through acquisitions and organic expansion. The company also invested in various renewable energy projects and initiatives to support Hawaii's clean energy goals.
Today, HEI's core business segments include the electric utility operations of Hawaiian Electric Company, Inc. and its subsidiaries (collectively, "Hawaiian Electric"), as well as the banking services of American Savings Bank, F.S.B. ("ASB"), a wholly-owned subsidiary. Hawaiian Electric is the principal utility in the state, serving approximately 95% of Hawaii's population across the islands of Oahu, Hawaii, Maui, Molokai, and Lanai. ASB provides a full range of banking and financial services to both consumers and businesses.
Financial Performance and Ratios
Over the past three years, HEI has demonstrated relatively stable financial performance, with annual revenue ranging between $2.58 billion in 2020 to $3.74 billion in 2022. Net income has also remained relatively consistent, fluctuating between $199.71 million in 2020 and $243.03 million in 2022.
HEI's financial ratios paint a mixed picture. The company's current ratio, a measure of short-term liquidity, has remained above 2.0 over the past three years, indicating a strong ability to meet its short-term obligations. However, the company's debt-to-equity ratio has increased from 2.16 in 2020 to 3.44 in 2022, reflecting a higher reliance on debt financing. Additionally, the company's return on equity has declined from 8.46% in 2020 to 7.98% in 2022, suggesting a potential need to optimize its capital structure and operational efficiency.
Maui Windstorm and Wildfires: Navigating a Challenging Landscape
In August 2023, the state of Hawaii was devastated by the Maui windstorm and wildfires, which resulted in significant damage to property and infrastructure, as well as loss of life. As a key utility provider in the affected areas, Hawaiian Electric faced substantial challenges in the aftermath of this disaster.
The company has been named in approximately 700 lawsuits related to the Maui windstorm and wildfires, with plaintiffs seeking damages and other costs. In June 2024, HEI and Hawaiian Electric accrued an estimated $1.71 billion in wildfire tort-related liabilities, a significant financial burden that has raised substantial doubt about the company's ability to continue as a going concern.
To address this challenge, HEI and Hawaiian Electric have been working with financial advisors to develop a plan to raise the necessary capital to fund the wildfire settlement payments. This has included a recent $558 million equity offering, as well as efforts to secure additional debt financing and explore other strategic alternatives.
The impact of the Maui windstorm and wildfires has also extended to HEI's banking segment, ASB. The bank's Lahaina branch was destroyed in the fires, and the bank has incurred additional expenses related to the event. As of June 30, 2024, ASB's outstanding credit exposure in Maui and the fire-impacted zone of Lahaina was 12.3% and 0.6% of its total loan portfolio, respectively.
Despite these significant challenges, HEI has remained focused on its core mission of providing safe, reliable, and affordable energy to the people of Hawaii, as well as maintaining the financial stability and resilience of its banking operations.
Regulatory Environment and Clean Energy Transition
HEI's electric utility segment, Hawaiian Electric, operates in a highly regulated environment, with the Public Utilities Commission of the State of Hawaii (PUC) overseeing various aspects of the company's operations, including rates, investment decisions, and renewable energy goals.
In 2020, the PUC approved a new performance-based regulation (PBR) framework for Hawaiian Electric, which aims to align the utility's business model with the state's clean energy and decarbonization objectives. The PBR framework includes mechanisms such as an annual revenue adjustment, performance incentives, and an earnings sharing mechanism, designed to incentivize the utility to achieve specific operational and environmental targets.
Hawaiian Electric has made significant progress in its transition to a clean energy future, with the company exceeding the state's renewable portfolio standard (RPS) target of 30% by 2020. However, the company has faced some challenges in meeting its more ambitious 2030 and 2045 RPS goals, due to delays and cancellations in the commercial operation of new renewable third-party generation resources, as well as supply chain disruptions and inflationary pressures.
To address these challenges, Hawaiian Electric has continued to pursue a diverse portfolio of renewable energy projects, including solar, wind, geothermal, and biofuel. The company has also been investing in grid modernization efforts, such as advanced metering infrastructure and distribution management systems, to better integrate and manage the growing number of distributed energy resources on its network.
Banking Segment: A Resilient and Innovative Approach
HEI's banking segment, ASB, has demonstrated resilience and adaptability in the face of economic challenges. The bank has maintained a strong capital position, with regulatory capital ratios well above the well-capitalized thresholds as of June 30, 2024.
ASB's net interest margin has been impacted by the rising interest rate environment, as the bank has sought to balance the higher yields on its earning assets with the increased cost of its funding sources. However, the bank has been able to partially mitigate this pressure through active management of its deposit mix and borrowing strategies.
In addition to its core banking operations, ASB has been focused on expanding its digital capabilities and introducing innovative financial products and services to meet the evolving needs of its customer base. The bank's investments in technology have helped to improve operational efficiency and enhance the customer experience, positioning ASB for continued growth and success in the Hawaii market.
Financials
HEI's financial performance over the past three years has shown relative stability in revenue and net income. Annual revenue ranged from $2.58 billion in 2020 to $3.74 billion in 2022, while net income fluctuated between $199.71 million in 2020 and $243.03 million in 2022. The company's financial ratios reveal a mixed picture, with a strong current ratio above 2.0 indicating good short-term liquidity, but an increasing debt-to-equity ratio from 2.16 in 2020 to 3.44 in 2022, suggesting higher reliance on debt financing.
In the most recent fiscal year (2023), HEI reported revenue of $3.68 billion, net income of $201.13 million, operating cash flow of $474.37 million, and free cash flow of $35.59 million. However, the company's financial performance has been significantly impacted by recent events, particularly the Maui windstorm and wildfires.
For the most recent quarter (Q2 2024), HEI reported revenue of $897.36 million, a slight increase of 0.19% compared to Q2 2023. This growth was primarily due to higher net interest income in the bank segment, partially offset by lower electric utility revenues. However, the company reported a net loss of $1.30 billion for the quarter, primarily due to the $1.71 billion accrual for wildfire tort-related claims in the electric utility segment. Operating cash flow for Q2 2024 was $68.83 million, while free cash flow was negative at -$11.49 million.
HEI's business is concentrated in the electric utility and banking sectors in Hawaii. The Electric Utility segment, which includes Hawaiian Electric Company, Inc. and its subsidiaries, provides electricity generation, transmission, and distribution services across the Hawaiian islands. For the three and six months ended June 30, 2024, this segment reported revenues of $792.33 million and $1.58 billion, respectively. However, due to the wildfire-related liabilities, the segment reported operating losses and net losses for both periods.
The Bank segment, consisting of American Savings Bank, F.S.B. (ASB), reported revenues of $101.94 million and $207.09 million for the three and six months ended June 30, 2024, respectively. The segment's performance was impacted by a $82.20 million goodwill impairment charge recorded in Q2 2024 as a result of HEI's strategic review of ASB. Despite this, the Bank segment reported net income of $45.79 million and $24.85 million for the three and six months ended June 30, 2024, respectively.
Liquidity
HEI's liquidity position has been impacted by the Maui windstorm and wildfires, with the company accruing an estimated $1.71 billion in wildfire tort-related liabilities as of June 2024. To address this, HEI has undertaken various capital-raising initiatives, including a $558 million equity offering and efforts to secure additional debt financing.
As of June 30, 2024, HEI reported cash and cash equivalents of $550.41 million. The company's debt-to-equity ratio stood at 3.48, reflecting the increased leverage taken on to address the wildfire-related liabilities. HEI's current ratio was 3.69, and its quick ratio was 3.79, indicating a strong ability to meet short-term obligations.
In terms of available credit, HEI has a $175 million revolving credit facility, which was fully drawn as of June 30, 2024. Additionally, the company secured a new $250 million asset-based lending facility, which became effective on July 24, 2024, subject to certain conditions. These credit facilities provide some additional financial flexibility as the company navigates its current challenges.
The company's ability to maintain adequate liquidity in the face of these challenges will be crucial for its ongoing operations and financial stability. HEI continues to work with financial advisors to develop and implement strategies to address its liquidity needs and strengthen its financial position.
Outlook and Risks
HEI's near-term outlook is marked by significant uncertainty, primarily due to the financial implications of the Maui windstorm and wildfires. The company's ability to successfully navigate the legal and financial challenges related to the disaster will be a critical factor in determining its future performance and viability.
Beyond the wildfire-related issues, HEI faces a number of other risks, including regulatory uncertainty, the ongoing transition to a clean energy future, and the potential for macroeconomic headwinds that could impact both its utility and banking operations.
The company's ability to maintain its strong community relationships, execute its strategic initiatives, and adapt to a rapidly changing business environment will be key to its long-term success. Investors will be closely watching HEI's progress in addressing the Maui windstorm and wildfires, as well as its efforts to position the company for sustainable growth and value creation.
The Hawaiian electric utility industry is transitioning towards more renewable energy generation to meet the state's renewable portfolio standard goals. This transition has resulted in challenges such as project delays and cost overruns, which have impacted the company's ability to meet its carbon reduction targets. HEI will need to navigate these industry trends effectively to maintain its competitive position and meet regulatory requirements.
Conclusion
Hawaiian Electric Industries, Inc. is a diversified utility holding company that has demonstrated resilience and adaptability in the face of significant challenges. While the company's near-term outlook is clouded by the financial implications of the Maui windstorm and wildfires, HEI's long-term prospects remain promising, driven by its commitment to clean energy transformation, innovative banking solutions, and a deep-rooted connection to the local community.
The company's financial performance has been significantly impacted by recent events, particularly the wildfire-related liabilities. However, HEI's banking segment continues to provide some diversification and stability to the overall business. The company's liquidity position, while strained, is being actively managed through various capital-raising initiatives and credit facilities.
As HEI navigates this complex landscape, it will need to balance addressing its immediate financial challenges with positioning the business for long-term growth and sustainability. This includes continuing its clean energy transition, enhancing its banking operations, and maintaining strong relationships with regulators and the communities it serves.
Investors will be closely monitoring HEI's progress in addressing its immediate challenges, particularly the resolution of wildfire-related liabilities and the implementation of its financing plan. The company's ability to strengthen its financial position, meet its regulatory obligations, and capitalize on opportunities in both the utility and banking sectors will be crucial for its future success.
Despite the current uncertainties, HEI's deep roots in Hawaii and its essential role in providing energy and financial services to the state position it uniquely to overcome these challenges and potentially emerge as a stronger, more resilient company in the long term. As the company continues to navigate this difficult period, its commitment to sustainability, innovation, and community service will likely play a key role in shaping its future trajectory and value creation for stakeholders.