Hawaiian Electric Utility Registers Solid Growth

We are maintaining our $39 per share fair value estimate, narrow moat rating, and stable moat trend after Hawaiian Electric Industries reported full-year 2022 earnings per share of $2.20, at the high end of management’s narrowed $2.08-$2.20 per share range. Earnings were down from $2.25 in 2021. Management initiated 2023 EPS guidance of $2.15-$2.35, in line with our $2.27 estimate.

The company operated well under the first full year of the performance-based regulation construct. Income at Hawaiian Electric’s subsidiary utility increased 6%. The utility benefited from higher revenue under approved regulatory mechanisms, mainly the annual adjustment revenue mechanism. Revenue from the major project interim recovery mechanism also helped. Partially offsetting these benefits were increased operating expenses, higher interest expense, and higher depreciation.

The utilities’ earned return on equity was 8.2%, a 10-basis-point improvement year over year but still below its peers. Hawaiian Electric is unique as utility regulation allows for significant performance adders, as well as penalties, based on numerous metrics. We expect the company to gradually improve earned returns more in line with its 9.2% allowed ROE. Management expects earnings at the utility to grow 5% through 2025, which we view as achievable.

American Savings Bank was responsible for the drop in consolidated earnings in 2022, with segment net income down 20% year over year. Bank earnings in 2021 benefited mainly from one-time events related to the pandemic, including the release of credit reserves and Paycheck Protection Program fees. Loan growth remained strong, up 15%, but management expects loan growth to normalize. Total earning assets were up 7.2% with total deposits remaining flat. Despite macroeconomic headwinds, the Hawaiian economy remained strong and tourism continues to recover.