Hawaiian Electric Industries - Q1 2024

Executive Summary

• Q1 2024 consolidated net income was $42.1 million and diluted EPS was $0.38; core EPS excluding wildfire-related items was $0.45, implying ~$0.07 EPS impact from wildfire costs.
• Utility net income was $39.2 million, down year over year on higher O&M (wildfire, insurance, vegetation) and heat rate penalties; Bank net income improved to $20.9 million on higher NIM and a reserve release.
• Liquidity: holding company cash $127 million and utility cash $130 million at quarter-end; a $250 million accounts receivable facility received PUC approval on June 27, 2024, adding flexibility.
• Strategic backdrop: ~400 tort suits and ~160 insurer subrogation claims tied to Maui wildfires; no reserve recorded pending liability determination; legislative wildfire framework pushed to next session but engagement remains high.

What Went Well and What Went Wrong

What Went Well

• ASB profitability recovered: NIM expanded and a $1.5 million reserve release improved earnings; Q1 ROE 15.6% and NIM 2.75% underscored stability after Q4 repositioning.
• Wildfire mitigation advancing: PUC approved a 5-year $190 million grid resilience plan; 2024 capital allocated ~35% (~$120 million) to wildfire work; pursuing $450 million matching funds for $900 million of resilience projects.
• Liquidity initiatives progressing: PUC scheduled decision on A/R facility for June 24 (later approved at $250 million), bolstering liquidity and operational flexibility.
• Quote: “American Savings Bank executed well… higher net income as net interest margin and profitability benefited from the strategic balance sheet repositioning” – Scott Seu.

What Went Wrong

• Utility O&M elevated: ~+$12 million after-tax increase, including ~$7 million wildfire-related costs and higher insurance/vegetation; heat rate penalties added ~$3 million after-tax headwind.
• Operational issue: Hamakua Energy (biomass/CTs) outage; management expects CT-1 back in weeks; conducting root cause analysis (believed fuel-related).
• Ongoing legal uncertainty: ~400 lawsuits and ~160 subrogation claims; no reserve taken given indeterminate liability and damages; court dates set into late 2024 for certain cases.
• Analyst concern: legislative relief delayed; securitization and mitigation frameworks need more detail and likely wait until 2025 session, creating interim regulatory uncertainty.

Transcript

Operator (participant)

Good day. My name is Brianna, and I will be your conference operator. At this time, I would like to welcome everyone to the Hawaiian Electric Industries, Inc. First Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one a second time. I will now turn today's call over to Mateo Garcia, Director of Investor Relations. Please go ahead.

Mateo Garcia (Director of Investor Relations)

Thank you. Welcome, everyone, to HEI's first quarter 2024 earnings call. Joining me today are Scott Seu, HEI President and CEO; Scott DeGhetto, HEI Executive Vice President, CFO, and Treasurer; Shelee Kimura, Hawaiian Electric President and CEO; Anne Teranishi, American Savings Bank President and CEO, and other members of senior management. Our earnings release and our presentation for this call are available in the investor relations section of our website. As a reminder, forward-looking statements will be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings, and in the investor relations section of our website. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure.

Now, Scott Seu will begin with his remarks.

Scott Seu (President and CEO)

Aloha kākou. Welcome, everyone. For today's call, I'll start with key updates regarding the Maui wildfires, followed by operational updates, and then Scott Seu will walk you through our first quarter financial results before we open it up for questions. We continue to work in earnest with key stakeholders to help our community recover from the devastating impacts of the Maui wildfires. Last quarter, we discussed Governor Josh Green's One 'Ohana initiative, which is intended to help the families most impacted by the fires heal and to help our state move forward. The first phase of One 'Ohana launched on March 1 and has seen a steady uptake. 58 total registrations have been received thus far, including 43 from families of decedents and 15 from injured survivors. On April 29, Governor Green announced that the registration deadline has now been extended to May 31.

The Governor has said that the deadline for completed claims forms will be July 1. Hawaii's annual legislative session concluded in early May, and last week, the governor signed into law Senate Bill 582, which sets aside critical funding to help address the ongoing Maui wildfire recovery efforts, including the state's contribution to the $175 million One 'Ohana Fund. Although we are disappointed that we ran out of time in this legislative session to pass legislation supporting the key priorities we laid out on our last earnings call, our state's lawmakers and leadership remain highly engaged in determining how to design wildfire legislation that makes sense for Hawaii, our customers, and our company. Legislation that creates a framework to reduce wildfire risk is critical to ensure Hawaii can attract low-cost capital, which ultimately lowers the cost to customers of needed investments.

Our state's leadership recognizes this, and last week, Governor Green announced the formation of a new climate advisory team that will play a critical role in drafting comprehensive climate resilience policy. As one of its first projects, the advisory team will recommend steps to create a fund to mitigate the impacts of climate change and to develop a fair and comprehensive structure to resolve claims related to future disasters in our state. The Governor has expressed the fund's necessity for stabilizing the insurance market and addressing the financial burdens arising from the increased impacts of climate change. We'll continue to work constructively with Governor Green, our regulators, and other parties to advance solutions that help keep Hawaii safe and will stabilize our energy future in the face of increasingly severe weather events.

Last month, we saw the publication of two key reports, one from the County of Maui's Department of Fire and Public Safety, and the other from Hawaii's Attorney General. Both the fire department's after-action report and the Attorney General's Lahaina Fire Comprehensive Timeline report were consistent with our understanding of the events that took place on August 8th, namely, that a morning fire appears to have been caused by power lines that fell in high winds. The Maui County Fire Department responded to this fire, reported that it was 100% contained and later declared it extinguished. A second afternoon fire began in the same area later that day, after Hawaiian Electric's power lines in West Maui had been de-energized for more than six hours. Neither of the reports released last month focuses on the cause of the Maui wildfires.

The cause of the afternoon fire that devastated Lahaina has still not been determined and is the focus of a separate investigation being conducted by the Bureau of Alcohol, Tobacco and Firearms. Turning to an update on litigation. As of May 9, HEI and Hawaiian Electric Company have each been named as a defendant in approximately 400 lawsuits by plaintiffs claiming losses related to the August 8th windstorm and wildfires. Subrogation claims from about 160 different insurers with exposure in Maui have also been filed. The Maui Circuit Court has set a September 9, 2024, trial date for six cases concerning the fires in Upcountry Maui. As a reminder, those fires were separate from the fires that occurred in Lahaina. The Upcountry fires occurred in the Olinda and Kula areas of Maui, over 35 miles from Lahaina.

Fortunately, there were no fatalities in the Upcountry fires and relatively few structures damaged in comparison to the Lahaina fires. The Maui Circuit Court has also set a November 18th, 2024, trial date for four of the Lahaina cases filed. No trial dates have been set in cases pending in the Oahu Circuit Court or in federal court. Turning to operational updates. On slide four, the utility continues to advance wildfire mitigation and resilience efforts, and in the first few months of this year, progressed applications for federal funding to help limit the cost of these investments to customers. In February, Hawaiian Electric received PUC approval for its five-year, $190 million grid resilience plan, enabling the utility to move forward with finalizing $95 million in Department of Energy Infrastructure Investment and Jobs Act funding by matching it with $95 million in rate recovery.

In addition to this, the utility is also pursuing $450 million of matching federal funding for $900 million of projects addressing wildfire-focused grid resilience, grid modernization, and grid innovation projects. While pursuing these longer-term projects, the utility continues to take more immediate action to address wildfire risk. Over 35% of the utility's 2024 capital budget, nearly $120 million, is dedicated to wildfire mitigation work. The utility is implementing enhanced wildfire operational strategies and practices, which will include a public safety power shutoff program as a last resort. Investments are also being made to improve situational awareness through advanced technologies, including cameras utilizing artificial intelligence. The utility also continues to progress grid hardening work.

These interim wildfire safety measures are part of the utility's longer-term wildfire safety strategy, which is being developed collaboratively with our communities and other stakeholders, and which we expect to begin implementing in 2025. Turning to the bank, ASB continues to perform well, and in the first quarter, the bank saw the benefits of the strategic actions undertaken in the fourth quarter of 2023. As you'll recall, last quarter, the bank sold low-yielding securities and reduced high-cost deposits with the proceeds. We saw the benefits from that balance sheet repositioning this quarter as ASB's cost of funds decreased and net interest margin expanded, leading to improved profitability compared to last quarter. The bank also released a portion of the reserves initially taken following the wildfires on Maui, reflecting Maui's resilient economy and better-than-expected outlook.

ASB's loyal and long-tenured deposit base remains stable, and as of March 31st, 86% of deposits were FDIC-insured or fully collateralized. Customer deposits are safe, and there is no risk to deposits as a result of legal claims related to the wildfires. I will now turn the call over to Scott DeGhetto, who will discuss our financial results.

Scott DeGhetto (EVP, CFO and Treasurer)

Thank you, Scott. I'll start with the results for the quarter on slide six. We earned consolidated net income of $42.1 million and EPS of $0.38 in the first quarter. This included $7.2 million after tax, for about $0.07 per share of wildfire-related expenses, net of insurance recoveries and deferrals. Excluding these expenses, core net income and EPS were $49.3 million and $0.45 per share, compared to $54.7 million and $0.50 per share in the first quarter of 2023. Utility net income included $5 million of wildfire-related impacts, net of $7.4 million of insurance recoveries and $5.9 million of deferred costs. The holding company and other segment included $2.3 million of wildfire expenses, net of $1.9 million in insurance recoveries. Net wildfire costs were immaterial to bank net income.

The decrease in utility net income was driven by higher O&M expenses due to increased wildfire mitigation and other wildfire-related costs. Bank net income benefited from higher net interest margin, resulting from the strategic balance sheet repositioning executed last quarter, and also benefited from the reserve release that Scott mentioned. On a consolidated basis, core ROE remains healthy at 9.5%, excluding wildfire impacts. This is down from 10% ROE in the first quarter of last year, due primarily to lower utility and other segment earnings, partially offset by higher bank earnings. Utility core ROE was down 20 basis points to 8%, excluding wildfire impacts, and bank core ROE was up 7 basis points to about 15.6%. The approximately $0.07 decrease in the utility's EPS contribution was driven by an $0.11 increase in O&M expenses.

$0.05 of the increase was wildfire-related, primarily driven by the settlement of indemnification claims asserted by the state. The remaining O&M increase included higher insurance costs and higher vegetation management costs. Earnings were also driven lower by penalties from worse heat rate performance. These items were partially offset by increased revenues, primarily from the annual revenue adjustment and major project interim recovery mechanisms, as well as increased AFUDC and higher interest income. The approximately $0.02 increase in ASB's EPS contribution was driven by $0.02 of higher non-interest income and $0.02 of lower provision, partially offset by $0.02 of lower net interest income.

Holding company and other segment expenses were higher by about 7 cents per share, primarily from 3 cents per share of lower Pacific Current net income and 2 cents per share of wildfire expenses, as well as a small impact from tax rate adjustments. Lower Pacific Current net income was mostly driven by a $2.6 million after-tax write-off from a fire at Pacific Current's biomass generating facility on Kauai. The fire was started by a contractor performing maintenance on the facility. Turning to our liquidity on slide eight, we continue to prudently manage our liquidity as we work through the timing and impacts of litigation related to the Maui wildfires. As of the end of the first quarter, the holding company and the utility had $127 million and $130 million of cash on hand, respectively.

We continue to explore additional sources of liquidity, and the utility accounts receivable financing facility we discussed last quarter is awaiting PUC approval. The PUC issued a procedural schedule for the accounts receivable facility docket earlier this week, and a decision and order is scheduled for June 24th. Once approved, we expect the facility to provide up to $250 million of additional liquidity. At that, let's open up the call to questions.

Operator (participant)

We will now begin the Q&A session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press star one a second time. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from Michael Lonegan with Evercore. Please go ahead.

Michael Lonegan (Director of Equity Research)

Hi, thanks for taking my question. So as you mentioned, the fire department report and the AG's investigation report, you know, are consistent with what you've been saying, you know, making the distinction between a morning fire and an afternoon fire. Just wondering, you know, in the event, you know, if the ATF's report were to link, you know, the afternoon fire to your company, just how are you or how you are thinking about your approach, you know, or your options that you have to that situation?

Scott Seu (President and CEO)

Hey, Mike, this is Scott. Yeah, we're not going to speculate on what the findings of the ATF report will be. Once that report comes out, we'll, we'll obviously review it very carefully and then make that determination, but we can't speculate right now.

Michael Lonegan (Director of Equity Research)

Great. Thank you. Secondly, for me, press reports have indicated, you know, that you may be pursuing a sale of American Savings Bank. Just wondering if there's anything you could share on that?

Scott DeGhetto (EVP, CFO and Treasurer)

Yeah. Hey, Mike, it's Scott DeGhetto. It's, you know, my comments are consistent with what we've said in the past. You know, we continue to not speculate on any strategic transactions or alternatives.

Michael Lonegan (Director of Equity Research)

Okay, great. And then, and then just quickly, lastly, for me, you know, obviously making progress with the first One 'Ohana Fund. Just wondering if you have a sense, you know, for when the second fund for property owners and businesses could be launched and, you know, how it might be funded, and if you're planning on making a contribution to that as well?

Scott Seu (President and CEO)

Yeah, Mike, the only thing we can say is that those discussions are in progress. We can't really say when or provide any details. Those discussions involve many different parties, and we absolutely just in, in general, we feel that it provides, if to the extent it can provide an attractive alternative to folks to reach closure as opposed to litigation, then it's worthy of our support.

Michael Lonegan (Director of Equity Research)

Great. Thanks for taking my questions.

Scott Seu (President and CEO)

Thanks, Mike.

Operator (participant)

Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.

Jonathan Reeder (Equity Analyst)

Hey, good morning, team. I was hoping you could just kind of expand a little bit on, you know, why you think the legislatures did not pass either the key piece of the legislation during the regular session, you know? And then, would you say the prospects of, like, a special session being convened to do so are kind of eliminated by the, you know, establishment of the CAT team? And then, you know, would deferring the passage of potential legislation to 2025, would that be too late to, you know, provide the clarity and assistance that you all need?

Scott Seu (President and CEO)

Yeah. Hi, Jonathan, this is Scott. So, yeah, while we are obviously disappointed that we ran out of time to get the legislature passed, we actually feel that we were able to make pretty significant progress across all fronts in terms of the key bills and issues, you know, making it all the way to conference committee. What that really indicated was that there was a high degree of engagement and really a lot of good discussion with legislators in terms of the importance of the three initiatives that we were really promoting. And again, so that was the wildfire mitigation work… securitization, and then establishment of a going forward disaster recovery fund.

What we heard in our discussions and all the way up to the very end was there is a lot of understanding that was built over the course of the session of the importance of these measures. What happened though was there was still a desire for further details, and I think it was reported broadly that with respect to securitization and the wildfire mitigation plans, there was a request by some legislators for more specific information about what those plans would be, what would be the cost impacts on customers, and so on. The Climate Advisory Team that the governor stood up will be very helpful to keep those discussions going in the interim before next year's session. I think it'll position everybody, including the legislature, better to be able to make these critical decisions and move forward.

Whether or not we have a special session even before then is up to the legislature themselves. But I think it's a very positive that we're gonna continue to engage with, with the key decision makers in the interim.

Jonathan Reeder (Equity Analyst)

Gotcha. That makes sense. I guess the One 'Ohana initiative, at least the first phase, how does that level of participation, you know, compare to your expectations? And do you expect it will move materially higher, given the deadline was recently pushed back?

Scott Seu (President and CEO)

Well, I think the way that we think about it is that for everybody who has registered, that is one more family that will not have to go through the lengthy and unpredictable litigation process. So it's, it's a good number. Of course, we are hopeful that it will continue to get steady uptake, and we will see where we are, and the governor and others will, will, you know, determine May 31st whether it gets further extended or at that point, if that's, if that's where it, where it stops. But overall, I think we're, we're happy that there are at least a number, a fair degree of interest coming from the families.

Jonathan Reeder (Equity Analyst)

Okay, and then, like, in terms of them being, like, firmly committed to it, like, remind me, is it like the, the end date, like July, which I think currently is July first, for the completed forms, is that when like you're definitely in, or, you know, people that have submitted forms, can they still change their mind?

Scott Seu (President and CEO)

Yeah, it's a voluntary participation, so at any time, a family can decide to opt out, even if they've registered or started the process. I think that's an important component. We wanted to make sure that families really had the optionality.

Jonathan Reeder (Equity Analyst)

Okay. Gotcha. Shifting gears a little bit, and I may have missed it, if, if Scott missed mentioning it, I apologize, but can you talk about the financial ramifications from the issue that the Hamakua Energy, you know, being completely out of service since, like, late February? You know, including, like, the impact on Pacific Current earnings, the impact on, you know, potentially any utility earnings or, yeah, earnings from, like, the higher power costs or the CapEx, you know, to replace one of the generators, just stuff like that.

Scott DeGhetto (EVP, CFO and Treasurer)

Yeah. So in terms of Hamakua, we're hoping to get Hamakua, and there's two units there. There's a CT one, CT two. They're both 30 megs. We're looking to get CT one back in the next couple of weeks. What I would tell you is, you know, when the plant's not running, yes, they're not generating revenues, but they're also not burning fuel. There is a component, obviously, of O&M that continues to run through. But we're in the process of doing a root cause analysis in terms of what happened there. We currently believe it's tied to a fuel issue, and we'll keep you posted on that.

Jonathan Reeder (Equity Analyst)

Okay. And then I think I heard you say that $117 million that's being spent at the utility this year for wildfire-related stuff is 40% of the budget. So that implies, like, $300 million for 2024 utility CapEx. Is that right?

Scott DeGhetto (EVP, CFO and Treasurer)

So roughly, yeah. Essentially, as we mentioned previously, our CapEx forecasts historically for 2024, we're forecasting toward the lower end of that range. So that's in the right ballpark.

Jonathan Reeder (Equity Analyst)

Okay, the lower end of that $320-$4.30 range that was last put out, or?

Scott DeGhetto (EVP, CFO and Treasurer)

That, that's right.

Jonathan Reeder (Equity Analyst)

Okay. Gotcha. I think any update in terms of, like, the timing of the ATF report, or that's still just completely in their hands?

Scott Seu (President and CEO)

Yeah, it's still our understanding that they intend to release the report prior to the one-year anniversary of the fires, so that would be prior to August 8th.

Jonathan Reeder (Equity Analyst)

Okay, great. Thank you so much for taking my questions, and good luck as you continue to work through the process.

Scott Seu (President and CEO)

Thanks, Jonathan.

Operator (participant)

Our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson (Equity Analyst)

Hey, good morning.

Scott Seu (President and CEO)

Hey, Paul.

Paul Patterson (Equity Analyst)

With respect to the American Savings, what is the, the tax book, what's it valued on, on a tax basis? Do you have that off the... Do you guys have that available?

Scott Seu (President and CEO)

Yeah, Paul, let me ask if Dane Teruya, our bank CFO, can respond to that.

Scott DeGhetto (EVP, CFO and Treasurer)

On the tax basis, it's roughly around $680 million.

Paul Patterson (Equity Analyst)

... Okay. And then, with respect to the liabilities associated with all these losses, do we have an estimate of what these claims, obviously, they're just claims, but what they stand at now?

Scott Seu (President and CEO)

No, Paul, we continue to not have that. You know, there's a lot of complications in terms of determining what that might be, including, you know, the resolution of the claims or determination of liability. So plaintiffs would have to prove, you know, the degree that Hawaiian Electric acted negligently and was the proximate cause of the damages. So again, we're not through that process. We've not concluded that a loss is probable and reasonably estimable, so that's why we have continued to not have, we have not taken any reserve.

Paul Patterson (Equity Analyst)

Well, I understand. Thanks for the clarification. Well, I guess what I was just wondering is sort of an aggregate amount, and I realize that's, I realize that that's not what that necessarily would be reflective of what the what would actually come about. But I'm just wondering, you know, with all these lawsuits, is there some sort of aggregate amount that if you added them all up, and you know, obviously they're not going to be added on, but I'm just sort of curious as to what what we're - I mean, is it, am I correct that it's 560, roughly speaking, lawsuits that have been filed so far?

Scott Seu (President and CEO)

Well, as we said earlier, there's been about 400 tort claims, and 160 or so in terms of the subro claims.

Paul Patterson (Equity Analyst)

Right.

Scott Seu (President and CEO)

It's hard for us to really try and just do a very simple math and come up with a total aggregate amount.

Paul Patterson (Equity Analyst)

Okay. Fair enough. I guess my other questions I think have pretty much been answered. In terms of, we don't have a sense whether or not they're going to be going for a special session, I guess. Is that just to follow up on, I forget who asked it, but it sounds like there may be one, but it also sounds to me that maybe you were looking towards next year about the securitization of wildfire litigation legislation.

Scott Seu (President and CEO)

Yeah, I think the best way to answer that, Paul, is that we are not the decision makers for the legislature in terms of determining if they're going to have a special session. We are gearing up for the next session. I think that's absolutely a true statement, and if we happen to have a special session before then, then better yet.

Paul Patterson (Equity Analyst)

Okay. Okay. Fair enough. Okay, great! I appreciate it. Have a great weekend, guys.

Scott Seu (President and CEO)

Thanks, Paul.

Operator (participant)

This will conclude our question and answer session. I will now turn the call back to Scott Seu for closing remarks.

Scott Seu (President and CEO)

Thank you, everybody, for joining our call. We greatly appreciate your interest in HEI and of course, your support, and our hearts continue to go out to our communities here, especially on Maui. Thank you all.