Hawaiian Electric Industries - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $799.2M and diluted EPS from continuing operations was $0.17; consolidated diluted EPS was $(0.40) given discontinued operations from ASB and wildfire-related effects.
• Hawaiian Electric utility core net income was ~$49.0M, flat year over year, with higher O&M offset by revenue growth and operational gains; consolidated core EPS from continuing operations was $0.20.
• A unanimous Hawaii Supreme Court decision clarified insurer subrogation limits, providing key momentum to finalize the Maui wildfire settlement, with preliminary approval expected Q2 and final approval targeted Q4 2025 (subject to court timing).
• Strategic actions: sale of 90.1% of American Savings Bank (ASB) in Dec-2024 to reduce holding company debt, and prefunding ~$479M for the first settlement installment, supporting liquidity and a focus on the utility; management stated no additional equity raise or ATM drawdowns are contemplated near term.
• Potential stock catalysts: legislative progress on securitization/wildfire recovery fund and final judicial approval of settlement; risks include elevated wildfire/O&M costs and regulatory outcomes.

What Went Well and What Went Wrong

What Went Well

• “The past year was pivotal… significant progress… foundation for long-term success,” including definitive settlement agreements and favorable Supreme Court ruling that insurers cannot separately sue defendants beyond agreed settlement amounts.
• Utility execution on wildfire mitigation: ~$120M invested in 2024 for grid hardening, PSPS, situational awareness tools (weather stations, AI cameras), vegetation management, reducing ignition risk.
• Renewables and customer affordability: utility achieved a 36% RPS in 2024 (up from 33%), typical residential bill decreased 7%, and $18M bill credits returned.

What Went Wrong

• GAAP results materially impacted by wildfire accruals: FY 2024 net loss $(1,426)M; utility FY net loss $(1,226)M driven by $1,875M pretax wildfire tort-related claims; Q4 consolidated diluted EPS was $(0.40).
• Higher O&M pressure in Q4 (+$30M; +$25M after-tax) from indemnification settlements, wildfire mitigation, and higher insurance costs; utility Q4 GAAP net income fell to $46M from $58M YoY.
• “Holding and Other” losses increased YoY due to Pacific Current impairment and higher wildfire-related expenses; Q4 “Holding and Other” net loss of $(17)M vs $(13)M YoY.

Transcript

Operator (participant)

Hello, and welcome to the fourth quarter 2024 Hawaiian Electric Industries Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session, and if you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Mateo Garcia, Director of Investor Relations. You may begin.

Mateo Garcia (Director of Investor Relations)

Thank you. Welcome, everyone, to HEI's fourth quarter and full year 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, 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 an overview of the important accomplishments we made over the past year and touch on our priorities going forward. I'll then turn it over to Scott DeGhetto, who will discuss the financial implications of recent announcements and walk through our financial results. We'll then open it up for questions. The past year was pivotal in the history of our company, and I'm proud of what we've been able to accomplish. Since August of 2023, we've told you that our objective is to remain a strong, financially healthy enterprise, best positioned to serve the communities in which we operate. This objective has guided us throughout the past 18 months as we've taken prudent, measured actions to maintain our financial strength in the wake of the Maui wildfires.

In November 2024, we came together with other parties to sign final settlement agreements in the Maui wildfire tort litigation. We did so on an expedited basis, significantly enhancing clarity for our company's path ahead. This milestone accomplishment was the culmination of months of negotiations, and once fully approved by the court, the settlement will provide an accelerated path to recovery for those impacted by the fires. Throughout the year, we took numerous actions to bolster our liquidity and ensure HEI is in the strongest possible financial position as we work toward finalizing the settlement. The successful equity offering we closed in September resulted in $558 million in net proceeds, fully funding our first payment under the settlement. We also strengthened our liquidity by putting in place a $250 million ATM program at the holding company and a $250 million accounts receivable-backed credit facility at the utility.

With these collective actions, we ended 2024 in the strongest liquidity position in our company's history. In late December, we completed the strategic review process for American Savings Bank. This transaction was the result of a deliberate and thoughtful process involving numerous potential buyers. After evaluating a range of factors, including transaction certainty, proceeds, regulatory considerations, and potential stakeholder impacts, our board concluded that selling the bank to a group of independent investors was the best step forward. Our sale of 90.1% of our bank simplifies HEI's strategy and regulatory position and allows us to focus on our core utility business. The proceeds will be used to reduce holding company debt, strengthening our balance sheet, and increasing financial flexibility going forward.

Following the Maui wildfires, we also said that the utility would quickly implement enhanced wildfire safety measures while working closely with the community and other stakeholders to develop an updated long-term wildfire safety strategy. In 2024, the utility implemented impactful measures on an expedited basis and just last month submitted its updated long-term wildfire safety strategy, which I'll discuss in more detail shortly. I'd add that the achievements made to progress the utility's wildfire safety strategy were made while continuing to progress another key strategic initiative: integrating increasing amounts of renewables on the utility's grid. The utility achieved a 36% renewable portfolio standard in 2024, up from 33% in 2023. This keeps Hawaiian Electric on track to reach its interim goal of 40% RPS by 2030. The utility was able to achieve this milestone while reducing customer rates, and the average residential bill decreased 7% in 2024.

Finally, our utility is continuing its efforts at the Hawai'i State Legislature to pursue the creation of a wildfire recovery fund and a mechanism to support independent power producer financing of clean energy projects. I'd emphasize that it's still early in the legislative process, and our legislature is juggling a number of complicated issues this year. However, I'm pleased that the high level of engagement among so many in Hawai'i to address these critical issues. Turning to the next slide, we remain deeply committed to advancing wildfire mitigation efforts, and since launching an expanded wildfire safety strategy in the wake of the Maui wildfires, the utility has rapidly advanced efforts to reduce the risk of wildfires. In 2024 alone, the utility invested approximately $120 million to make wildfire safety improvements.

In 2024, our utility launched a public safety power shutoff program, tested and replaced thousands of utility poles, upgraded miles of overhead power lines, cleared intrusive vegetation near electrical equipment, and installed weather stations and AI-assisted high-definition video cameras across our service territories. These initiatives reflect our ongoing dedication to supporting Hawai'i's resilience and safety in the face of increasingly severe weather events. I'm pleased that we were able to make such substantial strides in 2024 to reduce the risk of wildfires ignited by utility equipment. In January, the utility filed an updated wildfire safety strategy with the PUC. The updated strategy builds upon the immediate actions taken in response to the August 2023 wildfires and establishes a three-year action plan for 2025 through 2027. The cost of the plan is estimated at about $450 million, with approximately $400 million expected to be capital expenditures.

The ultimate objective of the plan is to identify and implement measures that can accomplish the greatest risk reduction while balancing affordability and reliability for our communities. The utility's approach to accomplish this is detailed on slide five. I'd note that implementation of the wildfire safety strategy will be an evolving process, which will include annual updates to the PUC and ongoing assessments of wildfire risk, mitigation measures, and environmental conditions. Lastly, I'll note that on February 6, the Hawai'i Supreme Court heard oral arguments in the proceeding to resolve the outstanding issues with insurers who filed subrogation claims related to the 2023 Maui wildfires. Just a few days later, on February 10, the court issued a unanimous decision in our favor. The court's decision aligns with our position on key questions that arose from insurers' challenges to the settlement.

It clarifies that once the settlement becomes final, insurers seeking to recover amounts paid to settling plaintiffs cannot separately sue defendants. We're pleased that the court's decision aligns with our arguments and was issued on an accelerated timeline. The decision helps move the settlement forward, bringing increased certainty to those who suffered loss in the Maui wildfires while providing more clarity for our company's path toward reestablishing financial stability. This was a key step in finalizing the settlement, and the Second Circuit Court on Maui can now consider the settlement agreements for final judicial approval. We expect our first payment obligation under the settlement to become due late this year or early next. In summary, with our simpler, more focused business model, strong liquidity position, and measures in place to protect against the risk of catastrophic weather events going forward, we believe we're well-positioned to continue executing on our priorities.

Looking ahead, we'll continue to focus on obtaining supportive legislation, finalizing and implementing the settlement agreement in the Maui wildfire tort litigation, and ultimately returning to investment grade. With that, I'll now turn the call over to Scott DeGhetto.

Scott DeGhetto (EVP, CFO and Treasurer)

Thank you, Scott. Turning to slide seven, I'll first touch briefly on the previously announced ASB transaction. At the end of 2024, we closed on the sale of 90.1% of ASB for $405 million based on a total valuation of $450 million. We are pleased to have completed this transaction in the timeline that we did with simultaneous signing and closing. The structure allowed us to avoid lengthy and uncertain regulatory reviews. The net proceeds of approximately $380 million will be used to pay down holding company debt. ASB's 2024 results are presented as discontinued operations in the consolidated financial statements. For the full year 2024, the net loss from discontinued operations totaled $103 million compared to net income of $53 million in 2023. The $103 million loss includes a net loss on the sale transaction of approximately $116 million, which is net of a $2.4 million tax benefit.

Excluding wildfire expenses, the goodwill impairment recorded in the second quarter, and the net loss recorded due to the sale transaction, ASB's core net income for 2024 was $79 million. The remainder of my comments on the quarter's results will focus on our continuing operations. For the full year 2024, we generated a loss from continuing operations of $1.3 billion. The results include wildfire settlement accruals of $1.9 billion pre-tax, as well as the impacts of other Maui wildfire-related expenses. The results also include the $35 million asset impairment recorded at Pacific Current in the third quarter. Excluding these items, consolidated core net income was $124 million compared to $152 million in 2023. Utility core net income was $181 million compared to $195 million in 2023. The decrease in utility core net income was driven by higher O&M expenses, which included increased wildfire prevention-related expenses such as vegetation management.

Holding company core net loss was $56 million compared to $43 million in 2023. The higher core net loss was driven by lower Pacific Current net income due to outages at both the Hamakua and Mahipapa generating facilities. Turning to our liquidity on the next slide. As of the end of the fourth quarter, the holding company and the utility had approximately $566 million and $184 million of unrestricted cash on hand, respectively. The holding company cash balance includes the approximately $380 million from the ASB sale that will be used to retire debt. In addition, $479 million has been set aside in a wholly owned subsidiary created for the specific purpose of holding the first installment payment pursuant to the Maui wildfire settlement. This is included in restricted cash on the balance sheet.

Looking ahead, we will continue to prudently manage our liquidity as we work through finalizing the settlement and as we formulate financing plans for future settlement payments and utility capital expenditure needs. With that, let's open up the call to questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure you are not on speakerphone and that your phone is not on mute when called upon. Thank you. Your first question comes from Michael Lonegan with Evercore. Your line is open.

Michael Lonegan (Director)

Hi. Thanks for taking my question.

Julien Dumoulin-Smith (Research Analyst)

Hi, Michael.

Michael Lonegan (Director)

Hi. Obviously, the Hawai'i Supreme Court issued their ruling that the insurers can't bring their separate legal action against the defendants. I was just wondering if you could talk about your confidence level that the settlement will proceed forward without any more interference from the insurance companies, whether the case be appealed to the U.S. Supreme Court or if the insurers try to make other arguments. Maybe they try to say the settlement was reached in bad faith or pursue another avenue to disrupt it.

Scott Seu (President and CEO)

Yeah. No, thanks for the question, Mike. So the bottom line up front, the conclusion of the Hawai'i Supreme Court decision, that was a very positive and a major step towards finalizing the settlement agreement. So we're really, really pleased with the outcome. We are awaiting for the written order to come from the Supreme Court, which will probably be issued in the coming weeks. At some point, we'll move to dismiss the subrogation insurers' claims taking into account the Hawai'i Supreme Court ruling. I can't really say when we would time that motion. We're still considering the timing on that motion. Next steps going forward to finalize the settlement through the court would be we expect the class and individual plaintiffs to announce their agreement on how they're allocating the aggregate settlement amount between the class fund and the individual fund.

After that occurs, then the class will move for preliminary approval, and once that's granted, begin the notice process. After that, there's going to be an opportunity for claimants to opt out or object to the class settlement, obtain good faith settlement determinations, and final class approval. In terms of timing, we expect preliminary approval in the second quarter, objection and opt-out deadlines to be in the third quarter, and the approval hearing to be in the fourth quarter of 2025. Of course, timing of all of this could shift. Let me get back to the overall outcome and confidence level. This is the outcome we are hoping for, and it's just a matter of working through the process now.

Michael Lonegan (Director)

Got it. Thanks. And then on CapEx, you highlighted you're going to invest nearly $400 million in wildfire safety over the next few years. I think you previously said your maintenance capital is about $300 million a year. Just wondering if you could share what your total investment level we should expect over the next few years and what rate-based growth that could drive, and then also how we should think about your FFO to debt target as you finance the settlement payments.

Scott Seu (President and CEO)

Okay, Mike. I'm going to have Paul Ito, Hawaiian Electric CFO, respond to your question.

Paul Ito (CFO)

Hey, Mike. Thanks for the question. So right now, we are currently refining our three-year capital forecast in light of the recently filed wildfire safety strategy. And in addition, we're preparing for a potential rate case. And this refinement process includes, number one, prioritizing the projects, and then, number two, assessing the availability and cost of resources, both internal and external. So subject to the foregoing caveats, over the three years, we do expect an increasing level of potential CapEx. For 2025, we're targeting to be moderately higher than 2024, probably in the $350 million-$375 million range. In 2026 and 2027, we do have additional opportunities for CapEx. So as you mentioned, our baseline CapEx would be the first layer. That's, again, in the $300 million range. We talked about the wildfire safety strategy in terms of $400 million, roughly, over the three years.

But in addition to that, we also have approved EPRM projects that we would start work on. There are a number of those projects. The largest ones include our Waiau repowering project. It's a 253-megawatt repowering. We have our Waena BESS project, Army Privatization, and some resilience work. But in aggregate, if you take all of those together, these projects would generally add, roughly, call it $150 million-$175 million in 2026, and then somewhere in the range of $200 million-$250 million in 2027. So again, subject to resource availability, but in broad strokes, that's the level of CapEx that we're forecasting. In addition to that, we do have some additional EPRRM projects that are not approved, of course, subject to approval by the PUC. So again, rough estimates, but I think it gives you a general sense of our CapEx plan going forward.

And then I'll turn it over to Scott to talk about the FFO to debt question.

Scott Seu (President and CEO)

Yeah. On the FFO side, we're not going to give you a specific target other than to say we're going to target investment-grade credit ratings. And so I think you understand what that means from an FFO to debt perspective. And if you look historically where we were, we tended to be, I think, higher than the peers. And we're just going to try and stay in the allowed ranges from all three of the agencies, again, to maintain or at least not maintain, but target an investment-grade rating.

Michael Lonegan (Director)

Got it. Thanks, and then lastly for me, in the Hawai'i legislative session, I know it's early. With some concerns about customer bills, there's an amended version of House Bill 982 that proposes that about roughly half of the $1 billion wildfire insurance fund would be financed by shareholders, with the other half by customers through securitization. I was just wondering, based on your plans to finance the settlement with a combination of debt and equity and your goal to return to investment grade, in a scenario such as this, where you have to finance $500+ million on behalf of investors, obviously large relative to the size of your company, how would you think about financing it? Anything you can share there?

Scott Seu (President and CEO)

Yeah, Michael. Like I said in my earlier comments, it is very early in the process, and there's a lot of debate going on. I'll note that in the most recent version of that bill, the actual amounts that would possibly be coming from shareholders was blanked out. So to me, it's an indication that it is early in the process. I think it's fair to say that everybody, including the utilities, is very focused on impacts on customers. But we'll just have to see how this plays out.

Michael Lonegan (Director)

Great. Thanks for taking my question.

Scott Seu (President and CEO)

Thanks, Michael.

Operator (participant)

Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Julien Dumoulin-Smith of Jefferies. Your line is open.

Julien Dumoulin-Smith (Research Analyst)

Hey, good afternoon, team. Thank you guys very much for the time. I appreciate it.

Scott Seu (President and CEO)

Thanks, Julian. Hi.

Julien Dumoulin-Smith (Research Analyst)

Hey, afternoon. Hey, just wanted to pick up on that last point there. Just wanted to understand how you guys are thinking about framing the wildfire legislation, maybe perhaps firstly, building stakeholder support. We got a crossover day coming up here in the next handful of weeks. Can you speak to a little bit about your successes thus far on that front? I'll note, for instance, the senator who seemingly prevented this bill last time from coming out of a committee has sponsored the new iteration. I find that notable, and then separately, obviously, last go-around, you didn't have the settlement in hand, and so presumably, that should have unlocked a separate set of pathways and stakeholders.

But be very curious to see how you would set expectations of both what the major building blocks are that are viable, and then B, process and what we should be expecting on these upcoming crossover dates. I think the first one's on March 6th, if I got it right.

Scott Seu (President and CEO)

Yeah. So the way I'd think about it, Julian, is, yeah, there has been a lot of positive momentum, especially when we compare against where we were last year, last session. Right? A year ago, we didn't know what the outcome of the settlement discussions would be. We weren't quite sure in terms of our overall how quickly we could move through the litigation process and so on. So where we are today is in a much more positive stance, and there's a lot more clarity. So with that, that's provided the basis for these discussions to resume in the legislature. And yes, there are always going to be some pretty tough questions coming about in terms of how do we manage impacts on customers?

How do we balance the needs of our customers, our shareholders, while we still are moving towards strengthening the financial positioning of the company so that we can continue to provide service, so those are all swirling around during these legislative discussions right now. The way that I will always remind people is that we fully expect that we have to have these discussions where we are right now in the process at the legislature. Yes, it was very, I think, a very positive sign that our state senator was willing to reintroduce the bill, and again, it's to tee up the discussion, to debate the issues.

I think it was very positive when you read the introductions to those bills in terms of the recognition why establishment of something like a wildfire recovery fund is good policy and will provide benefits for customers, for the company, and the state of Hawai'i. So I think that what we'd expect is that there's going to be continued ongoing debate, and we'll be participating in that. There are certain elements of the legislation that are very important to us in order to have the benefits of balancing the risk to customers as well as to shareholders. We'll just be part of that process. And I'm just very, very pleased in terms of, like I said earlier, the fact that we are in the mix. We have these bills going forward, and we're having the debate.

Julien Dumoulin-Smith (Research Analyst)

Maybe just as a follow-up, if we can address securitization directly. I mean, obviously, the rating agencies have taken a fairly hard line on this subject. I mean, can you speak a little bit to the prospects of getting something that would suffice with the agencies here and maybe speak to that issue a little bit further, both in terms of the prospects in process here in the legislature as well as to the nuances of exactly what is being prescribed by the agencies at this point in time, if we can get enough detail?

Scott Seu (President and CEO)

Yeah. Well, let me comment first with the perspective of the legislative discussions regarding securitization. I think given all the discussion that started last session and that's continued to this year, I think there is a fairly good understanding now of why securitization makes a lot of sense in terms of being able to secure lower-cost financing, which ultimately goes towards benefiting our customers. So I think that's a positive. As far as the second part of your question, what are the expectations of the rating agencies? I'll have Scott DeGhetto comment on that.

Scott DeGhetto (EVP, CFO and Treasurer)

Yeah. I think that the agencies, all three of them, want to see some sort of backstop fund, among other things, to enhance ratings. Again, to Scott's earlier point, I think it's too early in the process from a legislative process standpoint to determine where that's going to shake out. And if we get it, it's obviously credit-positive. Or if we get some sort of bill that resembles what's been introduced in the legislature, it'll be credit-positive. And if we don't, we'll just continue to work with the rating agencies and develop a plan to get to investment grade as best we possibly can. But again, I think it's just too soon to speculate. Yeah. Absolutely. And just in terms of creating a pathway here for funding, I know that you said a second ago it was blanked out in the 982 about any shareholder funding.

But can you speak to, I mean, Scott, you've been very diligent thus far in managing the company through this difficult period in terms of ensuring an ongoing access to capital and, more specifically, a cash-flow-positive backdrop for the core company? If you think about the financing need, providing a clear latitude through the near and medium term to find resolution here out of this all. Yeah. And again, we haven't given any direct guidance in terms of how we'll fund the balance of the settlement payments, as we've said on previous calls. But as we go forward, we're continuously looking at the capital markets. We have, in my opinion, strong access. That was demonstrated by the equity deal that was done in September, which was well oversubscribed. The utility refunded the $50 million maturity that they had coming due in January.

They did that prior to the end of the year. We've had a number of firms reach out to us on refinancing the $50 million that comes due at HEI in December, and we're receiving inbounds quite regularly on what's going on in the capital markets, our access both to the debt and the equity market, so I feel very confident about our access going forward, and again, we've prefunded that payment approximately a year in advance, and so we really have a lot of time to continue to develop our thoughts around how we'll finance the balance of those payments.

Julien Dumoulin-Smith (Research Analyst)

Right. Let me ask that maybe more directly here. No equity raise contemplated, at least in the medium term from what I can tell based on what you would need, barring any changes like the legislature?

Scott DeGhetto (EVP, CFO and Treasurer)

Yeah. The answer to that question is yes.

We don't have any anticipated equity raises, and we don't have any anticipated drawdowns or use on the ATM facility either.

Julien Dumoulin-Smith (Research Analyst)

Thank you so much for that clarity. I really appreciate you being transparent about it. Thank you so much.

Scott DeGhetto (EVP, CFO and Treasurer)

Thanks, Julian.

Operator (participant)

This concludes the question-and-answer session. I'll turn the call to Scott Seu for closing remarks.

Scott Seu (President and CEO)

Mahalo to everybody for calling in today. So in closing, 2024 was a year of really significant achievements in the face of unprecedented challenges facing our company. I really feel that we've made rapid progress towards rebuilding the financial strength of our enterprise. And again, just want to highlight that with the recent favorable Supreme Court decision, we're well-positioned to navigate the path ahead. Again, I want to thank our shareholders, a great many of whom are our neighbors here in Hawai'i, for your continued investment in HEI. We greatly appreciate your support as we continue to help our communities move forward. Mahalo.

Operator (participant)

This concludes today's conference call. Thank you for joining. You may now disconnect.