10-K: Hawaiian Electric Industries Amends Retirement Plan, Files Annual Report Amidst Wildfire Challenges

Hawaiian Electric Industries clarifies employee participation in its retirement savings plan and files its annual report, navigating financial and operational complexities following the devastating Maui wildfires.

Summary

• Hawaiian Electric Industries (HEI) has amended its retirement savings plan to clarify the participation date for eligible bargaining unit employees, effective August 1, 2023.
• The company has also filed its annual report on Form 10-K for the fiscal year ended December 31, 2023, which includes separate filings for HEI and Hawaiian Electric Company, Inc.
• The report highlights that HEI is a holding company with subsidiaries in electric utility, banking, and non-regulated renewable infrastructure businesses.
• The electric utility segment, consisting of Hawaiian Electric and its subsidiaries, accounted for approximately 89% of HEIs consolidated revenues and 97% of net income in 2023.
• ASB, the banking subsidiary, had assets totaling approximately $9.7 billion as of December 31, 2023.
• The Other segment includes HEIs corporate expenses and the results of Pacific Current, LLC, which focuses on renewable energy investments.
• The report also details the impact of the Maui windstorm and wildfires, which caused significant property damage and fatalities, and resulted in multiple lawsuits against HEI and its subsidiaries.
• HEI and Hawaiian Electric received multiple downgrades to their debt ratings to below investment grade in August 2023, which has negatively impacted their access to capital markets.
• The Utilities have set a goal to cut carbon emissions from power generation 70% by 2030, compared with 2005 levels, and to achieve net zero carbon emissions by 2045 or sooner, but delays and cancellations in renewable energy projects have slowed progress.
• The Utilities renewable portfolio standard (RPS) was 33.3% in 2023.
• ASB is one of the largest financial institutions in Hawaii with assets of $9.7 billion and deposits of $8.1 billion as of December 31, 2023.
• The report includes a detailed discussion of various risks, including those related to the Maui wildfires, access to capital markets, extreme weather events, regulatory actions, competition, cybersecurity, and environmental regulations.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with significant challenges and risks, particularly related to the Maui wildfires and financial stability, overshadowing some positive aspects like the commitment to renewable energy and employee benefits. The overall sentiment is cautious and somewhat negative from an investment perspective.

Positives

• The Utilities are committed to achieving the State of Hawaiis RPS goals and expect to meet or exceed the 2030 RPS requirement of 40%.
• The Utilities are continuing to replace significant amounts of fossil fuel generation with renewable energy.
• ASB is one of the largest financial institutions in Hawaii and continues to develop and introduce new products and services to meet the needs of its consumer and commercial customers.
• The Utilities have a new three-year contract with the International Brotherhood of Electrical Workers Local 1260, providing for a 3% general wage increase each year.

Negatives

• HEI and Hawaiian Electric received multiple downgrades to their debt ratings to below investment grade in August 2023.
• The Maui windstorm and wildfires have resulted in multiple lawsuits against HEI and its subsidiaries.
• Delays and cancellations in renewable energy projects have slowed the pace of progress toward reducing greenhouse gas emissions.
• The Utilities expect the planned 70% reduction in carbon emissions to be achieved later than the original 2030 target date.
• The Utilities are experiencing potential generation shortfalls on Maui in 2024.
• ASB experienced core deposit outflow in 2023 and was replaced by higher costing term certificates and other borrowings.

Risks

• Potential losses resulting from the Maui windstorm and wildfires could have a material adverse effect on HEIs and Hawaiian Electrics financial condition, liquidity, cash flows and results of operations.
• HEIs and Hawaiian Electrics access to capital markets and other sources of debt and equity financings in a timely manner and on acceptable terms will continue to be negatively impacted as a result of the downgrades in their debt credit ratings to below investment grade.
• Extreme weather events and other natural disasters, particularly those exacerbated by climate change such as the Maui windstorm and wildfires, could materially affect Hawaiian Electrics assets, particularly if they fail or are found to have contributed to a wildfire.
• HEI is a holding company that derives its income from its operating subsidiaries and depends on the ability of those subsidiaries to pay dividends or make other distributions to HEI and on its own ability to raise capital.
• The Company is subject to the risks associated with the geographic concentration of its businesses and current lack of interconnections that could result in service interruptions at the Utilities or higher default rates on loans held by ASB.
• Increasing competition and technological advances could cause HEIs businesses to lose customers or render their operations obsolete.
• The Company is subject to information technology and operational system failures, network disruptions, cyber attacks and breaches in data security that could materially and adversely affect its businesses and reputation.
• HEIs businesses could suffer losses that are uninsured due to a lack of affordable insurance coverage, unavailability of insurance coverage or limitations on the insurance coverage the Company does have.
• Increased federal and state environmental regulation will require an increasing commitment of resources and funds and could result in construction delays or penalties and fines for non-compliance.
• Actions of the PUC are outside the control of the Utilities and could result in inadequate or untimely rate increases, rate reductions or refunds or unanticipated delays, expenses or writedowns in connection with the construction of new projects.
• The capacity provided by the Utilities generating resources and third-party purchased power may not be sufficient to meet customers energy requirements.
• Electric utility and third-party purchased power projects may be significantly impacted by stakeholder activism.
• Electric utility generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated and/or increased operation and maintenance expenses and increased power purchase costs.
• The Utilities may be adversely affected by new legislation or administrative actions.
• The Utilities may be subject to increased operational challenges and their results of operations, financial condition and liquidity may be adversely impacted in meeting the commitments and objectives of clean energy initiatives, Renewable Portfolio Standards (RPS) and other climate related goals.
• Fluctuations in interest rates could result in lower net interest income, impair ASBs ability to originate new loans, impair the ability of ASBs adjustable-rate borrowers to make increased payment obligations or impact ASBs ability to attract and retain deposits.
• ASBs allowance for credit losses may not cover actual loan losses.
• ASBs operations are affected by factors that are beyond its control, that could result in lower revenues, higher expenses or decreased demand for its products and services.
• Banking and related regulations could result in significant restrictions being imposed on ASBs business or in a requirement that HEI divest ASB.
• The Company is subject to the risks associated with the geographic concentration of its businesses and current lack of interconnections that could result in service interruptions at the Utilities or higher default rates on loans held by ASB.
• A large percentage of ASBs loans and securities are collateralized by real estate, and adverse changes in the real estate market and/or general economic or other conditions may result in loan losses and adversely affect the Companys profitability.
• Increased scrutiny and changing stakeholder expectations with respect to our environmental, social and governance (sustainability) programs may result in increased costs and expenses and may expose the Company to new or incremental risks.
• HEIs businesses may be unable to attract, hire, engage and retain a highly skilled and diverse workforce, including senior management, which could affect the Companys execution of its growth strategy and profitability and adversely affect its future performance.
• The Companys costs and expenses could increase as a result of inflationary pressures and such increases may not be fully offset by an increase in revenues.
• HEI and Hawaiian Electric and their subsidiaries may incur higher retirement benefits expenses and have and will likely continue to be subject to substantial liabilities for retirement benefits.
• Adverse tax rulings or developments or changes in tax legislation could result in significant increases in tax payments and/or expense.
• The Company could be subject to the risk of uninsured losses in excess of its accruals for litigation matters, such as litigation related to the Maui windstorm and wildfires.
• Changes in accounting principles and estimates could affect the reported amounts of the Companys assets and liabilities or revenues and expenses.

Future Outlook

The Company expects that HEI and the Utilities liquidity will continue to be impacted as a result of the August 2023 downgrades of their credit ratings to below investment grade which prevents the Company from accessing unsecured, short-term borrowings and will continue to have restricted access to the capital markets and other sources of debt and equity financing in a timely manner and on acceptable terms while the resolution of the Maui windstorm and wildfires and the ongoing related lawsuits are pending.

Management Comments

• The Utilities target compensation at market rates, and due to the significant increase in competitive market pay for linemen over the past few years, provided an 11.4% market rate adjustment and a 4% annual incentive effective February 1, 2024.
• The International Brotherhood of Electrical Workers Local 1260 represents roughly half of the Utilities workforce covered by a collective bargaining agreement. On January 26, 2024, a new three-year contract was ratified and will be in effect from November 1, 2024 through October 31, 2027. The contract provides for a 3% general wage increase in each year of the three-year contract, double time for callouts, and a 1% incentive payment upon achievement of specified objectives.

Industry Context

The document reflects the challenges faced by utility companies in the face of climate change, natural disasters, and the transition to renewable energy, while also highlighting the competitive landscape in the banking sector.

Comparison to Industry Standards

• The Utilities higher levels of reserve margins are required to meet peak electric demands, to provide for scheduled maintenance of generating units (including the units operated by IPPs relied upon for firm capacity) and to allow for the forced outage of the largest generating unit in the system, which is higher than is typically carried by interconnected mainland U.S. utilities, which are able to share reserve capacity.
• The banking industry in Hawaii is highly competitive. At December 31, 2023, there were 7 financial institutions insured by the FDIC headquartered in the State of Hawaii. While ASB is one of the largest financial institutions in Hawaii, based on total assets, ASB faces vigorous competition for deposits and loans from two larger banking institutions based in Hawaii and from smaller institutions that heavily promote their services in niche areas, such as providing financial services to small and medium-sized businesses, as well as national financial services organizations.

Management Changes

Corporate Governance

Legal Proceedings

• Multiple lawsuits have been filed against the Utilities and HEI alleging negligence in failing to prevent the wildfires that led to the property destruction and loss of life.
• A securities class action and three shareholder lawsuits have also been filed against HEI and certain of its current and former officers and directors.

Related Party Transactions

• Certain transactions between HEIs electric public utility subsidiaries and HEI and affiliated interests are subject to regulation by the PUC.
• Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries.

Stakeholder Impact

• Shareholders are impacted by the downgrades in debt ratings and the suspension of dividends.
• Employees are impacted by the changes in compensation and benefits, as well as the potential for job losses due to the Maui wildfires.
• Customers are impacted by the potential for higher electricity rates and the disruption of services due to the Maui wildfires.
• Suppliers are impacted by the potential for reduced demand for their products and services due to the Maui wildfires.
• Creditors are impacted by the downgrades in debt ratings and the potential for increased risk of default.

Next Steps

• The Utilities will continue to replace significant amounts of fossil fuel generation with renewable energy between now and 2030 and expect to meet or exceed the State of Hawaiis RPS goals.
• The Utilities will continue using a portfolio approach to meet its obligation to serve, including increased renewable energy, energy storage, and other potential options, both supply side and customer programs.
• The Utilities will continue to work with various federal agencies to implement measures that will help them achieve their energy efficiency, resilience and clean energy objectives.
• The Utilities will continue to make investments in their cybersecurity program, including personnel, technologies, cyber insurance and training of Utilities personnel.
• The Utilities will continue to pursue complex business transformation initiatives, which include the implementation of new systems and the upgrade or replacement of existing systems.
• The Utilities will continue to work with the PUC to implement the PBR framework.
• The Utilities will continue to work with stakeholders to develop and implement the Integrated Grid Plan.
• The Utilities will continue to develop and implement demand response programs.
• The Utilities will continue to work with the PUC to implement the Electrification of Transportation (EoT) Strategic Roadmap.
• The Utilities will continue to work with the PUC to implement the Renewable Portfolio Standards (RPS).
• The Utilities will continue to work with the PUC to implement the Affiliate Transaction Requirements (ATRs).
• The Utilities will continue to work with the PUC to implement the Community-Based Renewable Energy (CBRE) program.
• The Utilities will continue to work with the PUC to implement the Microgrid Services Tariff.
• The Utilities will continue to work with the PUC to implement the Grid Modernization Strategy.
• The Utilities will continue to work with the PUC to implement the Expedited Pilot Process.
• The Utilities will continue to work with the PUC to implement the Earnings Sharing Mechanism (ESM).
• The Utilities will continue to work with the PUC to implement the Exceptional Project Recovery Mechanism (EPRM).
• The Utilities will continue to work with the PUC to implement the Annual Revenue Adjustment (ARA).
• The Utilities will continue to work with the PUC to implement the Energy Cost Recovery Clause (ECRC) and purchased power adjustment clause (PPAC).
• The Utilities will continue to work with the PUC to implement the Pension and other post-employment benefit trackers.
• The Utilities will continue to work with the PUC to implement the Renewable energy infrastructure program.
• ASB will continue to develop and introduce new products and services to meet the needs of its consumer and commercial customers.
• ASB will continue to make the investment in its people and technology necessary to adapt and remain competitive.
• ASB will continue to diversify its loan portfolio from single-family home mortgages to higher-spread, shorter-duration consumer, commercial and commercial real estate loans.
• ASB will continue to develop and introduce new products and services to meet the needs of its consumer and commercial customers.
• ASB will continue to make the investment in its people and technology necessary to adapt and remain competitive.

Key Dates

Keywords

Hawaiian Electric Industries, Hawaiian Electric, American Savings Bank, Retirement Savings Plan, Maui wildfires, Renewable energy, Carbon emissions, Debt ratings, Financial results, Regulatory risks, Cybersecurity, RPS, Power purchase agreements, Capital markets, Interest rates, Credit risk, Liquidity, Sustainability, Climate change