10-Q: Hawaiian Electric Industries Reports \$1.3 Billion Loss in Q2 Amidst Wildfire Claims

Hawaiian Electric Industries (HEI) and its subsidiary, Hawaiian Electric Company, Inc. (Hawaiian Electric), reported significant losses in the second quarter of 2024, primarily due to accrual of estimated wildfire liabilities.

Summary

• Hawaiian Electric Industries (HEI) reported a net loss of \$1.3 billion for the second quarter of 2024, and a net loss of \$1.25 billion for the first six months of 2024.
• Hawaiian Electric Company, Inc. (Hawaiian Electric) also reported a net loss of \$1.23 billion for the second quarter of 2024, and a net loss of \$1.19 billion for the first six months of 2024.
• These losses were primarily due to the accrual of estimated wildfire liabilities totaling approximately \$1.71 billion related to the Maui windstorm and wildfire tort-related legal claims.
• The company's management has expressed substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
• HEI and Hawaiian Electric are working on a financing plan to raise capital to fund the wildfire settlement payments, potentially through a mix of debt, common equity, and equity-linked securities.
• The company's electric utility segment experienced a decrease in operating income due to the wildfire tort-related claims and higher operating expenses.
• The bank segment also experienced a decrease in operating income due to a goodwill impairment of \$82.2 million.
• The other segment experienced a higher operating loss due to lower asset performances and higher corporate expenses.
• The Utilities kWh sales in the second quarter of 2024 were down by 1.2%, compared to the second quarter of 2023 due to a decrease in Maui sales from the Maui windstorm and wildfires and the continued adoption of energy efficiency measures and distributed energy resources.
• ASBs net interest margin for the second quarter of 2024 was 2.79% as compared to 2.75% for the prior quarters ended March 31, 2024 and June 30, 2023.

Sentiment

Score: 2

Explanation: The document conveys a highly negative sentiment due to the significant financial losses, the substantial doubt about the company's ability to continue as a going concern, and the numerous legal and operational challenges. The company's future is highly uncertain, and the risks are substantial.

Positives

• ASBs net interest margin for the second quarter of 2024 was 2.79% as compared to 2.75% for the prior quarters ended March 31, 2024 and June 30, 2023.
• The company is actively working with the State of Hawaii and others in the community on solutions for Mauis recovery, including the compensation of those who suffered losses in the Maui windstorm and wildfires.
• The Utilities have deferred \$30.2 million of certain incremental costs related to the Maui windstorm and wildfires to a regulatory asset.

Negatives

• HEI and Hawaiian Electric reported significant net losses due to wildfire liabilities.
• The company's management has expressed substantial doubt about its ability to continue as a going concern.
• The bank segment recorded an \$82.2 million goodwill impairment.
• The Utilities kWh sales in the second quarter of 2024 were down by 1.2% compared to the same period in 2023.
• The company is facing numerous lawsuits related to the Maui wildfires.
• The company's credit ratings have been downgraded to below investment grade.

Risks

• The company faces significant financial risks due to the Maui wildfires and related legal claims.
• There is substantial doubt about the company's ability to continue as a going concern.
• The company's ability to raise capital is uncertain.
• The company's credit ratings have been downgraded, impacting its ability to access capital markets.
• The company is facing numerous lawsuits, including class action and shareholder derivative lawsuits.
• The company's insurance coverage may not be adequate to cover all potential liabilities.
• The company's operations are subject to risks from extreme weather events and natural disasters.
• The company's ability to recover costs through rates is subject to regulatory approval.
• The company is subject to cybersecurity risks and potential cyber incidents.
• The company is subject to risks associated with increasing reliance on renewable energy.

Future Outlook

The company expects to finance the settlement payments over time through a mix of debt, common equity, equity-linked securities or other potential options. The company expects that its deposit base will remain relatively flat to down, given the higher interest rate environment, as well as inflationary pressures on customers that may drive increased spending. ASB also expects that the higher interest rate environment will continue to pressure funding costs and its deposit mix as customers move funds into higher costing certificate of deposits, which in turn will affect net interest income and net interest margin.

Management Comments

• Management believes HEIs and the Utilities current cash balance at June 30, 2024 of \$124.4 million and \$88.6 million, respectively, and available capacity on the asset-based lending facility (ABL Facility) would not be sufficient to fund the Companys planned expenditures and operational needs, which include potential payments to settle wildfire claims.
• Management believes the Company will be able to raise the necessary capital, there is no assurance that managements plans will be successful.

Industry Context

The announcement reflects the challenges faced by utility companies in the face of climate change and natural disasters, particularly in regions prone to wildfires. The need for robust risk management, insurance coverage, and access to capital is highlighted. The company's focus on renewable energy and grid modernization aligns with broader industry trends towards decarbonization and grid resilience.

Comparison to Industry Standards

• The financial results are significantly worse than industry standards due to the extraordinary impact of the Maui wildfires and related legal claims.
• The accrual of \$1.71 billion in wildfire liabilities is a unique event that is not typical for utility companies.
• The company's credit rating downgrades are also unusual and reflect the severity of the financial challenges it faces.
• The company's focus on renewable energy and grid modernization is consistent with industry trends, but the financial impact of the wildfires is a major deviation from industry norms.
• The company's performance is significantly worse than comparable companies such as NextEra Energy, Duke Energy, and Southern Company, which have not experienced similar levels of financial distress.

Legal Proceedings

• HEI and the Utilities have each been named in approximately 700 lawsuits related to the Maui windstorm and wildfires.
• Two class actions are also pending in federal court.
• One lawsuit was filed by the County of Maui against HEI and the Utilities.
• One lawsuit was filed by Spectrum Oceanic, LLC against HEI and the Utilities and other defendants.
• Other lawsuits were filed by approximately 160 subrogation insurers against HEI, the Utilities, a private landowner, and telecommunications companies.
• A putative securities class action was filed against HEI and certain of its current and former officers.
• Six putative shareholder derivative actions were filed against certain current and former officers and directors of HEI and Hawaiian Electric.

Related Party Transactions

• Intercompany electricity sales of the Utilities to ASB and other segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.
• Sales from Hamakua Energy, LLC (Hamakua Energy) to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.

Stakeholder Impact

• Shareholders face significant risks due to the company's financial losses and uncertainty about its future.
• Employees may be affected by potential restructuring or cost-cutting measures.
• Customers may experience service disruptions due to wildfire mitigation efforts and potential rate increases.
• Suppliers and creditors face increased risk due to the company's financial instability.
• Communities in Hawaii are impacted by the wildfires and the company's efforts to rebuild and restore power.

Next Steps

• The company will continue to work with financial advisors on a financing plan to raise capital to fund the wildfire settlement payments.
• The company will continue to work with the State of Hawaii and others in the community on solutions for Mauis recovery.
• The company will continue to pursue insurance recoveries to mitigate the financial impact of the wildfires.
• The company will continue to develop and implement its Wildfire Safety Strategy.
• The company will continue to work on its Integrated Grid Planning process.
• The company will continue to implement its Demand Response Portfolio Plan.
• The company will continue to implement its Grid Modernization Strategy.

Key Dates

Keywords

wildfires, Maui, legal claims, financial loss, going concern, capital raise, credit rating, renewable energy, electric utility, banking, insurance, regulatory, decarbonization, performance-based regulation, grid modernization