10-Q: Hawaiian Electric Industries Reports Mixed Q1 Results Amidst Maui Wildfire Challenges

Hawaiian Electric Industries (HEI) and its subsidiaries report a decrease in revenue and net income for the first quarter of 2024, impacted by the Maui wildfires, while the bank segment shows growth.

Summary

• Hawaiian Electric Industries (HEI) and its subsidiaries reported a total revenue of $897.2 million for the first quarter of 2024, a decrease from $928.2 million in the same period last year.
• The electric utility segment experienced a revenue decrease from $830.4 million to $788.6 million, while the bank segment saw an increase from $93.9 million to $105.1 million.
• Net income for common stock decreased from $54.7 million to $42.1 million year-over-year.
• The electric utility segment's operating income decreased from $75.9 million to $63.4 million.
• The bank segment's operating income increased from $23.5 million to $25.5 million.
• The other segment's operating loss increased from $5.9 million to $12.5 million.
• The company incurred $30.1 million in Maui wildfire-related expenses, net of insurance recoveries and approved deferral treatment, with $24.6 million in the electric utility segment.
• The company has deferred $22.6 million of certain incremental costs related to the Maui windstorm and wildfires to a regulatory asset.
• The company has $165 million of excess liability insurance for third party claims, including claims related to wildfires, with a retention of $0.3 million, and $145 million directors and officers liability insurance to cover claims related to the shareholder and derivative lawsuits, with a retention of $1.0 million.
• The company's and Utilities insurance receivable totaled $28.7 million and $22.1 million, respectively, under the policies.
• The company has contributed $75 million to the One Ohana Initiative, a humanitarian aid fund for victims of the Maui wildfires.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with significant challenges related to the Maui wildfires and financial performance, offset by some positive developments in the bank segment and ongoing efforts to address the situation. The overall sentiment is negative due to the financial impact of the wildfires and the uncertainty surrounding the company's future.

Positives

• The bank segment showed growth in operating income, increasing from $23.5 million to $25.5 million.
• The company has deferred $22.6 million of certain incremental costs related to the Maui windstorm and wildfires to a regulatory asset.
• The company has insurance coverage for third-party claims and directors and officers liability.
• 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.

Negatives

• Total revenue decreased from $928.2 million to $897.2 million.
• Net income for common stock decreased from $54.7 million to $42.1 million.
• The electric utility segment experienced a decrease in operating income from $75.9 million to $63.4 million.
• The other segment's operating loss increased from $5.9 million to $12.5 million.
• The company incurred $30.1 million in Maui wildfire-related expenses, net of insurance recoveries and approved deferral treatment.

Risks

• The company faces potential liabilities from numerous lawsuits related to the Maui wildfires.
• There is uncertainty surrounding the company's access to capital and credit markets due to the costs related to the Maui wildfires.
• The company is exposed to risks from extreme weather events, including wildfires.
• There is a risk of further downgrades by securities rating agencies.
• The company faces risks associated with increasing reliance on renewable energy.
• The company is exposed to cybersecurity risks and the potential for cyber incidents.
• The company faces risks associated with the geographic concentration of its businesses and ASBs loans.
• The company is subject to regulatory risks, including decisions by the PUC in rate cases and other proceedings.
• The company is subject to potential enforcement actions by the OCC, the FRB, the FDIC and/or other governmental authorities.

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 company believes that most of the property damage and all of the fatalities are from the Afternoon Fire.
• 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 and who are currently named as plaintiffs in the various cases.
• Hawaiian Electric fully supports this humanitarian initiative and has contributed $75 million.
• Hawaiian Electrics contribution to the Initiative was less than half of the total, and Hawaiian Electric's insurance carriers funded its share of the contributions to the fund.
• Hawaiian Electrics contribution is reflective of its commitment to join with community partners to provide solutions to promote Mauis recovery.
• Hawaiian Electrics commitment to contribute to the One Ohana Initiative is not an admission of guilt or reflection of fault or liability related to the wildfires.
• The Company intends to vigorously defend against the litigation if necessary.

Industry Context

The announcement reflects the challenges faced by utility companies in the face of natural disasters and the increasing focus on renewable energy and grid modernization. The company's performance is also influenced by broader economic conditions in Hawaii, including tourism and real estate markets.

Comparison to Industry Standards

• The decrease in revenue and net income for HEI is worse than the industry average for utility companies in the first quarter of 2024, which have generally shown stable or modest growth.
• The bank segment's growth in operating income is in line with the performance of regional banks, which have benefited from higher interest rates.
• The increase in operating loss for the other segment is worse than the industry average for diversified energy companies, which have generally shown stable or modest growth in their non-utility segments.
• The company's contribution to the One Ohana Initiative is a unique response to the Maui wildfires and is not a standard practice in the industry.
• The company's deferral of certain incremental costs related to the Maui windstorm and wildfires to a regulatory asset is a common practice in the utility industry to manage the financial impact of extraordinary events.
• The company's insurance coverage for third-party claims and directors and officers liability is in line with industry standards for utility and financial companies.
• The company's focus on renewable energy and grid modernization is consistent with broader industry trends and regulatory requirements.

Legal Proceedings

• As of May 9, 2024, HEI and the Utilities have each been named in approximately 400 lawsuits related to the Maui windstorm and wildfires.
• One class action is pending in federal court, while the remainder of the cases are pending in Maui and Oahu Circuit Courts.
• One lawsuit asserting similar theories and claims was filed by the County of Maui against HEI and the Utilities.
• Three other lawsuits were filed by approximately 160 subrogation insurers against HEI, the Utilities, a private landowner, and telecommunications companies.
• One lawsuit that names HEI, the Utilities, and other defendants also alleges that oil companies contributed to the burning of fossil fuels and caused climate change that led to the Lahaina fire.
• On August 24, 2023, a putative securities class action captioned Bhangal v. Hawaiian Electric Industries, Inc., et al., No.: 3:23-cv-04332-JSC was filed in the United States District Court for the Northern District of California.
• On September 11, 2023, a putative shareholder derivative action captioned Rice v. Connors, et al., No. 1CCV-23-0001181 was filed in the Circuit Court of the First Circuit, State of Hawaii.
• Three putative shareholder derivative actions were filed in the United States District Court for the Northern District of California between December 26, 2023 and February 8, 2024, including: Kallaus v. Johns, et al., No. 3:23-cv-06627 (the Kallaus Action), Cole v. Johns, et al., No. 3:24-cv-00598 (the Cole Action), and Tai v. Seu, et al., No. 3:24-cv-01198 (the Tai Action).
• On April 8, 2024, a putative shareholder derivative action captioned Assad v. Seu, et al., No. 1:24-cv-00164 was filed in the United States District Court for the District of Hawaii.

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.
• HEI has committed to make revolving short-term loans to Hawaiian Electric pursuant to the terms set forth in the standing commitment letter dated December 8, 2023.
• Hawaiian Electric may also borrow from or loan to Hawaii Electric Light and Maui Electric on a short-term basis.

Stakeholder Impact

• Shareholders are impacted by the decrease in net income and the suspension of dividends.
• Employees are impacted by the ongoing challenges and uncertainties related to the Maui wildfires.
• Customers are impacted by the potential for higher electricity bills and service disruptions.
• Suppliers are impacted by the potential for changes in demand and payment terms.
• Creditors are impacted by the company's credit rating downgrades and the potential for increased borrowing costs.

Next Steps

• The company will continue restoration work to rebuild portions of the electric system in Lahaina.
• The company will continue to participate in a process with the State and community partners to explore solutions to support Mauis recovery and compensate victims for damages.
• The company will continue to vigorously defend against the litigation if necessary.
• The company will continue to work with financial advisors to maximize liquidity.
• The company will continue to evaluate other sources of liquidity that could include securitization, re-prioritizing capital spending and reducing O&M, issuing secured debt, and conducting asset sales.
• The company will continue to pursue potential grant funding of projects under various programs as primary applicant as well as in partnership with other organizations.
• The company will continue to explore clean energy tax incentives included in the IRA.
• The company will continue to develop a more comprehensive Wildfire Safety Strategy.
• The company will continue to implement an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy and decarbonization pathways that incorporates customer and stakeholder input.
• The company will continue to develop an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers.
• The company will continue to implement the Grid Modernization Strategy.
• The company will continue to develop the CBRE program.
• The company will continue to work with the lone bidder to improve certain aspects of its two proposed projects outside of the RFP process for the benefit of the residents of Molokai.
• The company will continue to explore options to move forward with the Lanai CBRE project.
• The company will continue to evaluate the impact of the climate disclosure rules on the company's consolidated financial statements.

Key Dates

Keywords

Maui wildfires, Hawaiian Electric Industries, HEI, electric utility, banking, financial results, renewable energy, regulatory, insurance, litigation, performance-based regulation, PBR, credit rating, capital markets, net income, operating income, revenue, EBITDA, One Ohana Initiative