Q3 2023 Hawaiian Electric Industries Inc Earnings Call
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Good day, everyone and welcome to the Hawaiian Electric Industries third quarter 2023 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If.
If you would like to ask a question during that time simply press star one on your telephone keypad to withdraw your question. It is star one again I would now like to turn the conference over to Matteo Garcia Director of Investor Relations. Please go ahead Sir.
Thank you welcome everyone to Agi's third quarter 2023 earnings call. Joining me today are Scott few hei President and CEO.
Got to Ghetto, Hei executive Vice President CFO, and Treasurer, Shelly Kimura, Hawaiian electric President and CEO.
And Sharon Nishi American savings Bank, President and CEO and other members of senior management.
Our earnings release and a 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.
Refer to the information contained in the slides accompanying today's presentation for definitions information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure now Scott will begin with his remarks.
Hello, Hong Kong Cool welcome everyone given.
Given the August wildfires that impacted our customers and communities our discussion today will be different from our usual earnings calls I'll start with an overview of what we're doing across our companies to reinforce our commitment to serving our communities for the long term.
Shelley Kimura will then provide an update from the utility on a response and rebuilding efforts.
The ghetto, who started as hei CFO on October 1st will then walk you through the quarter's financials and provide an update on our guidance.
It's been three months since the tragedy of the August eight wildfires forever altered the lives of so many of them always in Hawaii's residents.
The tragedy is still fresh for us and the scale of the losses difficult for our hearts and minds to process.
We have friends family neighbors and employees on Maui, who have experienced loss and pain on a scale that no one ever should.
One of whom is greatest strengths is our ability to work together.
We have a concept here, which we call la Lima, meaning many hands working together and that is what it would take for a state to get through this and emerge in a position of strength.
Yesterday Governor Josh screen announced the multi phase initiative to support my always recovery protect our communities against feature extreme weather events and ensure that as a state we can attract the capital needed to keep our communities safe and our state on the path to a sustainable future.
The first phase is focused on providing financial support for families who have lost a loved one and those who were severely injured and I'm always fire.
Payment will be offered on an expedited basis, providing an alternative to a lengthy legal process and the costs associated with it.
Those who choose to participate will waive their ability to get compensated again through litigation related to associated claims.
The state of Hawaii County of Maui, Hawaiian Electric and command that schools have agreed to see this fund as part of the one off on our initiative.
Over $150 million has been raised to date and Hawaiian electric will contribute up to $75 million of the total.
Hawaiian Electric's contribution will be funded by insurance not customers.
This is the start of a constructive and collaborative process for the next phase is intended to support property owners and businesses, who have been severely impacted by the fire followed by statutory and regulatory changes to be proposed in early 2024 to protect how what your consumers and businesses from climate risks.
We look forward to working with the Governor the county of Maui coming him at schools and others in our communities to help address the many tragic impacts of the Maui wildfires.
Additional details will be provided in the months ahead.
As a result of this late breaking developments, we will be delaying the filing of our 10-Q to early next week.
Separate from the events on August 8th.
Sunday Mentos, if our businesses remained strong.
While we had utility equipment damage and lost the ESP branch in Lahaina.
Both our utility and bank have made the necessary adjustments to continue serving the people of west Maui at a time when they most need us.
Our recovery and restoration efforts have required close collaboration with the community and this coordination will remain crucial going forward.
As many of you know we took prudent actions during the quarter to reinforce our financial strength.
We recognize that our decision to suspend the quarterly cash dividend impacts many of U S.
Especially those who rely on the dividend as an important source of income.
This was not a decision we took lightly.
We believe it was the right decision to support our ability to be a strong partner to our communities and empower a thriving future for Hawaii.
Toward that end Hawaiian electric is reexamining and updating its near and long term capital expenditure plan.
To further mitigate the risks of extreme weather events.
This is a priority for us and the work is ongoing.
I know there is a lot of interest in the causes of the fire and our community deserves answers.
Why in electric and others are working to gain a full understanding what happened before during and after the fire.
Particularly as we advanced efforts to figure out what we need to do collectively to keep our communities safe.
We know that the litigation process is top of mind for many of you and I can tell you that as of November seven Hawaiian electric has been named as a defendant in 64 lawsuits by plaintiffs, claiming losses related to the August eight windstorm and wildfires.
Hei has been named and 65.
Many of those lawsuits also named other defendants, including the county of Maui, The state of Hawaii, private land owners and developers and telecommunications companies.
We will vigorously defend the litigation and we intend to contest, both causation and negligence.
Okay.
Most of the lawsuits are in this state circuit Court for Maui County.
We will need to file our responses to the first lawsuits with the court by November 17, and.
And we will then need to file our concert claims against other defendants by January of 19 of next year.
Each of those states is subject to extension or change by the court, but that's what we have currently.
The first trial date is scheduled for October 21 2024.
Lawsuits have also been filed on behalf of shareholders alleging losses from a decline in the stock price and claiming that the Hei board of directors has breached its fiduciary duties.
These cases are in different paths and have been tendered to our separate DNO insurance carriers.
Turning to the slides our core operations have remained strong while we work alongside others in recovery and rebuilding efforts.
On a consolidated basis third quarter earnings per share were <unk> 37 for the quarter net of about 19 cents of wildfire related costs.
Excluding these costs, we earned <unk> 56 per share for the quarter.
Scott to get O will speak to the quarter's financials in more detail shortly.
A few brief updates on the utility and bank operations during the quarter.
Our utility performed well despite working through the challenges of restoring power to our Maui customers following the wildfires.
We have requested deferral treatment of windstorm and wildfire related expenses and we've asked the PUC to issue a decision on an expedited basis by the end of the year.
Last week, we reached a stipulated settlement with the consumer advocate paving the way for a PUC decision.
The final award group selection and announcement under the stage three RFP, which we've updated you on each quarter. This year has been delayed by a little over a month given the events on Maui.
And for Oahu, Hawaii Island, and Maui is variable generation portion.
The utility will announced the selection of the final Award group on December 1st.
Proposals for the firm generation portion of the Malawi RFP are due in January of next year.
Turning to the bank ASB continues to be in a strong position to support our customers and community with a strong capital position excellent credit quality lending capacity and ample liquidity.
Customer deposits are safe and there is no risk to customer deposits as a result of legal claims related to the wildfires.
Asp's deposit base remains stable and was 77% insured and 87% insured or fully collateralized as of quarter end.
The deposit base remains majority retail at 84%.
We have not seen meaningful deposit outflows as a result of the events on Maui.
<unk> remains focused on supporting teammates customers and community members affected by the events of August East and is committed to helping Maui recover.
<unk> has donated nearly $150000 to support Maui relief efforts and is offering waived ATM fees as well as 90 day, forbearance and deferment for commercial and consumer loans.
Customers are able to apply for an emergency personal line of credit up to $5000.
I'm also proud to say that ASP teammates have contributed numerous volunteer hours to support the Maui community through donation drives cleanups and fundraising activities.
In summary, our core operations remained strong across the enterprise and we continue to be well positioned to serve our customers and community.
I'll now turn the call over to Shelly Tomorrow, President and CEO of Hawaiian electric to provide detail on the utilities recovery and response efforts.
Thank you Scott Hello, Hi, everyone I'll start by echoing Scott that our hearts eight for the many people who have been affected by this horrible tragedy on Maui.
I've spent much of my time over the last several months on Maui and I've seen the devastation in Lahaina firsthand.
I know I speak for the entire Hawaiian electric team when I say that we will stand with the Maui community to help recover and rebuild for however long it takes.
Since August eight over 400 employees have been assisting on the ground alongside first responders FEMA and other federal state and county agencies to assist in the recovery efforts.
Our team has shown unwavering dedication and helping our communities on Maui.
Power has now been restored to 99% of customers, who lost electricity in west Maui and Upcountry Maui.
Collaborating with the state.
<unk> County.
The emergency management and other county officials on the path forward for Lahaina Maui is a critical priority for us.
As an example, Maui emergency management officials had asked us to start replacing Poles and other electrical equipment that was damaged in and around Lahaina.
This involves installing temporary poles transformers power lines and other equipment that enables us to provide safe and reliable power while long term community driven plans are developed for lahaina and its future energy needs.
We have been keeping our utility regulators well informed on restoration efforts and as Scott mentioned, we have filed a request to defer expenses related to the wildfires we.
We expect to work in coordination with the PUC as we continue our restoration work and further strengthen our grid's resilience to impacts from climate change and extreme weather.
The risk of wildfires was the only one of a number of Hawaii's unique mix of risks identified through our resilience planning effort.
Wyoming Electric first began developing its wildfire safety strategy in 2019 and continues to adapt it to address the elevated risks and Hawaii.
Hawaiian electric is focusing its efforts in areas identified by the state of Hawaii as being at risk for wildfires.
The three phase safety strategy starts with immediate actions, including expanding the segments of our system to immediately turn off power, if a fault or disturbances detected on a circuit and an elevated risk area.
The power stays off until cruise visually confirm that it is safe to restore power.
The second phase encompasses some of the work that will be done with the $95 million in federal funding from the U S Department of energy under the infrastructure investment and jobs Act, which contribute half of the capital for the 190 million grid resiliency plan that we filed in June 2022.
This is subject to PUC approval.
The plan includes investments to strengthen critical transmission lines to withstand extreme when.
Bolster distribution lines, serving essential community facilities.
<unk> targeted utility poles enhanced vegetation management that falls under that utilities purview and deploy devices to help prevent and respond to wildfires.
As Scott mentioned, we are updating our capital expenditure program to further harden our system.
We are working in partnership with others to evaluate our resilience and wildfire defense strategies as risks evolve.
We are doing that work now by developing Hawaii for gas solutions to threats posed by climate geologically events like the one we experienced on August eight.
Solutions that are tailored to the mix of geology topography is climate and community needs that are unique to the islands we serve.
The launch of the one off kind of initiative that Scott spoke about is a step forward in this regard.
While it is still early days, we see this as a start of a constructive and collaborative process that could lay the foundation for work, we need to do to improve and harden the grid.
And better protect Hawaii from extreme weather events going forward.
I'll also highlight that a working group of the state Legislature recently issued a draft report on wildfire prevention actions that could take shape as legislation in the coming months.
The report's conclusions and recommendations aligned with Hawaiian Electric's own analysis and action steps described in our wildfire safety strategy, including.
Including development of best practices, and prevention and ignition during extreme weather condition and.
And prioritizing underground in lines and fire risk hazard areas.
We will continue to work closely with our legislators as well as regulators the communities, we serve and others to develop and implement statewide strategies to keep our communities safe and ensure nothing like the events of August eight ever happens again.
I'll now turn the call over to Scott to get Al who will provide detail on the quarter's financials.
Thank you Shelly.
Start with our results for the quarter on slide six.
We arent consolidated net income of $41 1 million and EPS of <unk> 37 for the third quarter. This included $20 4 million or <unk> 19 per share of wildfire related expenses and excluding those expenses core net income and EPS of <unk> $61 5 million and 56.
Compared to $62 1 million and EPS of <unk> 57 for the third quarter of last year.
Utility net income included $10 4 million of wind storm in wildfire related impacts bank net income included $6 3 million and holding company and other segment net income included $3 8 million.
Our consolidated last 12 months core ROE remains healthy at 10, 4% excluding wildfire impacts. This is down slightly from 10, 5% last year due primarily to last years gain on sale recorded at Pacific current and this year's higher holding company loss.
And lower bank earnings.
Utility core ROE was up 20 basis points to eight 3%, excluding wildfire impacts in bank core ROE on an LTM basis was up 220 basis points to 16, 4%, excluding wildfire impacts the higher bank ROE reflects the impacts of higher interest.
Rates to bank, a OCI, which reduces shareholders' equity.
On slide seven we show major variances across the enterprise compared to the third quarter of last year.
On the utility side, we saw higher Ara at M. P. IR revenues higher fossil fuel cost risk sharing revenues and higher AFDC from increased capex.
These were offset by $17 million and higher O&M $10 million of which was related to the Maui windstorm and wildfires.
These expenses included legal outside services and consulting costs the.
The remaining 7 million O&M increase was due to higher transmission and distribution expenses high.
Customer support costs and higher overhaul costs.
On the bank side lower net income was primarily due to variances in provision for credit losses, noninterest expense and net interest income partially offset by higher noninterest income.
The higher provision for credit losses was primarily due to additional credit reserves related to the Maui wildfires.
$5 $9 million of the $9 million variance in provision was wildfire related.
Asp's credit exposure in Maui is approximately $742 million with 95% of those loans secured by real estate.
The provision for credit losses for this portfolio includes reserves relating to the expected economic disruption brought on by the wildfires, resulting in added credit risk.
The higher noninterest expense of $4 8 million included wildfire related expenses of $2 7 million as well as higher compensation and benefits expenses of $1 3 million.
The $2 7 million of wildfire related noninterest expense included $1 3 million of professional services costs and about $1 million of other extraordinary expenses related to the destruction of our line of Bank branch, which was a leased location.
The lower net interest income was primarily due to higher interest expense from increased wholesale borrowings and certificates of deposit and lower interest and dividends on investment securities.
The higher holding company and other segment net loss was primarily due to lower Pacific current performance and the $3 8 million of after tax wildfire related expenses mentioned.
Turning to slide eight.
Given the uncertainty stemming from the August 8th wildfires, we are not providing full year 2023 EPS guidance at this time.
We will revisit our ability to provide guidance as we develop better clarity into potential impacts related to the Maui wildfires I will address how we are thinking about near term liquidity as we know this is top of mind for many of you.
With the downgrades to utility and Hei credit ratings from all three rating agencies, our capital markets access is constrained we ended the previous quarter with a higher cash position as we had pre funded in November $100 million utility maturity earlier this year and as a result had considerable cash on the balance.
As of June 30th.
Drawdown of the Hei and utility revolvers following the wildfires.
Provided $370 million of immediately available cash.
We also suspended hei's dividend, which represents about $40 million of cash quarterly.
We believe these were prudent and measured actions.
The revolver draws in dividend suspension have created significant liquidity runway as we work through the timing and potential impacts of litigation as.
As of the end of the third quarter, the holding company and the utility had $127 million and $275 million of cash on hand, respectively.
In closing I want to acknowledge what a challenging three months. This has been for all of our stakeholders, including our shareholders. Many of whom are part of our communities here in Hawaii.
Wanted you to know that we are resolved to continue taking the rights to remain a financially healthy enterprise best positioned to support the needs of our customers and the state of Hawaii.
And with that let's open up the call for questions.
Thank you if he would like to ask a question on the phone lines today that is star one on your telephone we will take our first question from Mike Monaghan with Evercore.
Yeah, Hi, Thanks for taking my question.
So obviously software.
The runway you have with your liquidity position.
You said, you're reexamining and.
Updating your capital program to Harden the grid you talked about resiliency I was just wondering how should we think about your maintenance level of spending is that like the approved level.
What would be on top of that that Youre planning in terms of capital spending.
Hey, Mike This is Scott.
I'm going to ask Kelly as she can comment on or exit I'm, sorry, I'm going to ask Paul Ito Hawaiian electric CFO as he can comment on that.
Yes, so Mike Thanks for the question. So our typical maintenance spend is somewhere in the range of $300 million a year as you know we are.
<unk> spend on we've always been spending on resilience and wildfire, but obviously, we're going to be accelerating some of that we also mentioned that we have IHA funding that will be part of the mix as we go forward here. We're currently in the process of establishing our 2020 for Capex budget. So I don't have anything to report at this time.
Typically our budget process runs through the end of the year and then we report to the board.
Next year.
But again, we will be prioritizing.
Wildfire related type investments and we think it's the right thing to do we've been doing it but we're just going to start accelerating that program.
Great. Thank you and then I have one follow up again.
So again it looks like you have some runway with liquidity. Just wondering is there anything you can say about whether youre pursuing asset sales like its the bank as a candidate or on a smaller scale Pacific current.
And then if you are joining that any any anticipated challenges to closing such a transaction.
Yes, Mike it's Scott to Ghetto at this point, we just we're not going to speculate on any of those potential options.
Okay, great. Thank you very much.
Okay.
We will take our next question from Julien Dumoulin Smith with Bank of America.
Excellent.
Thank you guys very much for the time best wishes to you and the employees and the impacted customers here.
And welcome Scott as well.
Just coming back to the core plan here, obviously, you talked about prioritizing spend and accelerating some of the Capex can you talk about just where you stand today, given the pro forma cash balances.
What your cash flow profile looks like through the course of the next year given that outside spend can you give us any kind of further clarity on just sort of status quo with that accelerates then how long that cash it could last given.
You know without tapping capital markets debt capital markets further again I get that's a difficult question I just wanted to ask it here at the outset, whatever you can offer.
And I think Julien you know at the end of the third quarter as we previously said the holding company and utility had $127 million and $275 million of cash on hand, respectively. We believe that that provides us with a good level of runway at this particular point in time.
Excellent and then when you think about that.
States actions, obviously, there's an everything's moving already here can you comment at all about any potential backstop elements or other wildfire are real.
Related.
Avenues being pursued by the state that could help bolster it backstop your liquidity and your ability to invest here if you will.
Okay.
Yes, Julian at this stage, it's a it is still early there is a lot more.
Discussions to be had including with the state.
One of the things that we have mentioned or was mentioned in the announcement of the by the Governor yesterday.
Was working together to see what can be done here in Hawaii.
To provide.
Greater coverage looking at various options, which would not only provide for the resilience of Hawaii, but also make sure that the customers are protected and the businesses in Hawaii remained financially strong. So there's a lot more details still to be worked.
Got it and if I can be a little bit more specific here. When do you expect a wildfire reports here and what's the statute of limitations to get those in as well right in terms of some of the liabilities.
Julian just to clarify are you asking about utility.
Filing wildfire wildfire mitigation plans.
Well I was thinking more in the context of welfare reports on just the status of the actual the line of fire specifically right in terms of the documentation around that those are that that fire and then separately the statute of limitations for liabilities when we'll see that.
Expire if you will.
Okay.
So Julien this.
This is Shelly Kimura we.
We plan to file with the PUC a report.
About the August 8th incident, I don't have a timing on that that work is still ongoing but that's about all I can say right now.
Okay.
And there's no specific statute that you'd be looking to in terms of when claims need to be filed by.
So that's ambiguous though.
Yes, Julian will have.
I think thats it.
Legal question I'm sorry.
We will have to get back to you on that one but in general again as I talked about earlier.
The pathway forward.
Using the court system.
That will play out and like I mentioned, the first trial is not scheduled until October of next year.
There will be continuing discussions for sure between parties, but that's about all I can say right now.
Got it alright fair enough guys I'll leave it there. Thank you so much you guys take care.
Yeah. Thank you.
As a reminder, everyone that is star one to ask a question we will take our next question from Paul Patterson with Glen Rock Associates.
Hey, guys.
Just wanted to follow up on Julians questions.
And I apologize if I missed this what is the total amount.
Suits, that's being thought on those 65 or so.
Suits that have been filed.
What are the what are the damages that they're.
That they're asking for.
Yeah, Hi, Paul This is Scott at this time there are no <unk>.
Specified monetary.
Amounts in the lawsuits.
Okay.
And then with respect to the.
The program, which you guys are funding $75 million or the insurance companies are falling $75 million.
Where does that leave your.
Your insurance coverage.
For the remaining.
Let me put this way.
Including that what is the level of insurance coverage that you guys have.
I believe that could be applied potentially.
Damages.
Yes, so we have $165 million of liability insurance. So if you just simply take the 75 and subtracted.
From the 165, you know that would leave $90 million of additional coverage.
Okay.
And.
With respect to the program where we're.
This alternative to litigation program.
When with people.
What is the cutoff period for for people too.
To apply under that methodology.
The details are still being worked on that Paul the Governor statement indicated that once you get through more details of the program design and the launch that participants could perhaps start to receive their compensation second quarter of next year.
Okay.
Well, the 10-Q timing I apologize, but did you mentioned that I guess, it's delayed.
When does the E P. A M on the 10-Q.
Yes, we would expect that.
Early next week and the reason really was.
Due to the governors announcement yesterday.
Okay great.
Much appreciate it and hanging their claims.
Thank you. Thank you.
Okay.
And there are no further questions at this time I'd like to turn the call back over to Scott to you for any additional or closing remarks.
Thank you.
As we've said before our overarching objective is to remain a strong financially healthy enterprise.
Hawaiian Electric American savings Bank play very critical roles here in Hawaii, and it's important that they continue their service to our customers communities into Hawaii.
The utility is focused on working with the governor and other parties to uplift the people of Lahaina in Maui and to do what's needed to make all of Hawaii stronger and more resilient against extreme weather events.
American savings Bank is strong and secure and continues to serve its customers well so with that I just want to thank all of you mahalo to all of you for joining us today.
Thank you and that does conclude todays presentation. Thank you for your pencil.
A patient and you may now disconnect.
Okay.
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