Q3 2024 Hawaiian Electric Industries Inc Earnings Call
Audra: Good afternoon. My name is Audra and I will be your conference operator today.
Audra: At this time, I would like to welcome everyone to the 3rd Quarter 2024 Hawaiian Electric Industries, Inc. Earnings Conference Call.
Audra: Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.
Audra: After the speaker's remarks, there will be a question and answer session.
Audra: If you would like to ask a question during this time, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Speaker Change: At this time, I would like to turn the conference over to Mateo Garcia, Director of Investors Relations.
Please go ahead.
Thank you.
Speaker Change: Welcome everyone to HAI's third quarter 2024 earnings call. Joining me today are Scott Seu, HAI President and CEO, Scott Deghetto, HAI Executive Vice President, CFO and Treasurer, Shelee Kimura, Hawaiian Electric President and CEO, Anne Taranishi, American Savings Bank President and CEO, and other members of senior management.
Speaker Change: Our earnings release and our presentation for this call are available in the investor relations section of our website.
Speaker Change: 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.
Speaker Change: 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 in reconciliations of historical non-GAAP measures to the closest GAAP financial measure. Now Scott Seu will begin with his remarks.
Aloha kakou, welcome everyone.
Speaker Change: For today's call, I'll start with key updates regarding the Maui wildfires and the Definitive Settlement Agreement signed earlier this week.
We'll then open it up for questions.
Speaker Change: On November 5, we announced that HEI, Hawaiian Electric, and other defendants entered into a definitive settlement agreement with plaintiffs in the Maui wildfire tort litigation.
Speaker Change: Finalizing the terms of this agreement is another important milestone in our efforts to offer those who suffered loss an accelerated path to recovery and regain the financial strength of our enterprise.
Speaker Change: We're pleased to sign this final agreement just three months after reaching the initial term sheet agreement we discussed last quarter.
Speaker Change: We remain confident that this settlement represents the best outcome for our community and our company.
Speaker Change: We're moving forward with a clearer line of sight toward resolution of the wildfire-related tort litigation and increased certainty for our company's path ahead.
Speaker Change: which includes the $75 million we previously contributed to the One Ohana Initiative.
Speaker Change: We expect to pay the settlement amount in four equal annual installments, with the first payment expected to be made in late 2025.
Speaker Change: The settlement agreement is conditioned on a resolution of the claims of the insurance companies that have paid claims for property loss and other damages with no additional payments from defendants.
Speaker Change: Over the last few months, important progress has been made toward resolving the insurer's claims.
Speaker Change: On August 19, the Second Circuit Court on Maui, which is overseeing the Maui wildfire tort litigation, issued an order requiring insurers to seek recovery according to Hawaii law, which requires them to assert liens against their policyholders' recoveries if their policyholders settle.
Speaker Change: The Second Circuit Court subsequently requested the Hawaiʻi Supreme Court to weigh in on the order. And on September 25, Hawaiʻi Supreme Court agreed to review the Circuit Court's questions.
Speaker Change: Opening briefs in the State Supreme Court proceeding were filed earlier this week, on November 4, and reply briefs are due December 16, after which the Hawai'i Supreme Court is expected to rule.
Speaker Change: We're hopeful that the Supreme Court will issue a ruling in favor of the individual plaintiffs, which would likely resolve the outstanding issue with insurers and bring us one step closer towards finalizing the settlement.
Speaker Change: Many of the steps required to eventually receive judicial approval are happening concurrently with a Supreme Court process seeking resolution of the insurer claims.
Speaker Change: The final settlement agreement will become final after judicial review and approval is received and other conditions laid out in the settlement agreement are met.
Turning to operational updates.
Speaker Change: Over the past year, we've shared the immediate action plans the utility is prioritizing to address wildfire risks in the near term.
Speaker Change: These plans included implementation of a Public Safety Power Shutoff Program, or PSPS.
Speaker Change: Improving situational awareness through use of advanced technologies. Implementing enhanced operational strategies and practices. And hardening the grid to increase resilience.
Speaker Change: On our last earnings call, we noted that the utility had officially launched its Public Safety Powers Shutoff Program, or PSPS, on July 1st.
Speaker Change: The high degree of coordination and communication required for the program to be successful has already been put to the test twice, when we activated PSPS watches in September and October.
Speaker Change: The utility carefully monitored weather conditions throughout the activations, and fortunately, it was not necessary to shut off power to customers.
Speaker Change: I'm pleased that the utility was able to effectively coordinate with public agencies, first responders, customers, and others through the PSPS watches.
Speaker Change: Our utility will continue to work closely with key stakeholders to refine and enhance this new program to continuously make it more targeted and effective.
Speaker Change: The implementation of advanced technologies to improve situational awareness continues, and the utility has now deployed 55 new weather stations and installed 39 AI-enhanced video cameras across its service territory.
Speaker Change: Grid hardening work is also progressing and the utility continues to make investments to upgrade poles, install covered conductors, and strategically underground lines.
Speaker Change: Crews have inspected over 37,000 poles since the fall of 2023 across the highest risk circuits and have replaced approximately 2,200 poles.
Speaker Change: technologies such as sparkless fuses, new lightning arresters and smart reclosers are also being implemented in addition to executing increased vegetation management and hazard tree removal efforts.
Speaker Change: Importantly, investments to harden the grid increase resilience for various environmental risks that we face in Hawaii, including hurricanes, floods, tsunamis, and wildfires.
Speaker Change: The utility will be filing a new and comprehensive wildfire mitigation plan within the next few months, by January of 2025.
Turning now to the bank.
Speaker Change: The bank's core operations and earnings remain strong as it continues to serve as a trusted financial partner to customers across Hawaii.
Speaker Change: In the third quarter, ASB continued to perform well, generating strong net income and profitability while continuing the net interest margin expansion we've seen throughout 2024, following last year's strategic balance sheet repositioning.
Speaker Change: ASB has continued replacing higher cost sources of financing with cheaper sources of financing, and ASB's balance sheet is currently well-positioned for a potential declining interest rate environment.
Speaker Change: Economic indicators in Hawaii remain healthy and the bank is seeing strong credit quality across its loan portfolio.
Speaker Change: The bank's loyal and long-tenured deposit base remained stable, and as of September 30, 83% of deposits were FDIC-insured or fully collateralized.
Speaker Change: Lastly, I'll give a brief update on Pacific Current before turning the call over to Scott Deghetto.
Speaker Change: As we've discussed over the past year, HEI has been advancing a strategy designed to support a strong, financially healthy enterprise that will empower a thriving future for Hawaii.
Speaker Change: Consistent with this approach, HEI has been undertaking a comprehensive review of strategic options for Pacific Current.
Speaker Change: There is no set timetable for the review, and there can be no assurances that any actions regarding Pacific Current will result from our evaluation.
Speaker Change: In connection with this ongoing evaluation, we reported a non-cash absent impairment charge for Pacific Current, which Scott Deghetto will discuss.
Speaker Change: In summary, our operations remain strong across our companies, and with a signed settlement agreement now in place, we're continuing to build on our significant progress to clarify HEI's path forward.
Speaker Change: As we look ahead, we'll continue to take prudent and measured actions to ensure our companies are well positioned to serve our customers and community for the long term.
Speaker Change: With that, I'll now turn the call over to Scott Deghetto.
Scott Deghetto: Thank you, Scott. I'll start with our results for the quarter on slide 6.
Speaker Change: For the second quarter, we recorded a consolidated net loss of $104.4 million per $0.91 per share. The quarter's results included two significant one-time losses.
Speaker Change: First, at the utility, we recorded an additional $203 million pre-tax loss for the accrual of estimated wildfire liabilities from tort-related claims.
Speaker Change: You'll recall in the second quarter of this year, we accrued $1.71 billion for estimated wildfire liabilities.
Speaker Change: The $1.71 billion accrual was our best estimate as of June 30, 2024 of an equivalent lump sum amount of the four annual installments stipulated in the settlement agreement in principle.
Speaker Change: HEI now expects to make four annual payments of $478.8 million, totaling $1.92 billion, which is the $1.99 billion total agreed to in the settlement, plus the $75 million already contributed under the One Ohana Initiative.
Speaker Change: Our revised expectations resulted in the additional 203 million dollar accrual recorded in the third quarter.
Speaker Change: Second, we also recorded a $35.2 million pre-tax asset impairment at Pacific Current in connection with the ongoing review of strategic options that Scott mentioned.
Speaker Change: There were also $16.7 million of pre-tax wildfire-related expenses, a net of $8.6 million in deferrals recorded at the utility in the third quarter, as well as $9.6 million in accrued insurance receivables in addition to the $40 million mentioned.
Speaker Change: Excluding the impacts of these items, Utility Core Net Income was $43.7 million in the third quarter compared to $53.8 million in the same quarter of last year. Lower Utility Core Net Income was driven by higher O&M.
Speaker Change: Excluding these items, the holding company core net loss was $10.9 million, compared to $9.9 million in the same quarter last year, primarily due to higher holding company expenses.
Speaker Change: Excluding enterprise-wide wildfire expenses, net of insurance recoveries and deferrals, and excluding the Pacific Current Asset Impairment, HEI's core net income for the third quarter was $52.2 million compared to $61.5 million in the same quarter of last year.
Speaker Change: Turning to our liquidity on slide 7. As of the end of the third quarter, the holding company and the utility had approximately $678 million and $148 million of cash on hand, respectively.
Holding company cash includes proceeds from our recent equity issuance.
Speaker Change: As previously announced, in September we successfully closed on an offering of newly issued shares of common stock resulting in approximately 558 million in net proceeds. We intend to use the proceeds from our equity offering to fund our first settlement payment and for general corporate purposes.
Speaker Change: During the quarter, we also put in place an at-the-market equity issuance program that allows us to issue up to $250 million of common stock at our discretion.
Speaker Change: We have not yet issued any equity under the ATM program, but it provides an additional source of liquidity and flexibility.
Speaker Change: Last month, the utility received final approval from the Public Utilities Commission for their accounts receivable back credit facility.
Speaker Change: The $250 million facility had previously been approved to use for short-term financing needs, and this final approval allows the utility to use up to $100 million of the facility for long-term financing needs at any given time.
Speaker Change: Lastly, I'm pleased to report that we have resolved the going concern issue disclosed last quarter.
Speaker Change: As Scott mentioned, under the final settlement agreement signed earlier this week, we will make four payments of $479 million to resolve the Maui wildfire tort litigation.
Speaker Change: The first payment of approximately $479 million is anticipated to be made in late 2025 and is classified as a current liability.
Speaker Change: The remaining payments expected to be made over the next several years are classified as long-term liabilities.
Speaker Change: Following the September Common Stock Offering and other actions taken to address liquidity, sufficient cash is available to fund this current liability portion, and we have concluded that the conditions that led to the substantial doubt regarding HEI's ability to continue as a going concern
have been addressed.
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
We'll go first to Michael Lonegan at Evercore ISI.
Michael Lonegan: Hi, thanks for taking my question. So you announced the strategic review of Pacific Current. Obviously, it's a smaller scale asset, you know, no mention of the bank's strategic review. Just wondering if it's fair to say, you know, that's ongoing. And then, you know, also, would you be able to share the carrying costs of Pacific Current or the earnings, core earnings of it this quarter?
Speaker Change: Yeah, hi Mike, this is Scott Seu. Yeah, I will confirm that we are still going through the strategic review for both the bank and of course now with Pacific Current. Let me pitch it over to Scott DeGhetto in terms of addressing the other part of your question. Yeah, Mike, could you just repeat the question in terms of what you're looking for on Pacific Current?
Speaker Change: Yeah, so the carrying costs on your balance sheet or the core earnings that it delivered this quarter?
Scott Deghetto: Yeah, so we're not going to, you know, as we've said previously, Mike, when it comes to, you know, the review processes that we run for these assets, just like we've said in the past for ASB, same comment for Pacific Current, you know, we're not going to...
Scott Deghetto: You know comment any further Until such time as you know we've made when the board has made a determination that we feel it's relevant to continue to talk about it
Speaker Change: And then secondly, for me, the opening briefs were filed with the Supreme Court, but wondering how you're feeling about the prospects that the settlement could be resolved?
Speaker Change: through negotiation between the subrogating insurers and plaintiffs, obviously if the Supreme Court rules against the insurance companies, that could set a bad precedent for them nationwide.
Michael Lonegan: Yeah Mike, you know it's it's always possible that the individual plaintiffs and the segregation plaintiffs could come to some sort of an agreement.
Michael Lonegan: and a negotiated agreement. That would obviously be an acceleration of the process perhaps, but we're not directly a part of any of these discussions so that's about all I can I can say on that.
Speaker Change: Got it, thank you. And then you highlighted that you expect to pay the settlement in four installments, but the definitive settlement stipulate you can accelerate the payment. Is that something you're considering? Is there a scenario where you pay the settlement, you know, all up front, or are you committed to the four-year timeframe?
Yeah, right now our
Speaker Change: So, again, that option is always available to us if we want to use it in the future.
Speaker Change: Thanks and then lastly for me so on the PBR framework
Speaker Change: If I recall correctly, it became effective in 2021. So you're coming up on the fourth year of the five-year framework. So my understanding is the commission is gonna conduct a review process in 2025 to review the framework.
Speaker Change: You know, that was part of the establishment of it, to evaluate, you know, its course of action.
you know, before it's last year on the 26th.
Speaker Change: Just wondering, you know, in light of the wildfire, you know, development, you know, all the developments and what are your thoughts heading into, you know, a review of that framework, you know, what you see as risks or opportunities and, you know, what kind of steps you would be taking to prepare?
Speaker Change: Yeah, hi Mike. Let me, let me ask Joe Viola of the utility. Joe is our Senior Vice President. He oversees regulatory affairs. If Joe can comment on, on the response.
Speaker Change: Sure, and in fact, the PBR Comprehensive Review is going on right now, so we've been, excuse me.
Speaker Change: review and the Commission will give all the parties including Hawaiian Electric an opportunity to make suggestions on how the framework should be modified as it all goes forward. So that process...
Speaker Change: that the commission has set out as a multi-year process. The next multi-year rate plan is, would be scheduled to begin on January 1st of 2027. So everything that's happened during the.
Speaker Change: You know five years of the first multi-area rate plan including the Maui wildfires and all the implications of that Will be considered in in Designing what the next multi-area rate plan should look like
Great. Thanks for taking my question.
Thanks, Mike.
Speaker Change: And as a reminder to ask a question, please press star 1 on your telephone keypad. We'll go next to Jonathan Reeder at Wells Fargo
Hey, how's it going, team?
Hi, Jonathan.
Speaker Change: Just a couple quick questions. I know you're limited what you can say on the other side, but were any of the terms of the definitive settlement agreement, you know, that was signed earlier this week material materially different than the agreement and principles terms.
Um, no.
No, they were consistent.
Okay.
Speaker Change: and then I think you said in terms of the core utility income that the decrease was due to higher O&M. Was that the case? And you know I saw it was like a ten pretty substantial ten million dollar decrease.
Speaker Change: Yeah, Jonathan, let me let me ask Paul Ito, Hawaiian Electric CFO, to comment.
Paul Ito: Hey Jonathan, yeah there were higher O&M, some of them were one-time items, some of them were things like wildfire mitigation that we've been accelerating, for example inspections, but in the quarter we did record
Paul Ito: settlement administrative fee as part of the accrual for the quarter. It's limited. We also accrue costs related to the state settlement of indemnification claims.
Paul Ito: And then we also saw higher insurance premiums for property and general liability. So those are the main items that resulted in higher O&M for the quarter.
Speaker Change: okay and so the the one-time items the administrative fees stuff like that
Speaker Change: like roughly how much from the best versus yep I could be maybe a little more ongoing
Speaker Change: Yeah, the after-tax, so the settlement administration fee after-tax was about $2.6 million. The state indemnification claims was about the same amount, $2.6 million.
Speaker Change: and those would be the ones that would be more one-time in nature.
Okay.
Speaker Change: Okay, that's helpful. Okay, thanks. See you guys next week at EI. Thank you.
Yes, see you in a few days.
Speaker Change: And that concludes our Q&A session. I will now turn the conference back over to Scott Seu for closing remarks.
Thank you.
Scott Seu: Yeah, in closing, I just wanted to highlight again how we feel we've made substantial progress in the in the quarter. I'm very proud of the fact that we were able to reach the final settlement agreement.
Scott Seu: in a fairly quick time frame after the August term sheet agreement. I'm also very pleased that we were able to resolve the going concern issue that we disclosed last quarter.
Scott Seu: And above all, I think I just want to thank our shareholders, many of whom are our neighbors here in Hawaii, for your continued investment in HEI.
Scott Seu: I also want to thank those shareholders that supported our successful equity issues in September We really appreciate your support and we continue to help our communities move forward to a sustainable future. So with that, thank you everybody
Speaker Change: And that concludes today's conference call. Thank you for your participation. You may now disconnect.