Hawaiian Electric Industries Inc Q1 FY2025 Earnings Call

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the HEI First Quarter 2025 Earnings Conference Call. All lines have been muted to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Mateo Garcia, Director of Investor Relations. Please go ahead.

Thank you. Welcome, everyone, to HEI's first quarter 2025 earnings call. Joining me today are Scott Seu, HEI President and CEO; Scott DeGhetto, HEI Executive Vice President and CFO; Shelee Kimura, Hawaiian Electric President and CEO; and other members of senior management. Our earnings release and our 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. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measures. We will take questions from institutional investors at the end of this call. Individual investors and others can reach out to Investor Relations. Now Scott Seu will begin with his remarks.

Welcome, everyone. For today's call, I'll provide an update on our efforts to restore HEI's financial strength and emerge as a stronger, more resilient company. I will also discuss the recent Hawaii legislative session and the steps needed to execute the Maui wildfire settlement agreement. After my remarks, Scott DeGhetto will present our financial results, and then we will open the floor for questions. Last quarter, we highlighted the significant progress made in 2024 to secure a strong financial future for HEI and position our company to serve our communities effectively in the long term. This momentum has carried into 2025 with notable advancements in resolving the Maui wildfire litigation while establishing a durable foundation for financial stability going forward. In February, the Hawaii State Supreme Court provided a ruling that addressed the ongoing issues with insurers who filed subrogation claims related to the Maui wildfires. The court clarified that once the settlement is finalized, insurers looking to recoup payments made to settling plaintiffs cannot pursue separate lawsuits against defendants. This decision reaffirmed our stance and was crucial in moving the settlement closer to completion. With this critical Supreme Court ruling, we anticipate that the remaining administrative steps necessary to finalize the settlement will be finalized early next year, after which we will make our initial payment of $479 million. In March, Governor Green announced the initiation of the first disbursement under the $175 million One 'Ohana initiative, which aids families who lost loved ones and individuals who suffered serious injuries during the Maui wildfires. The One 'Ohana initiative aims to provide rapid relief to those most affected, and our company has contributed $75 million to this initiative, part of our $1.99 billion total contribution to the settlement. The process of resolving the Maui wildfire litigation is now clearer than it has been since August 2023. With the sale of American Savings Bank and the ongoing divestiture of Pacific Current assets, we are transitioning to a simpler business model focused solely on regulated utility operations. The measures we took last year to strengthen our balance sheet and liquidity are enabling us to move forward with enhanced financial stability. We are well-prepared to meet the remaining settlement payments alongside the robust capital expenditure cycle anticipated at Hawaiian Electric. The substantial investments slated for the utility's generation system and electric grid will improve safety, reliability, and resilience for our customers. Additionally, we are advancing an operational risk profile that has greatly improved since the 2023 Maui wildfires. The utility is actively implementing enhanced wildfire safety measures as outlined in the 2025-2027 wildfire safety strategy submitted to the Public Utilities Commission in January. Another key initiative for 2025 and 2026 is to realign the utility's target revenues within the performance-based regulation, or PBR, framework. In February, the PUC determined that target revenues would be rebased ahead of the second multiyear rate period of the PBR framework through a rate case-like proceeding. We plan to file an application to rebase target revenues later this year. Our advancements in strengthening the company have not compromised other key objectives. We remain dedicated to promoting our state's clean energy goals and our commitment to achieving 100% RPS and net zero by 2045. In summary, we believe our company's investment appeal is stronger today than it has been since the Maui wildfires. We have made considerable progress in resolving the wildfire litigation and streamlining our corporate structure. Furthermore, the actions we've taken to enhance our risk profile and financial flexibility position us well for the future. Moving on to the next slide, this legislative session has seen several measures pass, awaiting Governor Green's signature. Last week, the Hawaii state legislature approved House Bill 1001, which allocates funds for the state's contribution to the Maui wildfire litigation settlement. This was a vital step in ensuring the settlement is enacted. Additionally, the legislature passed Senate Bill 897, which mandates the Public Utilities Commission to set an aggregate liability cap on economic damages from future wildfires. Various factors will be considered in determining the cap, including implications for credit ratings, borrowing costs, and customer rates. To assert this liability cap, the utility must have a PUC-approved wildfire mitigation plan and demonstrate that it is being executed on an approved timeline. Senate Bill 897 also allows for securitization to fund wildfire safety improvements, facilitating critical safety enhancements at a lower cost to customers. Furthermore, this bill directs the PUC to explore the establishment of a disaster recovery fund, with recommendations to be submitted to the legislature prior to the 2026 session. Although several details still need to be finalized, Senate Bill 897 represents a significant legislative achievement that can mitigate wildfire liability risks for the utility moving forward. It also supports affordable financing options for implementing wildfire mitigation strategies. Hawaii has become one of 15 states to adopt or consider utility-related wildfire legislation, including laws that limit utilities' liability when they take precautionary measures against ignition risks. Additionally, legislation has been enacted to support the utility's ability to acquire reliable, economical clean energy. Senate Bill 1501 will help alleviate financial risks for independent power producers working with the utility by authorizing state support to ensure timely utility payments to producers. This initiative ensures that developers can access capital at manageable rates, delivering clean and reliable power to the utility, all while maintaining project feasibility and customer affordability. This legislation aligns with our state's aim to reach a 100% RPS and carbon neutrality by 2045. This year's positive legislative results are the product of extensive discussions, collaboration, and efforts from lawmakers and various stakeholders in Hawaii. We look forward to continuing our partnership with the Governor, the legislature, the PUC, and other stakeholders as these bills become law. Lastly, Slide 5 outlines the anticipated timeline for the final steps needed to finalize the settlement agreement. The Maui District Court is currently processing the administrative requirements for the settlement to proceed, including reviewing the agreements and making necessary determinations. We expect these steps to conclude by early 2026, after which our first payment obligation will commence.

Thank you, Scott. I'll start with our financial results for the quarter on Slide 6. In the first quarter, we generated net income of $26.7 million or $0.15 per share. The quarter's results include a $13.2 million pretax loss on sale recorded at Pacific Current resulting from the sale of its largest asset, the Hamakua power plant. The quarter's results also include $4.5 million of pretax Maui wildfire-related expenses net of insurance recoveries and deferrals. Approximately $2.5 million of the $4.5 million in net wildfire expenses was recorded at the utility. Excluding these items, consolidated core net income was $39.8 million for the quarter or $0.23 per share. This compares to core income from continuing operations of $28.4 million or $0.26 per share in the first quarter of 2024. As a reminder, income from continuing operations is the appropriate 2024 metric to compare to as it excludes the operations of American Savings Bank, which we sold at the end of last year. Utility core net income for the quarter was $49.7 million compared to $44.2 million in the first quarter of 2024. The increase in utility core net income was driven by better heat rate performance, higher annual revenue adjustment mechanism revenues and lower bad debt expense, partially offset by higher wildfire mitigation program expenses and higher insurance costs. Holding company core net loss was $9.9 million compared to $15.8 million in the first quarter of 2024. The lower core net loss was driven by higher interest income from holding company cash being held on the balance sheet, primarily to make the first settlement payment. Turning to the next slide. I'll provide a few key updates on our capitalization and liquidity. As of the end of the first quarter, the holding company and the utility had approximately $492 million and $130 million of unrestricted cash on hand, respectively. The March 31 holding company cash balance includes the approximately $384 million from the ASB sale that was used to retire debt on April 9. In addition, the holding company has approximately $300 million in combined liquidity available under its ATM program and revolver capacity. The utility also has approximately $300 million of liquidity available under its accounts receivable credit facility and revolver capacity. The first settlement payment of $479 million continues to be held in a subsidiary created for addressing the first installment payment pursuant to the Maui wildfire settlement. This is included in restricted cash on the balance sheet until we make the first settlement payment expected in early 2026. We mentioned previously that the net proceeds from last year's sale of 90.1% of American Savings Bank would be used for debt reduction at the holding company. Following a successful tender offer in March, on April 9, HEI retired approximately $384 million of debt. The lower holding company debt balance gives us more financial flexibility as we formulate plans for financing the balance of the settlement payments. Looking ahead, HEI remains committed to a simpler, more focused business model. Following the successful sale of Pacific Current's largest asset, we are continuing to explore our options with the remaining assets. Lastly, the utility dividend to HEI has been reinstated after the temporary suspension that began with the second quarter 2024 dividend. Hawaiian Electric's Board of Directors approved a $10 million quarterly dividend for the first quarter of 2025. This decision was made after considering several factors, including the continued progress of the Maui windstorm and wildfire settlement as well as the utility's results of operations and liquidity position. With that, let's open up the call to questions.

Our first question comes from Nicholas Campanella with Barclays.

Hi. This is Michael Brown on for Nicholas Campanella. First question is, do you anticipate positive feedback from the rating agencies if SB 897 is signed into law? How do you think that they will view that?

Yeah. The simple answer to that is yes. We don't want to speculate on what the rating agencies are thinking or how they'll respond to that. But they've given us very strong indications that once that is signed as well as a number of other key milestones, including the final court approval of the settlement agreement, that those are all credit positives.

My next question is, if SB 897 is signed into law, what kind of step forward is this for the wildfire fund going forward?

Mike, this is Scott. I'm not exactly sure what your question about 897 is.

How will this legislation shift the discussion towards the future wildfire fund implementation?

Well, as part of the Senate Bill 897, there is a component that requires the PUC to study the viability of a wildfire fund and come back to the legislature prior to the next session with recommendations on whether a fund should be created. If so, how large should it be, what should be the structure and other considerations. So the PUC will be doing this study towards the end of this year.

Our next question will come from the line of Julien Dumoulin-Smith with Jefferies. Please go ahead.

Good afternoon. Thank you for your time. I'd like to follow up on SB 897. What exactly is this liability cap? It seems like the PUC has been instructed to establish one. How do you view what an appropriate range might be, or how do you conceptualize this proposed liability cap? Additionally, how are you interacting with stakeholders to explore what this might look like?

Hi, Julien. This is Scott. It's important to note that SB 897 establishes an aggregate liability cap. The core of the bill instructs the PUC to initiate a rulemaking process that considers several factors mentioned earlier and outlined in the bill. The PUC will evaluate whether the liability cap should be based on a certain timeframe, occur on a per event basis, be a flat dollar amount, or be a percentage of our market cap or rate base. These factors are all specified in the legislation. I think it's crucial that we wait for the PUC process to unfold. However, keep in mind that the bill mandates that a cap will be set, and it's up to the PUC to determine the most appropriate structure to fulfill the cap's objectives.

And if I can just add a little more detail to that, this is Shelee, to help you understand. During the legislative session, proposals were made to set the limit at the lesser of $500 million or some other criteria. Later, it was discussed at $1 billion. The challenge during the session was helping people feel comfortable with that figure. Currently, the legislation states that the PUC will determine the amount in a manner similar to the California law, which focuses on what the utility can afford without negatively impacting ratepayers and our capacity to provide service.

Got it. No problem. I understand it’s still early, and I appreciate the dynamic nature of the situation. If I could follow up, assuming this legislation is enacted, can you provide more details on your financing plan for the remaining three settlement payments? You've already discussed the first one, but what is your approach for the others and any potential securitization options?

We are continuously assessing the capital markets to identify the best way to finance it. This will involve considering various factors. The initial payment will not occur until early 2026, so we are still about a year away from discussing funding for the second payment. Therefore, it is too early to draw any firm conclusions about our financing strategy, but as I have mentioned before, it will involve a mix of both debt and equity.

Yeah. No, fair enough. I get it's preliminary. We're all chopping at the bit, and I hope you appreciate that, Scott. Look, let me ask...

As time goes on and we get closer, we'll be more definitive in how we answer that question.

Got it. You mentioned moving forward with some of the items. How do you view the recent Supreme Court decision on subrogation? You've addressed that aspect. Are there any other remaining hurdles to obtaining final approval and fully concluding this matter?

Yes. So at this stage, I mean, that was probably one of the most important decisions to allow the settlement process to continue forward. So going ahead, the Maui Circuit Court will go through a number of proceedings, including preliminary approval of the class settlement agreement, individual plaintiffs' approval of their settlement as well. After you get to the class settlement preliminary approvals, then there's some administrative steps, including notice to the class, opportunities for individuals to sign on. And that period will probably span several months, all of which would lead to our estimation that a final approval hearing would happen sometime in the first quarter of 2026. And then following that, we would make our first payment.

One other point, Julien, I wanted to make because I didn't answer the second part of your question on securitization. Just to be clear, the securitization authorization is for utility CapEx. It is not for funding any of the settlement or the settlement payments.

Okay. Thank you for that. Appreciate you following. Hi, guys. Thank you all very much. Appreciate it. Best of luck.

Thanks, Julien.

Our next question comes from the line of Michael Lonegan with Evercore. Please go ahead.

Hi. Thanks for taking my questions. So to follow up on the securitization, obviously, it's for the wildfire mitigation and resiliency investment. Will you approach it as a securitization or could it be viewed as an investment to generate earnings?

Yes. Mike, the way that SB 897 is drafted is that it appears as though the first $500 million of utility CapEx towards wildfire mitigation would be using the securitization method.

Thank you. To follow up on the financing, you mentioned a combination of debt and equity over time. With the settlement period spanning four years, could there be a chance for you to take advantage of some block equity or your ATM if your stock price rises due to improved clarity on the tariff situation and the economy?

That's a good question. The situation with tariffs is evolving constantly. Given that and our outlook for future financing, I hope tariffs won't impact our plans. As you mentioned, we will be financing the remaining payments over the next few years. If the market conditions indicate it would be beneficial to prefund, we would consider that option. However, currently, we do not have any immediate plans to finance those payments. The first payment is scheduled for the first quarter of 2026, which is the timeline we anticipate will unfold.

Great. And then, thank you – and then, lastly for me, just wondering if you could talk about the planned rate case filing, the key components of it. Is it going to be a 12-month forward test year? And what are your expectations for potential revisions to the five-year PBR framework?

Sure. I'll start off, and perhaps Shelee or others from the utility can add their insights. Essentially, Mike, when the PUC initially adopted PBR, they set a multiyear rate period that will conclude on May 31 of next year. The following, second multiyear rate period will begin on January 1, 2027. In February of this year, the PUC instructed that from now until January 1, 2027, the utility should prepare to rebase the target revenues before the start of the second multiyear rate period. This means, as I mentioned earlier, the utility will submit information to the PUC later this year to support the revenue rebasing. The PUC was clear that this process will resemble a rate case. They want to maintain flexibility to enhance efficiency and ensure it aligns with the PBR context. It’s still early, and we are gearing up for the filing. After the filing is made, there will be a continuous process focused on rebasing the target revenue and considering other potential adjustments to the overall PBR framework. There are going to be several moving parts occurring simultaneously.

Great. I would just add one thing that I think Scott did a really good job describing. I believe the question you asked was about the test year, and we are looking at a 2026 test year.

Our next question will come from the line of Jonathan Reeder with Wells Fargo. Please go ahead.

Hey, good morning, team. Thanks for taking my question. I just wanted to follow up quickly on that last topic. You said a 2026 test year. Is it safe to say that the 9.5% allowed ROE and 57%, I believe it is, equity ratio, that those items will be scrutinized and readdressed?

So we're going to take another look at that given our current environment and our current context. And so that is something that we'll be evaluating and proposing in our filing later this year.

Okay. But it will be an item that, I guess, could potentially change positively or negatively.

The legislature invested considerable time exploring various factors, including establishing a methodology and examining examples from other states. Ultimately, they determined that the Public Utilities Commission would be better suited to engage in a comprehensive, detailed process to address the technical aspects of these considerations. This led to the decision to involve the PUC in a thorough rulemaking process rather than simply assigning a number to be codified into law. It's important to view this as a product of careful and deliberate discussions, rather than a mere deferral to the PUC.

Okay. Curious, what is your understanding of what the Governor's position is on the liability cap since ultimately, he has to sign off on what the PUC rules are?

I can't speak for the Governor, but his office plays a very active role in any legislative session. They provided testimony at various stages of this bill as it progressed through the legislative process. Ultimately, once the PUC completes the rulemaking, the Governor has the opportunity to weigh in and have any additional thoughts considered by the PUC, if necessary. Overall, the outcome of the bill allows for an appropriate process and input from many stakeholders, including the Governor. All right. Well, I just want to thank everybody again for joining us today. In closing, I want to reiterate that we are in a stronger position today than at any point since the 2023 Maui wildfires. Our position is a direct result of the actions that we’ve taken to regain our financial strength and emerge a stronger, more resilient company. With resolution of the wildfire tort litigation expected over the next year, our simpler business model focused solely on regulated operations, our strong and improving safety profile and earnings improvement opportunities on the horizon, we’re very optimistic about our future. So thank you again everybody.

This will conclude today's call. Thank you all for joining. You may now disconnect.