Hawaiian Electric Industries, Inc. (NYSE:HE) Q4 2023 Earnings Call Transcript
Hawaiian Electric Industries, Inc. (NYSE:HE) Q4 2023 Earnings Call Transcript February 13, 2024
Hawaiian Electric Industries, Inc. misses on earnings expectations. Reported EPS is $0.48 EPS, expectations were $0.49.
Hawaiian Electric Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Hawaiian Electric Industries Fourth Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mateo Garcia, Director of Investor Relations. You may beging your conference.
Mateo Garcia: Thank you. Welcome everyone to HEI’s fourth quarter and full year 2023 earnings call. Joining me today are Scott Seu, HEI's President and CEO; Scott Deghetto, HEI’s Executive Vice President, CFO and Treasurer; Shelee Kimura, Hawaiian Electric President and CEO; Ann Teranishi, American Savings Bank 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 measure. Now, Scott Seu will begin with his remarks.
Scott Seu: Aloha kakou. Welcome everyone. For today's call, I’ll start with key updates regarding the Maui wildfires followed by financial and operational updates and then Scott Deghetto will walk you through our 2023 financial results in more detail before we open it up for questions. It's been just over six months since the tragedy of the August 8 wildfires. Our community continues to grieve and we know that it will be a long road ahead. However, I'm encouraged and inspired by the way so many in our community have come together to work towards the near and long-term solutions necessary to help our state heal and emerge stronger.
Ohana: Hawaiian Electric will contribute up to $75 million and the State of Hawaii, Maui County, Kamehameha Schools, Spectrum and Hawaiian Telcom have committed to contribute the remainder. The speed at which this first fund has come together is encouraging and as the Governor has said, it will help with healing and help everyone move forward.
Ohana: We're focused on bills that would establish a fund for property owners to recover damages from future catastrophic wildfires, wildfire risk mitigation planning requirements overseen by the Public Utilities Commission, along with cost recovery for implementing approved plans and securitization as a financing option. The Office of the Governor has expressed the importance of legislation that can help stabilize the electric utility and Hawaii's energy future. His administration has proposed a bill that requires the utility to develop a wildfire mitigation plan overseen by the Public Utilities Commission, and also include securitization as a tool to finance wildfire safety and recovery. Dozens of bills have been introduced to address other aspects of wildfire risk more broadly.
The legislature is considering bills that would establish a state fire marshal, a state wildfire fuel reduction task force, a wildfire safety advisory board and a state firefighting helicopter program, to name a few examples. It's still early in the legislative process, and bills can undergo significant changes over the legislative session, which will run through early May. However, I'm pleased to see commitment among so many in Hawaii to urgently address the risks wildfires and other extreme weather events pose to our state. We also continue to work through the litigation process. As of February 12, Hawaiian Electric Company has been named as a defendant in 101 lawsuits by plaintiffs claiming losses related to the August 8 windstorm and wild fires, and HEI has been named in 101 as well.
Most of these lawsuits have been removed from the state court to federal court, but jurisdiction is still in the process of being settled. Certain milestone dates that were set earlier by the state court, such as when we'll need to file counterclaims, are no longer in effect and will be revisited once jurisdiction is settled. Subrogation claims from about 150 different insurers with exposure on Maui have also been filed and will respond to those complaints once they are served on us. Turning to the next slide our utility received several constructive regulatory decisions in recent months that support our efforts to strengthen the resiliency of our system while we continue to advance Hawaii's clean energy goals. Earlier this month, Hawaiian Electric received PUC approval for their five-year, $190 million grid resilience plan.
The plan includes a slate of foundational resilience investments as the first phase of a long-term climate adaptation effort that will help harden the utility's grids against severe weather-related events fueled by climate change. This approval enables the utility to move forward with $95 million in Department of Energy Infrastructure Investment and Jobs Act funding by matching it with $95 million in rate recovery. The utility also received several important regulatory decisions prior to 2023 year end, including approvals to defer costs associated with the Maui wildfires and to recover $8.8 million in previously deferred costs from the COVID-19 pandemic. Our approximately $82 million ~$82 million Waena Battery Energy Storage Project on Maui was also approved.
This is a critical project for ensuring adequacy of supply on the island. The utility has continued to progress its Stage 3 RFP, its largest renewables procurement ever. Contract negotiations are in process with the developers of 16 renewable energy projects across our islands. The projects will further reduce Hawai's dependence on imported oil for power generation. The negotiations are expected to produce long-term contracts for approximately 517 MW of variable generation, 694 MW of firm renewable generation, and 2.1 GWh of storage. As we've discussed previously, the utility's own 253 MW Waiau Repowering Project on Oahu was selected in the RFP. The project will be built at the site of Hawaiian Electric's existing 85-year-old facility and could potentially use renewable gas or hydrogen when it becomes commercially available.
The utility is working closely with the Department of Energy on federal loan funding options to help fund the project. We are also pursuing additional federal funding sources, including nearly $450 million of grants for grid resilience, modernization and innovation for investments to increase resilience to natural hazards, including wildfires. In December, the utility connected the world's most advanced battery energy storage system to Oahu's grid. The Kapolei energy storage battery plant provides 185 MW of total power capacity and 565 MW hours of energy, and this is the first time a standalone battery has provided grid-forming services at this scale. We're pleased with the utility's continued progress towards a clean energy powered grid and encouraged by the constructive regulatory and federal government engagement on Hawaii's clean energy future.
I'm also pleased to announce that we recently reached agreement with our union, IBEW 1260, on a new three-year contract, effective through October 2027. The contract provides stability and visibility as we continue performing critical work to modernize our generation system and make our electric grids more resilient. Turning now to our financial results, our core operations have continued to perform in-line with expectations while we work alongside others in the Maui reconstruction efforts. On a consolidated basis 2023 net income was $199.2 million and earnings per share was $1.81. This included about $14 million of Maui wildfire related expenses, net of insurance recoveries and deferrals, and a loss in the sale of securities of $11 million resulting from a strategic balance sheet repositioning at the bank.
Excluding these items, core net income was $224 million and EPS was $2.04, down about 5% compared to last year's core net income, which excludes the gain on sale of an equity method investment recorded in 2022 at Pacific Current. Utility, net income and EPS were $194 million and $1.76 or $195.1 million and $1.77 on a core basis, up about 3% compared to 2022. Bank net income and EPS were $53.4 million and $0.48. Excluding wildfire related expenses and the securities loss, core net income was $72.6 million and EPS was $0.66, down from $80 million and $0.73 last year. At the holding company level, the net loss of $48.1 million in 2023 was up from $27.8 million in the prior year and included $4.7 million of wildfire related expenses. Excluding these expenses, core net loss was $43.4 million and core EPS loss was $0.39.
Turning to the Bank, ASB's business proved resilient through the economic impacts of the Maui wildfires and the challenging interest rate environment experienced in 2023. ASB's loyal and long tenured deposit base remained stable during the year and as of December 31, 86% of deposits were FDIC insured or fully collateralized. Customer deposits are safe and there is no risk to customer deposits as a result of legal claims related to the wildfires. Asset quality remains strong and the Hawaii market continues to be characterized by strong credit quality and low delinquency rates in comparison to the mainland. The Bank's capital remains strong with ample liquidity and lending capacity. The sale of investment securities executed in the fourth quarter positions ASB for improved profitability and net interest margin while strengthening the balance sheet.
In the fourth quarter, the Bank sold low yielding securities and reduced high cost deposits with the proceeds. Scott Deghetto will discuss the transaction in greater detail. ASB has continued to support the Maui community at a time when they most need us, and the Bank has provided numerous options for our Maui customers facing financial hardship as a result of the fires, including waived ATM fees, forbearance and deferment for commercial and consumer loans and emergency personal lines of credit. In addition, the Bank has provided $135,000 of charitable contributions to support the Maui community and has partnered with the Hawaii Restaurant Association, the Hawaii Bankers Association and others to provide donations and other resources for Maui residents during this difficult time.
We are optimistic regarding Hawaii's economic outlook and the economy has proved resilient following the wildfires in August. Hawaii's statewide seasonally adjusted unemployment rate was 2.9% in December and continues to outperform the U.S. average of 3.7%.
UHERO: Maui's unemployment rate was around 5% as of yearend and in the month of December, visitor arrivals to Maui were 75% of the previous years. Total statewide arrivals for the year were 90% of pre-pandemic levels. Despite the economic impacts from the Maui wildfires, statewide visitor spending for the full year was up over 2022. Visitor spending increased 5.5% to $20.8 billion in 2023. This is well above pre-pandemic levels by almost 20% despite Japanese visitor arrivals being at about half of pre-pandemic levels. Real estate values in Hawaii remain consistently strong. In December, the Oahu median single family home price was over $1 million and the median condo sales price was just under $510,000. Home sales volumes were down year-over-year, but we're encouraged to see the recent decline in mortgage rates.
Hawaii's market continues to be characterized by limited inventory and stable prices supported by limited land available for property development. I'll now hand it off to Scott Deghetto to walk through our financial results in more detail.
UHERO: Maui's unemployment rate was around 5% as of yearend and in the month of December, visitor arrivals to Maui were 75% of the previous years. Total statewide arrivals for the year were 90% of pre-pandemic levels. Despite the economic impacts from the Maui wildfires, statewide visitor spending for the full year was up over 2022. Visitor spending increased 5.5% to $20.8 billion in 2023. This is well above pre-pandemic levels by almost 20% despite Japanese visitor arrivals being at about half of pre-pandemic levels. Real estate values in Hawaii remain consistently strong. In December, the Oahu median single family home price was over $1 million and the median condo sales price was just under $510,000. Home sales volumes were down year-over-year, but we're encouraged to see the recent decline in mortgage rates.
Hawaii's market continues to be characterized by limited inventory and stable prices supported by limited land available for property development. I'll now hand it off to Scott Deghetto to walk through our financial results in more detail.
UHERO: Maui's unemployment rate was around 5% as of yearend and in the month of December, visitor arrivals to Maui were 75% of the previous years. Total statewide arrivals for the year were 90% of pre-pandemic levels. Despite the economic impacts from the Maui wildfires, statewide visitor spending for the full year was up over 2022. Visitor spending increased 5.5% to $20.8 billion in 2023. This is well above pre-pandemic levels by almost 20% despite Japanese visitor arrivals being at about half of pre-pandemic levels. Real estate values in Hawaii remain consistently strong. In December, the Oahu median single family home price was over $1 million and the median condo sales price was just under $510,000. Home sales volumes were down year-over-year, but we're encouraged to see the recent decline in mortgage rates.
Hawaii's market continues to be characterized by limited inventory and stable prices supported by limited land available for property development. I'll now hand it off to Scott Deghetto to walk through our financial results in more detail.
Scott Deghetto: Thank you, Scott. I'll start with our results for the year on Slide 8. We earned consolidated net income of $199.2 million and EPS of $1.81 for the full year. That included $14.1 million or about $0.13 per share of wildfire related expenses, net of insurance recoveries and deferrals, and $11 million or $0.10 per share from a loss on a sale of securities at the Bank resulting from the Bank's balance sheet repositioning. Excluding those nonrecurring expenses, core net income and EPS were $224.3 million and $2.04, compared to $235 million and $2.14 in 2022. Utility net income included $1.1 million of windstorm and wildfire related impacts. Bank net income included $8.3 million and the holding company and other segment included $4.7 million of these costs.
In December, the PUC granted the utility's request for deferral treatment of windstorm and wildfire related incremental non-labor expenses and as a result, the utility deferred $10.9 million of after tax O&M expenses in 2023. In total, the utility's incremental after tax, Maui windstorm and wildfire related expenses of $1.1 million were comprised of $29.6 million of expenses, net of $17.5 million of insurance related recoveries and the $10.9 million in deferred costs. As mentioned, the bank executed a balance sheet repositioning in the fourth quarter that resulted in an $11 million after tax loss on the sale of investment securities. This resulted from a strategic sale of $185 million of low yielding assets with proceeds used to reduce ASB's highest cost source of funding, which was certificates of deposit.
The transaction is expected to improve this year's net interest income and net interest margin. In addition, lower asset levels will allow ASB's leverage ratio to improve faster. On a consolidated basis core ROE remains healthy at 9.9% excluding wildfire impacts and the loss on sale of securities. This is down from 10.2% core ROE last year due primarily to lower bank earnings and a higher holding company loss. Utility core ROE was flat at 8.2% excluding wildfire impacts, and Bank core ROE was up 80 basis points to 14.9% excluding wildfire impacts. The higher Bank ROE reflects the impacts of higher interest rates to Bank AOCI, which reduces shareholders equity. The approximately $0.04 increase in the utility's EPS contribution was the result of a $0.28 increase in revenues, primarily from the annual revenue adjustment and major project interim recovery mechanisms, a $0.05 increase in AFUDC, and a $0.04 increase from the fuel cost risk sharing mechanism.
These increases were partially offset by a $0.24 increase in O&M expense, a $0.06 increase in depreciation, $0.03 of higher interest expense, and about $0.01 per share of incremental wildfire costs, net of insurance recoveries and deferred costs. The approximately $0.25 decrease in ASB's EPS contribution was driven by the $0.10 loss from the Bank's balance sheet repositioning, $0.09 of higher noninterest expenses, $0.08 of wildfire related expenses, including $0.04 of additional provision recorded in Q3 and $0.02 of higher provision partially offset by a $0.03 increase in noninterest income. Holding company and other segment expenses were higher by about $0.19 per share, consisting of $0.04 in wildfire expenses $0.05 from lower Pacific Current asset performance, $0.04 of interest expense and a $0.06 negative variance due to the 2022 gain on sale of an equity investment at Pacific Current.
Turning to our liquidity on Slide 10, we continue to believe that we have sufficient liquidity runway as we work through the timing and potential impacts of litigation related to the Maui wildfires. As of the end of the fourth quarter, the holding company and the utility had $137 million and $106 million of cash on hand respectively. In addition, we continued to pursue additional financing through an accounts receivable facility at the utility, which we expect will provide $200 million to $250 million of additional liquidity. Last week, Hawaiian Electric's Board of Directors declared a $13 million quarterly cash dividend to HEI. With the suspension of HEI's dividend to our common shareholders cash needs at the HEI parent company are limited relative to cash needs prior to the dividend suspension.
Right sizing the utility's dividend to HEI allows more cash to be kept at the utility, supporting its ability to perform needed restoration work in West Maui and make critical capital investments for wildfire mitigation and in other electrical infrastructure, while capital markets access remains constrained. In closing, I want to acknowledge what a challenging year 2023 was for our community, our employees and our shareholders. We will continue taking the right steps in working collaboratively with our community, regulators and lawmakers to remain a financially healthy enterprise best positioned to support the needs of our customers in the state. And at that, let's open up the call to questions.
See also Top 20 Defense Contractors in 2024 and 15 States with the Best Healthcare in the US.
To continue reading the Q&A session, please click here.
