HAWAIIAN ELECTRIC CO INC

Recent developments. On August 8, 2023, a number of brush fires in the West Maui (Lahaina) and Upcountry Maui areas caused widespread property damage, including damage to property of the Utilities, and 101 confirmed fatalities in Lahaina at this time (the Maui windstorm and wildfires). The Maui windstorm and wildfires were fueled by extreme winds and drought-like conditions in those parts of Maui. According to the Maui Police Department’s Preliminary After-Action Report, in addition to the loss of life, over 3,450 acres burned and over 3,000 structures were destroyed in those areas. In Lahaina, a fire was reported at about 6:30 a.m. (the “Morning Fire”) and appears to have been caused by power lines that fell in high winds and spread into a field near Lahaina Intermediate School. The Maui Fire Department responded promptly to the Morning Fire, and according to the Fire Department’s public statement that morning, by 9 a.m. the Morning Fire was “100% contained.” The Maui fire chief subsequently reported that the Fire Department had determined that the Morning Fire was “extinguished” and left the scene. Shortly before 3 p.m. that day, while the power remained off, Utility crew members saw a small fire in the same field about 75 yards away from Lahainaluna Road. They immediately called 911 and reported the fire (the “Afternoon Fire”). At the time of the Afternoon Fire, the Company’s power lines in the area where that fire ignited were not energized and had not been energized for more than six hours. By the time the Maui Fire Department arrived back on the scene, it was not able to contain the Afternoon Fire and it spread out of control toward Lahaina. No determination as to the cause of the Afternoon Fire has been made. The Company believes that most of the property damage and all of the fatalities are from the Afternoon Fire.

The circumstances surrounding the Maui windstorm and wildfires are currently the subject of several investigations.

As of May 9, 2024, HEI and the Utilities have each been named in approximately 400 lawsuits related to the Maui windstorm and wildfires. These civil and class action lawsuits have been filed in the Maui and Oahu Circuit Courts against HEI, the Utilities, and other defendants, including the County of Maui, the State of Hawaii and related state entities, private landowners and developers, telecommunications companies, and oil companies (collectively “tort-related legal claims”). One class action is pending in federal court, while the remainder of the cases are pending in Maui and Oahu Circuit Courts. Most of these lawsuits allege that the defendants were responsible for, and/or negligent in failing to prevent or respond to the wildfires that led to the property destruction and loss of life. Other claims include, among other things, personal injury, wrongful death, emotional distress and inverse condemnation. One lawsuit asserting similar theories and claims was filed by the County of Maui against HEI and the Utilities, and three other lawsuits were filed by approximately 160 subrogation insurers against HEI, the Utilities, a private landowner, and telecommunications companies. One lawsuit that names HEI, the Utilities, and other defendants also alleges that oil companies contributed to the burning of fossil fuels and caused climate change that led to the Lahaina fire. Additional lawsuits may be filed against the Company and other defendants in the future. The plaintiffs seek to recover damages and other costs, including punitive damages. In addition to the tort-related legal claims, the Company is also involved in a securities class action and five shareholder lawsuits. See Note 2 of the Condensed Consolidated Financial Statements.

On April 16, 2024, the County of Maui Department of Fire and Public Safety (MFD) released its After-Action Report (AAR) on the Maui windstorm and wildfires, the purpose of which was to enable future enhancements to mitigate the impact of future similar major events. The AAR identified 17 issues that the MFD faced during the Maui windstorm and wildfires or needs to address and provided 111 recommendations to consider for addressing these challenges. The issues and recommendations focus on the MFD. Some of the key areas for improvement include addressing the lack of apparatus, personnel and fire stations and the need for mutual aid and communication programs. The AAR did not address the cause or origin of the fires.

On April 17, 2024, the Hawaii Attorney General released the first of three reports that it plans on releasing regarding its investigation into the Maui windstorm and wildfires (the first AG report). The first AG report chronologically details the major events and response efforts related to the Maui windstorm and wildfires, with a focus on the events concerning the Lahaina area between 2:55 p.m. on August 8, 2023, and 8:30 a.m. on August 9, 2023. It did not address the cause or origin of the fires. The second planned report is expected to analyze the timeline and facts of the Maui windstorm and wildfires and the third planned report is expected to provide recommendations to address future events.

In the 2024 Hawaii Legislative session, bills were proposed (1) to create a statewide wildfire relief fund to compensate participating property owners, insurers, and government entities for damages resulting from future catastrophic wildfires; (2) to establish a process for the PUC to review and approve risk-based wildfire protection plans for electric utilities; and (3) to authorize the PUC to issue bonds securitized by future rate payments to pay for the risk-based wildfire protection plans and certain other costs related to catastrophic wildfires. The bills passed all committees and made it to the conference committee—the last stop in the Hawaii Legislature before the final reading—but they did not progress out of conference committee. Thereafter, Governor Josh Green announced the creation of a Hawaii Climate Advisory Team, which the Governor’s office stated in a news release would “recommend steps to create a durable fund to mitigate the impacts of dynamic climate change and to develop a fair and comprehensive structure to resolve claims related to future disasters” including “develop[ing] a customized go-forward fund structure and related claims settlement mechanics.” As to the wildfire mitigation plan and securitization bill, the Governor’s office stated in a letter that Hawaii’s “energy future and the stability and reliability of the utility is riding on this bill”; and later stated to news outlets that the Governor plans to continue negotiations and discussions with the goal of having the bill reintroduced at the next Hawaii legislative session in 2025.

In the first quarter of 2024, economic conditions in Hawaii remained stable with seasonally adjusted unemployment rate at 3.1% for March 2024 and total passenger counts higher by 0.2% for the first quarter 2024, as compared to the same quarter last year. While economic conditions remained stable during the quarter, the Utility’s kWh sales in the first quarter of 2024 were down by 1.5%, compared to the first quarter of 2023 due to a decrease in Maui sales from the Maui windstorm and wildfires and the continued adoption of energy efficiency measures and distributed energy resources. While the level of kWh sales does not affect Utility revenues due to decoupling, it may increase or decrease the price per kWh paid by customers. See “Decoupling” in Note 4 of the Condensed Consolidated Financial Statements for a discussion of the decoupling mechanism.

At the Bank, net interest margin for the first quarter of 2024 was 2.75% as compared to 2.63% for the prior quarter ended December 31, 2023. The increase was due to higher yields on earning assets as a result of the repayment of maturing higher costing liabilities using proceeds from the sale of $185 million of investment securities in the prior quarter ended December 31, 2023. However, net interest margin was lower as compared to the prior quarter ended March 31, 2023 of 2.85% primarily due to the higher interest rates as the Bank used higher costing other borrowings and term certificates to fund its loan growth.

ASB’s funding cost, which impacts its net interest margin, is driven by the mix of its funding sources, with the lowest cost source of funding provided by its core deposits. At March 31, 2024, ASB’s year-to-date average core deposits were down approximately 1.8% from year end 2023 balances, resulting in an increase in its overall cost of funds. Looking forward, ASB expects that its deposit base will remain relatively flat to down, given the higher interest rate environment, as well as inflationary pressures on customers that may drive increased spending. ASB also expects that the higher interest rate environment will continue to pressure funding costs and its deposit mix, which in turn will affect net interest income and net interest margin.

Since its peak in June 2022, monthly inflation rates have decreased as reflected in the U.S. Consumer Price Index (CPI). Although the inflation rate, as measured by CPI, has been cooling off from its 2022 peak, the rate is still at a moderately-high level of 3.5% as of March 31, 2024 and inflationary pressures are expected to continue over the near- to medium-term and have led to higher costs for O&M and capital projects and higher interest expense at the Utilities and HEI, as well as higher compensation and benefits cost at the Bank.

Short-term interest rates have also increased significantly as a result of the Federal Reserve’s ongoing rate increases to the federal funds target rate. The higher interest rate environment has impacted the fair value of the Bank’s investment portfolio, which declined and was recorded as an other comprehensive loss. Unrealized losses on held-to-maturity (HTM) securities are not recorded to other comprehensive loss because ASB has the positive intent and ability to hold the securities till maturity and recover its full investment. At March 31, 2024, the unrealized losses on HTM securities not recorded to other comprehensive losses was approximately $85 million after tax.

For further discussion of the impacts of inflation and other macro-economic factors impacting the Utilities and the Bank, see “Recent Developments” in the Electric utility and Bank sections below.