HAWAIIAN ELECTRIC CO INC

• Also, see segment discussions which follow.

The Company’s effective tax rates for the first three months of 2024 and 2023 were 22% and 21%, respectively. The effective tax rate was higher for the first three months of 2024 primarily due to an increase in excess taxes related to vesting of share-based awards and no dividend deduction due to suspension of dividends, partially offset by higher nontaxable bank owned life insurance in 2024.

For the three months ended March 31, 2024, the Company’s incremental expenses related to the Maui windstorm and wildfires described in Note 2 of the Condensed Consolidated Financial Statements, were as follows:

1 Related to the PUC’s order, received on December 27, 2023, approving deferred accounting treatment for the Utilities’ incremental non-labor expenses related to the August 2023 Maui windstorm and wildfires. Amounts were reclassified to a regulatory asset. See Note 2 of the Condensed Consolidated Financial Statements.

2 Includes $6.7 million pursuant to an agreement to settle indemnification claims asserted by the State of Hawaii. See Note 2 of the Condensed Consolidated Financial Statements.

Note: Other segment Maui windstorm and wildfires related expenses - legal, outside services and other are included in “Expenses-Other” and interest expense is included “Interest expense, net—other than on deposit liabilities and other bank borrowings” on the HEI and subsidiaries Condensed Consolidated Statements of Income. See Electric utility and Bank sections below for more detail.

Since the Maui windstorm and wildfires on August 8, 2023 through March 31, 2024, HEI and its subsidiaries have incurred approximately $169 million of Maui windstorm and wildfires expenses, including the One ‘Ohana Initiative contribution. Certain of these costs are reimbursable under excess liability insurance and directors and officers liability insurance policies. As of March 31, 2024, HEI and its subsidiaries have approximately $58 million and $135 million of insurance coverage remaining under the excess liability and directors and officers liability policies, respectively, after deducting applicable retention amounts and estimated insurance recoveries, including the One ‘Ohana Initiative contribution. The Company is unable to determine whether the insurance coverage remaining under the excess liability and directors and officers liability policies are sufficient to cover future costs.

The Company expects the Electric utility and HEI to continue to incur significant expenditures in connection with the Maui windstorm and wildfires; however, the Company has partially mitigated the financial impact through insurance recoveries as well as the Utilities obtaining deferral treatment for incremental non-labor expense.

Economic conditions.

Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local news media).

In the first quarter, the average daily passenger count was 0.2% higher than the comparable period in the prior year. The recovery in total passenger counts from the low levels in 2020, which occurred under COVID-19 restrictions, thus far has been driven by domestic travelers, with international travelers, primarily Japan, remaining at lower levels, but activity is increasing compared to 2022. In the first quarter, international visitor arrivals (excluding Japan) have continued to increase at a modest pace, but is still 14.9% below 2019 levels, whereas Japanese visitors are 44.7% below 2019 levels.

Hawaii’s seasonally adjusted unemployment rate in March 2024 was 3.1%, which was higher compared to the March 2023 rate of 2.9%. The national unemployment rate in March 2024 was 3.8% compared to 3.5% in March 2023. According to the most recent forecast by UHERO, issued on February 23, 2024, job growth in the state will decrease to 0.8% for 2024 and 0.9% for 2025. The Maui windstorm and wildfires destroyed a majority of the businesses in Lahaina, but initial visitor recovery after the wildfires has proven to be somewhat stronger than initially expected. The labor market recovery on Maui was also stronger than expected, reflecting faster employment recovery and anticipated outflows from the labor force as some residents relocate off island. Accordingly, unemployment on Maui is predicted to average 5% in 2024, receding to 3.1% by 2026.

Hawaii real estate activity through March 2024, as indicated by Oahu’s home resale market, resulted in a decrease in the median sales price of 6.7% for condominiums and an increase of 1.5% for single-family homes compared to the same period in 2023, with the March median single-family home price of $1,100,000, below the record $1,153,500 set in May 2022. The number of closed sales decreased 22.5% for condominiums and 2.5% for single-family residential homes through the first quarter of 2024 compared to 2023.

Hawaii’s petroleum product prices relate to the crude oil in international markets. The price of crude oilhas decreased 13% over the same quarter in the prior year. While the fuel costs are below 2022’s peak, they remain elevated.

At its March 20, 2024 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 5.25% - 5.50%. The FOMC is still assessing plans to adjust their stance on monetary policy depending on the economic outlook to achieve maximum employment and inflation at the rate of 2 percent over the long run. The Federal Reserve stated that it will continue to reduce its holdings of Treasury securities and agency mortgage-backed securities.

UHERO forecasts full year 2024 real GDP growth of 1.5%, an increase in total visitor arrivals of 2.0%, an increase in real personal income of 1.6%, and an unemployment rate of 2.7%. The Maui visitor industry has been recovering faster than anticipated and visitors to the rest of the state have reached record levels. Hawaii has seen strong visitor spending at the end of 2023, however real visitor spending is expected to soften. The 2024 U.S. economy is off to a positive start due to strong consumer spending, healthy job markets and progress on reducing inflation, which will help bring inflation into the Fed’s target range and achieve a “soft landing”.

See also “Recent Developments” in the “Electric utility” and “Bank” sections below for further discussion of the economic impact of recent events.

“Other” segment.

1 Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.

The “other” business segment loss includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) and ASB Hawaii, Inc. (ASB Hawaii), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current’s indirect subsidiary, Hamakua Energy, which owns a 60 MW combined cycle power plant on Hawaii Island that provides electricity to Hawaii Electric Light; Pacific Current’s subsidiaries, Mauo, LLC (Mauo), which owns solar-plus-storage projects totaling 8.6 MW on five University of Hawaii campuses, Mahipapa, which owns a 7.5 MW nameplate biomass facility on Kauai, Alenuihaha Developments, LLC, which owns a collection of renewable energy assets on Oahu and Kauai, Ka‘ie‘ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative, and Ka‘aipua‘a, LLC, which is constructing a wastewater treatment and energy recovery facility on Hawaii Island; as well as eliminations of intercompany transactions.

In late February 2024, Hamakua Energy’s first combustion turbine (CT1) and its leased combustion turbine (leased CT) unexpectedly sustained damages resulting in a plant shut down on Hawaii Island. The Company is currently conducting an investigation into the root cause of the damages. Upon inspection of CT1, it was determined that the unit was not serviceable. Due to the generation capacity shortfall on Hawaii Island (refer to “System reliability” in“Recent developments” of the Hawaiian Electric’s MD&A below), and the extensive timeline and cost to overhaul CT1, management decided to retire and replace CT1. Due to the age of the unit, the net book value is immaterial. In April 2024, Hamakua Energy purchased a new combustion turbine and plans to install the unit in May 2024. Total capital cost of the unit, including installation, is expected to amount to approximately $8.3 million. Pursuant to the lease pool program agreement, the leased CT will be returned to the lessor for repairs. Hamakua Energy’s second combustion turbine (CT2) is currently in a scheduled overhaul which has incurred delays due to supply shortages. The CT2 overhaul is expected to be completed and the unit placed back into service in the third quarter of 2024.

In March 2024, a fire destroyed the cooling tower at the Mahipapa facility on Kauai. The fire was ignited from a vendor’s welding activities being performed on the cooling tower during its scheduled maintenance. As a result, the plant is currently shut down while repairs are being performed. Mahipapa recorded an impairment loss of $3.5 million in March 2024. The Company expects to complete its repairs and bring the facility back online in the third quarter of 2024.

Liquidity and capital resources. See “Credit and Capital Market Risk” in Item 1A. Risk Factors in HEI’s and Hawaiian Electric’s 2023 Form 10-K and in Item 1A. Risk Factors below.

The downgrades of HEI’s and Hawaiian Electric’s credit ratings from the uncertainty facing the Company due to the litigation risks and ongoing investigations related to the Maui windstorm and wildfires impacted the Company’s ability to access capital markets and other sources of debt and equity financing in a timely manner and on acceptable terms. While the fundamentals of its businesses remain strong, the Company took prudent and measured actions to reinforce its commitment to serving the community for the long term. In August 2023, HEI and Hawaiian Electric fully drew down $175 million and $200 million, respectively, on their existing revolving credit facilities. The cash proceeds were primarily invested in highly liquid short-term investments and used for general corporate purposes. The Company has taken additional prudent measures to strengthen its financial position while continuing to provide reliable service to its customers and reinforcing our commitment to serving the community for the long term. Some of these proactive measures include suspending the quarterly cash dividend on HEI’s common stock after payment of the second quarter dividend in September 2023 and reducing or eliminating discretionary costs. The Company is working with financial advisors to maximize liquidity and believes it has adequate cash to meet its financial obligations and sustain operations in the short term. The Company’s objective continues to be to operate a strong, financially healthy enterprise to empower a thriving future for Hawaii.

At the end of the quarter, HEI and Hawaiian Electric had no commercial paper outstanding. As of March 31, 2024, ASB’s unused FHLB borrowing capacity was approximately $1.4 billion and ASB had unpledged investment securities of $1.1 billion that were available to be used as collateral for additional borrowing capacity. At both March 31, 2024 and December 31, 2023, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was nil. As of March 31, 2024, HEI consolidated has $2.8 billion of long-term debt, net - other than bank, of which $60 million is due within 12 months and $122 million is due within 24 months.

As of March 31, 2024, HEI’s cash and cash equivalents balance, excluding its subsidiaries, was $127 million, compared to $137 million as of December 31, 2023. The Company believes that its cash and cash equivalents and expected operating cash flow from operations will be sufficient to meet the Company’s cash requirements in the short term based on its current business plans. However, the Company expects that HEI and the Utilities’ liquidity will continue to be impacted as a result of the August 2023 downgrades of their credit ratings to below investment grade which prevents the Company from accessing unsecured, short-term borrowings and will continue to have restricted access to the capital markets and other sources of debt and equity financing in a timely manner and on acceptable terms while the resolution of the Maui windstorm and wildfires and the ongoing related lawsuits are pending. Additionally, extended plant shutdowns at Pacific Current’s Hamakua and Mahipapa facilities, higher working capital requirements resulting from inflation and elevated fuel prices, could also increase liquidity needs.

For the Utilities, while fuel prices have moderated from their highs in 2022, they remain elevated and have increased the cost of carrying fuel inventory and higher customer accounts receivable balances as fuel is consumed and billed to customers. While the accounts receivable balance has decreased since December 2023, it remains elevated coming out of the pandemic and has led to higher bad debt expense and higher write-offs in 2023 and year-to-date 2024, following the end of the moratorium on disconnections. The higher bad debt expense is expected to continue until the Utilities return to pre-pandemic collection practices, along with a decrease in volume, for delinquent accounts. The Maui windstorm and wildfires have not and are not anticipated to materially impact accounts receivable and higher bad debt expense. As of March 31, 2024, approximately $18.9 million of the Utilities’ accounts receivables were over 30 days past due. Of the over 30 days past due amounts, approximately 38% were on payment plans. In addition to the cash flow impact from delayed collection of accounts receivable, lower kWh sales relative to the level of kWh sales approved in the last rate case generally result in delayed timing of cash flows, resulting in higher working capital requirements (see “Recent Developments” in the Electric utility section below).

If further liquidity is deemed necessary in the short term, the Utilities could also reduce the pace of capital spending related to non-essential projects, manage O&M expenses, seek borrowings on a secured basis, and explore asset sales.

At ASB, liquidity remains at satisfactory levels. ASB’s cash and cash equivalents was $227 million as of March 31, 2024, compared to $435 million as of December 31, 2023. ASB remains well above the “well capitalized” level under the FDIC Improvement Act prompt correction action capital category, and while the Hawaii economic outlook remains stable, there are emerging risks from potential continued turmoil in the banking industry, inflation, higher interest rates and the tightening of monetary policy that increase the risk of a recession, which could create increased uncertainty regarding the impact on loan performance and the allowance for credit losses (see “Recent Developments” in the Bank section below).

HEI Consolidated material cash requirements. Material cash requirements of HEI Consolidated include: Utility related capital expenditures (including capital expenditures related to wildfires and wildfire mitigations), labor and benefit costs, O&M expenses, legal and consulting costs related to the Maui windstorm and wildfires, fuel and purchase power costs, and debt and interest payments; Bank related investments in loans; HEI related labor and benefits costs, debt and interest payments and legal and consulting costs related to the Maui windstorm and wildfires and HEI equity contributions to support Pacific Current’s sustainable infrastructure investments.

Although the Company’s credit rating downgrades related to the Maui windstorm and wildfires will continue to adversely impact its ability to access capital markets and other sources of debt and equity financing, if at all, in a timely manner and on acceptable terms, the Company currently believes that its ability to generate cash, both internally from electric utility and banking operations and the existing cash fully drawn on its revolving credit facilities is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other material cash requirements in the shorter term. However, in the long-term, any material reduction or extended delay in dividends or other distributions from one or more operating subsidiaries to HEI and the potential damages and losses related to the Maui windstorm and wildfires and related lawsuits (see further information in Note 2 of the Condensed Consolidated Financial Statements), the economic impact of higher fuel prices, inflation, higher interest rates, tightening of monetary policy and geopolitical situations, create significant uncertainty, and the Company cannot predict the extent or duration of these conditions, the future effects that these conditions will have on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows.

The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:

HEI’s commercial paper borrowings and line of credit facility were as follows:

Note: This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s short-term commercial paper borrowings during the first three months of 2024 was nil. As of March 31, 2024, available committed capacity under HEI’s line of credit facility was nil.

On March 12, 2024, S&P revised HEI’s outlook to “Negative” from “Watch Negative” and affirmed the “B-” issuer credit rating.

There were no new issuances of common stock through the Dividend Reinvestment Program (DRIP), HEIRSP or the ASB 401(k) Plan in the three months ended March 31, 2024 and 2023.

For the first three months of 2024, net cash provided by operating activities of HEI consolidated was $125 million, primarily due to cash provided by the Utilities of $127 million—Utility customer cash receipts during the first quarter of 2024. Net cash used in investing activities for the same period was $6 million, primarily due to capital expenditures, purchase of FHLB stock, net of redemption, offset by ASB’s net decrease in loans held for investment, proceeds of sale of commercial loans and ASB’s receipt of investment security repayments and maturities. Net cash used in financing activities during this period was $311 million primarily due to net decreases in ASB’s other bank borrowings and deposit liabilities.

Dividends. The payout ratios for the first three months of 2024 and full year 2023 were nil and 59%, respectively. The HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company, current and expected future economic conditions, and capital investment alternatives. In August 2023, due to the potential impact from the Maui windstorm and wildfires, the HEI Board of Directors voted to suspend the quarterly cash dividend, starting after the second quarter dividend. This action is intended to allow the Company to provide additional liquidity and allocate cash to rebuilding and restoring power and help ensure a strong future for the Utilities and Bank. The ASB Board of Directors determined to suspend its quarterly cash dividends to HEI, starting after the second quarter 2023 dividend, to help ensure maximum possible Bank liquidity and capital. The Hawaiian Electric Board of Directors reduced its fourth quarter 2023 dividend to HEI, from $32 million in the third quarter, to $13 million, and recently declared a $13 million first quarter 2024 dividend to HEI, to allow the Utilities to devote more resources to restoration work on Maui and to make critical capital investments, including for wildfire mitigation. Future adverse events could cause dividends from the Utilities to be reduced or suspended. A material reduction, delay or suspension in dividends or other distributions from one or more of the operating subsidiaries to HEI for an extended period of time could have a material adverse effect on the Company’s financial condition and results of operation, barring other offsetting factors.

MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.

In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments.

For information about these material estimates and critical accounting policies, in addition to the critical policy discussed below, see pages 48 to 50, 67, and 80 to 81 of the MD&A included in Part II, Item 7 of HEI’s and Hawaiian Electric’s 2023 Form 10-K.

Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.