HAWAIIAN ELECTRIC INDUSTRIES 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 102 confirmed fatalities in Lahaina (the Maui windstorm and wildfires). The circumstances surrounding the Maui windstorm and wildfires are currently the subject of several investigations.

As of August 8, 2024, HEI and the Utilities have each been named in approximately 700 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, and telecommunications companies (collectively, tort-related legal claims). Two class actions are also pending in federal court. 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, one lawsuit was filed by Spectrum Oceanic, LLC against HEI and the Utilities and other defendants, and other lawsuits were filed by approximately 160 subrogation insurers against HEI, the Utilities, a private landowner, and telecommunications companies. 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. Defendants have asserted cross-claims against one another for indemnification, contribution, and subrogation. In addition to the tort-related legal claims, the Company is also involved in a securities class action and six shareholder lawsuits. See Note 2 of the Condensed Consolidated Financial Statements.

On August 2, 2024, attorneys representing the individual and class plaintiffs reached an agreement in principle with all defendants to settle all of their tort-related legal claims in the litigation arising out of the Maui windstorm and wildfires. HEI attached the agreement in principle to the Form 8-K that it filed on August 5, 2024. The agreement in principle was the product of a mediation process that lasted several months and remains subject to final documentation and court approval. Under the agreement in principle, HEI and Hawaiian Electric, the State of Hawaii, the County of Maui, Kamehameha Schools, West Maui Land Co., Hawaiian Telcom and Spectrum/Charter Communications have agreed to contribute a total of approximately $4.04 billion to one or more funds that would pay the claims of those who filed lawsuits in state and federal courts, or who may have claims but have not yet filed lawsuits, in connection with the Maui windstorm and wildfires.

The agreement in principle does not resolve claims with insurers who have asserted subrogation claims in separate lawsuits, and such insurers are not parties to the agreement in principle. However, the agreement in principle provides that the definitive settlement agreement must provide for resolution of all subrogation claims by insurers that have been or could be brought against defendants arising out of the Maui windstorm and wildfires for no additional consideration. The agreement in principle includes a condition to the defendants’ obligations providing that within 90 days from its execution, either (a) insurers that have brought claims arising out of the Maui windstorm and wildfires enter into a written agreement that provides for releases of all claims against the defendants, or (b) that a trial court enters an order providing that if the final definitive agreement between the plaintiffs and the defendants becomes effective, then those same insurers’ exclusive remedy for any claims against the defendants would be limited to asserting liens against the settlement amounts obtained by the individual plaintiffs (so long as the order becomes final and unappealable within nine months from its date of issuance or, in that time period, those same insurers agree to provide the requisite releases).

Of the total settlement amount, HEI and Hawaiian Electric would contribute a total of $1.99 billion, which includes as a credit towards that amount the $75 million previously contributed for the One‘Ohana Initiative, to be paid in four equal annual installments, with the first installment expected to be made no earlier than mid-2025. While the agreement in principle remains subject to final documentation and court approval, the Utilities have accrued their best estimate of the loss of approximately $1.71 billion, which represents the best estimate of the lump sum amount to settle claims with the plaintiffs as of June 30, 2024. The agreement in principle contains no admission of any liability by HEI or the Utilities and reflects the collective efforts of the State, HEI and the Utilities, and other defendants to seek a comprehensive resolution of the litigation arising out of the Maui windstorm and wildfires. The Utilities will seek insurance recovery to partially mitigate the potential financial impact; however, the timing and amount of any insurance recoveries are not determinable at this time.

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 second quarter of 2024, economic conditions in Hawaii remained stable with seasonally adjusted unemployment rate at 2.9% for June 2024 and the average daily passenger count was 1.7% lower than the comparable period in the prior year. While economic conditions remained stable during the quarter, the Utility’s kWh sales in the second quarter of 2024 were down by 1.2%, compared to the second 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 second quarter of 2024 was 2.79% as compared to 2.75% for the prior quarters ended March 31, 2024 and June 30, 2023. The increase in net interest margin was primarily due to the continued benefit from the sale of investment securities in the fourth quarter 2023 which was used to pay down maturing higher costing liabilities during the first quarter 2024. In addition, yields from earning assets increased primarily due to higher loan yields.

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 June 30, 2024, core deposits were down approximately 1.3% from year end 2023, 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 as customers move funds into higher costing certificate of deposits, 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 3.0% as of June 30, 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 intent and ability to hold the securities till maturity and recover its full investment. At June 30, 2024, the unrealized losses on HTM securities not recorded to other comprehensive losses was approximately $88 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.