There is great uncertainty over how Hawaiian Electric Industries (HEI) will be able to pay potential damage claims from deadly fires on Maui and upgrade its network to prevent future catastrophes, two advisory sources and a buysider said.
The Honolulu-based holding company, which owns a collection of utilities under Hawaiian Electric Company that power most of the Hawaiian islands and a savings bank, has faced mounting allegations and lawsuits over its actions before and during wildfires that swept through the town of Lahaina and other parts of Maui in early August.
The situation has drawn early comparisons to California utility PG&E’s 2019 bankruptcy following a series of deadly wildfires allegedly started by its equipment, and past disasters like the BP oil spill in the Gulf of Mexico.
This week HEI confirmed the company had engaged Guggenheim and other “experts” for advice and said it was suspending its dividend and drawing down on USD 370m in credit facilities. The company, which did not return a request for comment, has previously said it’s not planning to restructure.
The Federal Emergency Management Agency has estimated that it will cost USD 5.5bn to rebuild property damaged during the Lahaina Fire. The death toll reached 115 on Thursday and 388 people are still classified as missing.
It remains far too soon to estimate HEI’s ultimate liability from the fires, particularly given the large loss of life from the event, the sources said.
HEI’s market cap stood at USD 4bn prior to the fires and the company ended June with USD 2.6bn in long-term debt at the holding company and Hawaiian Electric. Shares have declined from over USD 36 to close Friday at USD 9.66.
HEI has highlighted to investors that there is no precedent in Hawaii for “applying inverse condemnation to a private party like an investor-owned utility,” unlike in California where at the time of PG&E's bankruptcy, utilities could be held liable for fires started by their equipment even if they didn’t act negligently.
Eric Goodman, a partner at Brown Rudnick who specializes in mass tort bankruptcies, said in his view both negligence and the doctrine of inverse condemnation were factors in the PG&E case, adding that either can result in legal liability.
The company pleaded guilty in 2020 to 84 counts of involuntary manslaughter and a count of causing the Camp Fire. Mass tort claimants ultimately secured USD 13.5bn from PG&E.
“If you’re criminally liable, you’re probably going to lose,” said Goodman, who represented the Official Committee of Tort Claimants in the bankruptcy.
On Thursday, the County of Maui filed suit against HEI and its affiliates alleging gross negligence for failing to maintain its power lines and de-energize them in advance of warnings that the island faced high winds and favorable fire conditions. Several other lawsuits have also been filed against the company with similar allegations.
To limit liabilities, HEI could try to ring-fence liabilities to its subsidiary Maui Electric, which Hawaiian Electric Company acquired in 1968 and accounts for around 14% of the business’ revenue, said a third advisory source.
In this scenario, HEI’s stock could be worth USD 25 a share based on the book value of its other utilities and the bank, he said.
Other sources said they believed HEI will struggle to limit liability to just Maui Electric. Claimants will likely go after HEI management and look to pierce the corporate veil between subsidiaries, the buysider said.
Still, in this case, HEI’s debt could see a recovery of around 70 cents based on the assumption that damages come to around USD 5bn and liabilities are treated pari passu, the third advisory source said.
At the end of 2022, Hawaiian Electric Company's debt stack was spread across USD 542m in special purpose revenue bonds and USD 1.15bn in senior unsecured taxable notes issued through private placements in multiple small tranches, according to SEC filings. HEI also issued a series of senior unsecured notes.
Some of the municipal bonds have traded since the fire with a USD 140m 4% revenue bond due 2037 changing hands Thursday at 63.5, according to EMMA data. The taxable notes have not traded in the past month, according to MarketAxess.
Potential damage claims from the fires are only the start of HEI’s liquidity needs, the sources said. No matter who ends up owning the assets, HEI will need to raise new capital to upgrade its grid, said the buysider, who said that as a result, HEI must walk a fine line when dealing with creditors.
“I don’t know how you raise money to pay off all the claims, plus rebuild and harden the system,” said the second advisory source who advises utilities.
The islands do not have favorable demographics to attract investment, the second advisory source noted, with the population declining for the past seven years. HEI also has limited capacity and human capital to execute upgrades, he said.
PG&E issued USD 8.9bn in debt when it emerged from bankruptcy in 2020 with USD 3.5bn of the funds raised to fund capital improvements. Years later the utility is still debating how best to operate its network to prevent fires after suspending an ineffective USD 2.5bn program to trim trees near power lines.
California helped support PG&E’s recapitalization by passing legislation to establish insurance protection for utilities in the event their equipment causes a fire in exchange for making safety improvements.
Hawaii will likely need to pass a similar law to incentivize investors to back HEI without fear of future fire liabilities, some of the sources said.
