10-Q: Hawaiian Electric Industries Reports \$1.36 Billion Net Loss Due to Wildfire Liabilities

Hawaiian Electric Industries (HEI) and its subsidiaries reported a significant net loss of \$1.36 billion for the nine months ended September 30, 2024, primarily due to accruals for wildfire-related liabilities.

Summary

• Hawaiian Electric Industries (HEI) reported a net loss of \$1.36 billion for the nine months ended September 30, 2024, primarily due to \$1.92 billion in estimated wildfire liabilities.
• The electric utility segment experienced a net loss of \$1.27 billion for the same period, also driven by the wildfire liabilities.
• HEI completed a sale of 62.2 million shares of common stock in September 2024, raising net proceeds of approximately \$557.7 million to help fund the first settlement payment.
• The company has also established an at-the-market (ATM) offering program to sell up to \$250 million of common stock.
• The Utilities revised their total settlement accrual to \$1.92 billion, classifying the first \$479 million installment as a current liability and the remaining \$1.44 billion as a non-current liability.
• The company believes that its current cash balances, available credit facilities, and expenditure reduction efforts provide sufficient liquidity to alleviate concerns about its ability to continue as a going concern.
• The company has agreed to transfer the amount of the first payment, \$479 million, into a new subsidiary, which is restricted from disbursing such funds except in connection with the initial payments to the settlement funds.
• The company expects to make this initial payment in late 2025.
• The company has been named in approximately 750 lawsuits related to the Maui windstorm and wildfires.
• The company has agreed to settle the tort-related legal claims in the litigation arising out of the Maui windstorm and wildfires for a total of \$1.99 billion, payable in four equal annual installments.
• The settlement agreements are subject to court approval and other conditions, including resolving claims of insurers.
• The company's insurance receivable totaled \$74 million and \$69 million for HEI and the Utilities, respectively, under the policies.
• The company recorded a pretax asset impairment charge of \$35.2 million for the three and nine months ended September 30, 2024 related to Pacific Current assets.
• The company also forgave its intercompany loan receivable from Mahipapa, including accrued interest, amounting to \$9.6 million.

Sentiment

Score: 3

Explanation: The document reveals significant financial distress due to wildfire liabilities, despite efforts to raise capital and settle claims. The outlook remains uncertain, with potential for further financial challenges.

Positives

• HEI raised \$557.7 million through a common stock offering to help fund the first settlement payment.
• The company has established an ATM offering program for additional capital raising.
• Management believes that current cash balances, available credit facilities, and expenditure reduction efforts provide sufficient liquidity to alleviate concerns about its ability to continue as a going concern.
• The company has agreed to settle the tort-related legal claims in the litigation arising out of the Maui windstorm and wildfires for a total of \$1.99 billion, payable in four equal annual installments.

Negatives

• HEI reported a net loss of \$1.36 billion for the nine months ended September 30, 2024, primarily due to wildfire liabilities.
• The electric utility segment experienced a net loss of \$1.27 billion for the same period.
• The company recorded a pretax asset impairment charge of \$35.2 million for the three and nine months ended September 30, 2024 related to Pacific Current assets.
• The company has been named in approximately 750 lawsuits related to the Maui windstorm and wildfires.
• The company has agreed to settle the tort-related legal claims in the litigation arising out of the Maui windstorm and wildfires for a total of \$1.99 billion, payable in four equal annual installments.

Risks

• The company's ability to raise sufficient capital to fund the remaining settlement payments is uncertain.
• The settlement agreements are subject to court approval and other conditions, including resolving claims of insurers.
• The company's credit rating downgrades may impact its ability to access capital markets and other sources of debt financing.
• The company faces ongoing litigation risks related to the Maui wildfires.
• The company's future operating results are subject to significant risks and uncertainties, including access to capital, ability to attract and retain key personnel, and pending or threatened litigation.

Future Outlook

The company is working with financial advisors on additional financing plans to raise capital necessary to fund the remaining settlement amount. The company expects to make the first settlement payment in late 2025.

Management Comments

• Management believes that HEIs and the Utilities current cash balances, available credit facilities, and expenditure reduction efforts provide sufficient liquidity to alleviate concerns about its ability to continue as a going concern.
• The Settlement Agreements contain 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.

Industry Context

The announcement comes amid broader industry challenges related to climate change, extreme weather events, and the increasing costs of renewable energy transitions. The company's situation highlights the financial risks associated with operating in areas prone to wildfires and the need for robust risk management strategies.

Comparison to Industry Standards

• The financial losses reported by HEI are significantly larger than those typically seen in the utility sector, primarily due to the unique circumstances of the Maui wildfires and the associated legal liabilities.
• The company's reliance on debt and equity financing to cover the settlement costs is a common practice in the industry, but the scale of the required financing is unusually large.
• The company's efforts to secure federal funding and implement cost-recovery mechanisms are consistent with industry practices, but the success of these efforts is uncertain.
• The company's focus on renewable energy and grid modernization aligns with broader industry trends, but the pace of these transitions may be impacted by the company's financial challenges.

Management Changes

Legal Proceedings

• As of November 4, 2024, HEI and the Utilities have each been named in approximately 750 lawsuits related to the Maui windstorm and wildfires.
• One class action is also pending in federal court.
• 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.
• On August 24, 2023, a putative securities class action captioned Bhangal v. Hawaiian Electric Industries, Inc., et al., No.: 3:23-cv-04332-JSC (the Securities Action) was filed in the United States District Court for the Northern District of California.
• On September 11, 2023, a putative shareholder derivative action captioned Rice v. Connors, et al., No. 1CCV-23-0001181 was filed in the Circuit Court of the First Circuit, State of Hawaii.
• Three putative shareholder derivative actions were filed in the United States District Court for the Northern District of California between December 26, 2023 and February 8, 2024, including: Kallaus v. Johns, et al., No. 3:23-cv-06627 (the Kallaus Action), Cole v. Johns, et al., No. 3:24-cv-00598 (the Cole Action), and Tai v. Seu, et al., No. 3:24-cv-01198 (the Tai Action).
• Two putative shareholder derivative actions were filed in the United States District Court for the District of Hawaii between April 8, 2024 and June 8, 2024, including: Assad v. Seu, et al., No. 1:24-cv-00164 (the Assad Action), and Faris v. Seu, et al., No. 1:24-cv-00247 (the Faris Action).

Stakeholder Impact

• Shareholders face potential dilution from equity offerings and uncertainty regarding the company's future financial performance.
• Employees may experience uncertainty due to the company's financial challenges and potential restructuring.
• Customers may face higher electricity rates due to the costs associated with wildfire mitigation and settlement payments.
• Creditors face increased risk due to the company's financial distress and potential for default.
• Suppliers may face uncertainty regarding future contracts and payments.

Next Steps

• The company will continue to work with financial advisors on additional financing plans to raise capital necessary to fund the remaining settlement amount.
• The company expects to make the first settlement payment in late 2025.
• The company will continue to work with key stakeholders in balancing the risk of utility-related wildfires with the public consequences of not having electricity.
• The company will continue to work to develop a more comprehensive Wildfire Safety Strategy.

Key Dates

Keywords

wildfires, settlement, lawsuits, capital raise, financial results, net loss, Hawaiian Electric, HEI, liquidity, insurance, impairment, debt, equity