Hawaiian Electric munis restore many losses after wildfire settlement deal

After taking a hit in the wake of the deadly 2023 wildfire that devastated the West Maui town of Lahaina, municipal bonds issued for investor-owned utility Hawaiian Electric are on an upswing.

The debt, trading in the secondary market as low as 63 cents on the dollar last year, had recovered to the 95 and 96 cent range in September, before falling to 91 cents, according to trading date posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website.

Fears that the Hawaii utility would end up in bankruptcy as California utility PG&E did after its equipment sparked a deadly northern California fire, have abated after a $4 billion global legal settlement was announced in August that would cap the utility’s liability at $1.99 billion.

At least 102 people died in the Maui conflagration.

In September, the utility raised $558 million in an equity offering that would cover the first of four payments called for in the settlement, which has not received final approval.

“We are taking a proactive approach to funding our settlement contribution, and securing this financing so quickly after entering the settlement agreement in principle – and well ahead of any payment coming due – is a testament to our progress and ability to deliver on our commitments,” Scott Seu, President and CEO of HEI, said in a statement at the time of the stock offering. “This is also a meaningful step toward resolving the going concern assessment we disclosed in August.”

The utility’s power lines were implicated for starting the fire, according to a report published this week by the Maui Fire Department and the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. The fire was accidental, the report found, initially starting when broken power lines were re-energized.

At the end of 2023, the company had $542 million of tax-exempt special purpose revenue bonds outstanding, issued through the Hawaii Department of Budget and Finance, according to the firm’s Form 10-K annual report.

The company’s bond ratings remain well in junk territory after rounds of downgrades following the wildfire.

S&P rates the utility B-minus, and placed it on CreditWatch Negative citing liquidity risk Aug. 26, after the settlement was announced but before the equity raise.

“Overall, we view this settlement as supportive of credit quality, potentially limiting HEI’s litigation exposure,” S&P said.

Fitch Ratings rates Hawaiian Electric B, on rating watch negative.

And Moody’s Ratings has the debt at Ba3.

And recent trades, while they have recovered from distress-sale levels of last year, remain below investment-grade spread, with a 2026 maturity trading at yields from 6.2% to 9.2% in September.

No investors were available to comment on why investor interest appears to have returned, but a series of events appear to have stabilized the utility’s prospects.

Proceeds from Hawaiian Electric’s equity raise, as noted in the prospectus filed on Sept. 24, will be used to “fund its contribution to the expected Maui wildfire tort litigation settlement and for general corporate purposes”.

The company “is now positioned to pre-fund HEI’s expected first settlement payment of roughly $478 million, which is expected to be required no sooner than mid-2025,” according to the company’s news release on the stock offering.

As part of the wide-ranging settlement announced in August, Hawaiian Electric and its parent company, Hawaiian Electric Industries joined the state of Hawaii, Maui County, Kamehameha Schools, West Maui Land Co., Hawaiian Telcom and Spectrum/Charter Communications in the proposed $4 billion agreement with the lead attorneys for individual and class plaintiffs.

The term sheet outlining the settlement agreement came as a result of a several-month mediation process.

It was overseen by a mediation panel of two retired California superior court judges and a Hawaii-based professional mediator.

The proposed terms remain subject to final documentation and court approval and do not include any admission of liability.

“Achieving this resolution will allow all parties to move forward without the added challenges and divisiveness of the litigation process,” Shelee Kimura, president and CEO of Hawaiian Electric, said in a statement on Aug. 2 when the settlement agreement was announced.

“For the many affected parties to work with such commitment and focus to reach resolution in a uniquely complex case is a powerful demonstration of how Hawaii comes together in times of crisis,” Kimura said.

HEI and Hawaiian Electric’s total payment obligation in the settlement is $1.99 billion, minus a $75 million credit for a contribution already made to the One “Ohana Initiative,” The sum will be paid in four equal annual installments.

The overall settlement will go toward the claims of hundreds of individual fire victims.

“While the settlement will close one chapter in the Maui recovery, the story will continue for many years and generations,” Kimura continued. “Hawaiian Electric’s commitment to our communities is unwavering, and we are resolved to be here for Lahaina for as long as it takes.”

Maui Circuit Court Judge Peter Cahill agreed on Aug. 30 to ask the state’s Supreme Court questions about how insurance companies can approach efforts to recoup money from policyholders.

The Supreme Court agreed to take up the case last week and issued an order asking attorneys to submit briefs on the issue within the next 40 days.

Cahill ruled previously insurers can seek reimbursement only from the settlement amount defendants have agreed to pay, which would thwart them from bringing individual lawsuits against the company.

The insurers who asked the questions be posed to the state Supreme Court are not part of the settlement agreement. They want to pursue their own claims against several of the parties that agreed to contribute payments toward the global settlement.

Insurers have paid out $2.3 billion in claims to Maui policyholders, and expect to pay another $1 billion, according to news publication Hawaii Civil Beat. And more than 140 of the insurers, including local companies and international giants, have filed lawsuits.

Hawaii Governor’s Office

The final fire report the Maui Fire Department and ATF released this week declared the fire to be accidental.

The fire was determined to be one fire with a single origin and cause that proceeded in two distinct phases, a morning and an afternoon phase, according to the report.

“In sum, the origin and cause of the Lahaina fire is clear: the re-energization of broken power lines caused sparks that ignited unmaintained vegetation in the area,” Maui Fire Department Chief Brad Ventura said at a news conference Wednesday.

The morning fire, which started at 6:34 a.m. on Aug. 8, originated in an unmaintained weedy area near a utility pole. Molten metallic material (sparks) were ejected from the “re-energization of broken power lines,” according to ATF. That phase of the fire was believed to be contained by 9 a.m.

“All available indicators showed the fire was fully contained and extinguished – no flames, no smoke, or perceptibly combusting material were observed for several hours,” fire and ATF officials said at the press conference. Five hours after containing the first blaze, fire personnel redeployed on a day of high-danger fire conditions on the island.

Embers from the morning phase of the fire remained undetected and were rekindled by a severe wind event at approximately 2:52 p.m., marking the start of the afternoon phase of the fire that caused the mass deaths and destruction of the town of Lahaina.

“We want to make abundantly clear to the community that our firefighters went above and beyond their due diligence to be as confident as they could be that the fire was completely extinguished before they left the scene,” Assistant Chief Jeffrey Giesea said.

The Origin and Cause Report was produced after ATF personnel assisted Maui Fire Department with data collection, photo and video analysis, and witness interviews during the weeks following the fires.

ATF then consolidated and analyzed that information as the basis for its independent findings and conclusions, as well as its electrical examination, which are appended to Maui Fire Department’s report.