Hawaiian Electric Industries Inc.'s stock price regained some ground Aug. 28 after the company said an internal investigation determined its power lines did not cause wildfires that ravaged Maui, but the utility remains on precarious financial footing.

Hawaiian Electric Industries (HEI) utility subsidiary Hawaiian Electric Co. Inc. said in an Aug. 27 news release and related Form 8-K filing with the SEC that the utility's power lines had been "de-energized for more than six hours" when an afternoon fire began Aug. 8. That fire, the second of the day on Maui, devastated the town of Lahaina and killed at least 115 people.

The Aug. 27 comments refute a County of Maui class-action complaint alleging that the company and its utility subsidiaries failed to shut off power lines during forecast high-fire danger conditions, thus causing the inferno.

"We were surprised and disappointed that the County of Maui rushed to court even before completing its own investigation," Hawaiian Electric Co. President and CEO Shelee Kimura said in a statement. "We believe the complaint is factually and legally irresponsible. ... Unfortunately, the county's lawsuit may leave us no choice in the legal system but to show its responsibility for what happened that day."

HEI utility subsidiaries are Hawaiian Electric Co., Hawaii Electric Light Co. Inc. and Maui Electric Co. Ltd., which serves customers on Maui.

After settling at $9.66 on Aug. 25, HEI shares gained nearly 45% on Aug. 28 to end the trading session at $13.97. That was far below the Aug. 11 closing price of $32.40 before attorneys from three firms in California and Hawaii filed a class-action complaint Aug. 12.

The US Bureau of Alcohol, Tobacco, Firearms and Explosives is also investigating the cause of the wildfire. Hawaii Attorney General Anne Lopez said she would hire a third-party organization for an independent review.

Financial pressure

The results of its internal investigation might not be enough to keep HEI from filing for Chapter 11 bankruptcy, even if the company and its utilities maintain financial footing after suspending the quarterly cash dividend and drawing down a combined $370 million from existing credit facilities, said Rob Rains, senior energy analyst with independent research firm Washington Analysis.

"Any further significant decline in their equity cushion will impact their bonds as well," Rains said in an interview. "Sometimes the market's perception becomes reality, so if folks perceive that [HEI] cannot continue to operate, it essentially creates a run on itself," especially if more lawsuits against the company are filed or additional negative facts come to light.

Analysts at Wells Fargo agreed that HEI cannot afford to lose more equity.

"The investigative and legal processes needed to potentially absolve the utility of the mounting wildfire-related liabilities are likely multiyear. As such, we remain of the opinion that a bankruptcy reorganization is still perhaps the most plausible path forward given what appears to be an inevitable liquidity crunch," Wells Fargo said in an Aug. 25 report.

On the credit side, S&P Global Ratings downgraded HEI and its rated subsidiaries to B- from BB- on Aug. 24. Although the rating agency believes that HEI can pay debts due "at least" through 2025, the company will still "require consistent and extraordinary regulatory support" from the Hawaii Public Utilities Commission in the form of higher customers bills.

Additionally, HEI's disclosure that it retained financial advisers reflects an "increased potential for adverse developments that could affect the company's debt service capacity in the future," S&P Global Ratings said.

Fitch Ratings downgraded HEI to B from BBB+ on Aug. 21. Moody's on Aug. 18 put both HEI and Hawaiian Electric Co. under review for downgrade.

Potential shareholder damages

HEI also faces financial pressure from a separate class-action securities fraud lawsuit filed Aug. 24 in the US District Court for the Northern District of California. That suit accuses the company and four current and former top executives of making "materially false and misleading statements," including those related to inadequate wildfire prevention and safety protocols, resulting in "significant losses and damages" amid HEI's "precipitous decline" in stock market value.

The burden of proof for securities fraud is significantly higher than for criminal negligence, and many cases end up getting dismissed, according to Debevoise & Plimpton LLC securities attorney Maeve O'Connor, but some event-driven cases like the one filed against HEI have resulted in large settlements.

"In a case like this which centers on a disaster and 'bad facts' surrounding that, there's likely to be intense pressure on the company to get it resolved," O'Connor said in an interview.

"Many in the defense bar have the view that these cases are not actually strong securities cases, but they're difficult to fight in court because the surrounding facts are really problematic," O'Connor continued. "Sometimes the courts are disinclined to dismiss a case that relates to such upsetting facts even if they don't fit terribly neatly into the framework of a securities case."

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This report may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this report were not prepared by S&P Global Ratings.