Executive Summary / Key Takeaways

• Hawaiian Electric Industries (HEI) is strategically simplifying its business model to focus solely on its regulated electric utility operations in Hawaii, following the sale of American Savings Bank and the ongoing review of its Pacific Current assets.
• Significant progress has been made towards resolving the Maui wildfire tort litigation with a definitive settlement agreement, providing increased clarity on potential liabilities and enabling a path towards financial recovery, contingent on key conditions including insurer resolution and court approval.
• The utility is undertaking a robust capital expenditure cycle, targeting $350-$375 million in 2025 and increasing levels thereafter, focused on enhancing grid resilience, implementing wildfire safety measures, and integrating renewable energy sources to meet ambitious state decarbonization goals.
• While facing financial pressures from wildfire-related costs and credit rating downgrades impacting access to capital, HEI has bolstered liquidity through recent equity issuance and credit facilities, providing sufficient cash for the initial settlement payment expected in early 2026.
• The company's competitive positioning is defined by its unique island operating environment and regulatory framework, leveraging technological advancements in grid modernization and renewable integration to pursue state mandates, while navigating challenges related to scale, operational risks, and the cost impacts of its geographic isolation compared to larger mainland utilities.

A Turning Point in the Pacific: Reshaping Hawaiian Electric's Future

Hawaiian Electric Industries, Inc. (HEI), founded in 1891, has long served as the backbone of Hawaii's energy infrastructure, providing electric utility service across the principal islands, excluding Kauai. Operating five distinct grids and serving approximately 95% of the state's population, HEI's history is deeply intertwined with the growth and development of the islands. Over time, the company expanded its portfolio, notably including American Savings Bank (ASB) and investments in sustainable infrastructure through Pacific Current. However, the devastating Maui wildfires in August 2023 marked a pivotal moment, necessitating a strategic re-evaluation and accelerated focus on core strengths and risk mitigation.

In the wake of the wildfires, HEI has embarked on a deliberate path to simplify its corporate structure and concentrate on its foundational regulated utility business. This strategic pivot is underscored by the sale of 90.1% of ASB on December 31, 2024, and an ongoing comprehensive review of strategic options for Pacific Current assets. This streamlining is intended to enhance focus, simplify regulatory oversight, and strengthen the financial position of the core utility operations as it confronts the challenges and opportunities ahead.

The utility operates within a performance-based regulation (PBR) framework established by the Public Utilities Commission (PUC) in December 2020, which governs its revenue adjustments, cost recovery, and performance incentives. This framework is crucial to understanding the utility's financial mechanics and its alignment with state energy policy goals.

Powering a Sustainable Future: Technology and Operational Strategy

Hawaiian Electric's operational strategy is centered on providing safe, reliable, affordable, and increasingly clean energy to its island communities. Achieving the state's ambitious goals of 100% renewable portfolio standard (RPS) and net-negative carbon emissions by 2045 requires significant technological advancement and strategic investment.

The company is actively implementing its Integrated Grid Planning (IGP) process, accepted by the PUC in March 2024, which outlines actionable steps and leverages a flexible framework to adapt to future technologies. A key component of this is grid modernization. Phase 1 of the Grid Modernization Strategy (GMS), involving the deployment of 447,000 advanced meters (serving ~95% of customers), was completed in 2024, enhancing data collection and grid management capabilities. Phase 2, focused on an Advanced Distribution Management System (ADMS), is being re-scoped after being unsuccessful in securing federal funding, but the strategic intent remains to maximize flexibility, minimize redundancy, deliver customer benefits, and enable greater integration of distributed energy resources (DER) and renewable energy.

Technological advancements are also critical to the utility's enhanced wildfire safety strategy. This includes improving situational awareness through the installation of weather stations and AI-assisted high-definition video cameras across service territories. These technologies are designed to help prevent ignition, enable quicker response, and add situational awareness during high-risk conditions. Grid hardening efforts, such as upgrading poles, installing covered conductors, strategically undergrounding lines, and deploying technologies like sparkless fuses, new lightning arresters, and smart reclosers, are underway to increase resilience against various environmental risks, including wildfires, hurricanes, and floods.

The transition to renewable energy involves integrating diverse sources like solar, wind, geothermal, and battery storage. The utility has made progress, achieving a 36% RPS in 2024, up from 33% in 2023, and remains on track for the interim 40% target by 2030, despite challenges. Battery storage is a key technology, supported by programs like the Emergency Demand Response Program (EDRP), which incentivizes dispatchable electricity from customer-sited batteries to address potential reserve shortfalls. As of March 31, 2025, the EDRP on Oahu had approved applications totaling 47.95 MW, and on Maui, approximately 10.55 MW. These technologies are foundational to meeting clean energy mandates, enhancing grid stability with intermittent renewables, and ultimately impacting the cost and reliability of service for customers.

Navigating a Unique Competitive Landscape

Hawaiian Electric operates in a competitive landscape shaped by its distinct island geography and regulatory structure. While it holds a near-monopoly position in the electric utility sector across its service islands, it faces competitive pressures from various angles.

Directly, HEI's operational and financial performance is often compared to larger mainland utilities like NextEra Energy (NEE), Duke Energy (DUK), and Southern Company (SO). These comparisons highlight both HEI's unique strengths and its inherent disadvantages. Unlike these national players with vast interconnected grids and economies of scale, HEI manages five separate, smaller island grids. This geographic isolation contributes to higher operating costs (reflected in higher O&M expenses, partly due to import dependencies and the cost of maintaining distributed infrastructure across islands) compared to the lower costs per unit often seen by larger utilities like NEE or DUK. For instance, HEI's Q1 2025 operating expenses included $143.1 million for other operation and maintenance, impacted by wildfire-related costs and higher insurance premiums.

While HEI lags in overall scale and faces financial pressures that have impacted its margins and ROIC compared to some peers, its strategic focus on integrating high levels of renewable energy positions it favorably in the context of the clean energy transition. With a 36% RPS in 2024, HEI is ahead of many mainland utilities in renewable penetration, leveraging technologies like advanced solar and storage integration that offer greater efficiency in clean energy generation compared to utilities with more fossil-heavy mixes like SO. This focus aligns with state policy and provides a unique value proposition in a market prioritizing decarbonization.

HEI's competitive advantages primarily stem from its regulatory licenses, which provide a stable revenue base through mechanisms like the Annual Revenue Adjustment (ARA) and Exceptional Project Recovery Mechanism (EPRM). This regulatory moat helps counter the scale advantages of larger competitors by ensuring recovery of prudently incurred costs and a return on approved investments. The company is also leveraging its deep understanding of Hawaii's unique environmental challenges, particularly wildfire risk, to develop specialized mitigation strategies and technologies, positioning itself as a leader in island resilience.

However, HEI's disadvantages include its limited geographic market, which restricts growth opportunities compared to diversified national utilities. Furthermore, the significant financial impact of the Maui wildfires has strained its balance sheet and led to credit rating downgrades, increasing its cost of capital and potentially hindering its ability to access financing on terms comparable to higher-rated peers. This vulnerability to catastrophic events and the associated litigation and recovery costs represent a significant challenge not faced to the same degree by many mainland utilities.

Indirect competition comes from distributed energy resources like rooftop solar and battery storage (e.g., offered by companies like Tesla (TSLA)), which reduce customer reliance on the grid and can impact utility sales volumes. HEI is addressing this through programs like CBRE and demand response, aiming to integrate these resources into the grid effectively rather than solely viewing them as competitive threats.

Strategically, HEI positions itself by emphasizing its commitment to Hawaii's specific energy future, collaborating with stakeholders on clean energy and resilience planning (e.g., through the IGP process), and seeking legislative and regulatory support to address unique challenges like wildfire liability and financing clean energy projects. This localized, collaborative approach is key to its strategy in navigating the competitive landscape.

Financial Performance and the Path to Recovery

The financial performance of HEI in recent periods reflects the significant impact of the Maui wildfires and the strategic actions taken in response. For the three months ended March 31, 2025, HEI reported consolidated net income for common stock of $26.7 million ($0.15 per share), a decrease from $42.1 million ($0.38 per share) in the same period of 2024. This decrease was primarily driven by the absence of income from discontinued operations (ASB) in 2025 and a loss on the sale of Hamakua Holdings in the All Other segment, partially offset by an increase in Electric Utility net income.

The Electric Utility segment saw core net income increase to $49.7 million in Q1 2025 from $44.2 million in Q1 2024. This improvement was attributed to better heat rate performance, higher ARA revenues, and lower bad debt expense, despite being partially offset by increased wildfire mitigation program expenses and higher insurance costs.

Full year 2024 results were significantly impacted by the accrual of estimated wildfire liabilities ($1.9 billion pretax), resulting in a consolidated net loss of $1.3 billion. Excluding these and other specific wildfire impacts and the Pacific Current asset impairment, consolidated core net income for 2024 was $124 million, down from $152 million in 2023, primarily due to higher O&M expenses at the utility and lower Pacific Current earnings from facility outages.

Liquidity has been a key focus. As of March 31, 2025, HEI consolidated had approximately $1.23 billion in total available liquidity, including $629 million in cash and cash equivalents. Hawaiian Electric had $130 million in unrestricted cash and $374 million in available credit capacity (ABL Facility and revolver).

The net proceeds from the September 2024 equity offering ($558 million) and the ASB sale ($384 million used for debt retirement on April 9, 2025) have significantly bolstered the balance sheet. The $479 million first installment of the wildfire settlement is held in restricted cash and classified as a current liability, expected to be paid in early 2026. Management believes current liquidity is sufficient to meet obligations for the next 12 months, including this first payment.

The company is actively developing a financing plan for the remaining $1.44 billion settlement liability, anticipating a combination of debt and equity, though specific details are still being formulated. The utility is also planning a robust capital expenditure program, targeting $350-$375 million in 2025 and potentially increasing to $150-$175 million higher in 2026 and $200-$250 million higher in 2027 (including baseline, wildfire safety, and approved EPRM projects). These investments are crucial for grid modernization, resilience, and clean energy integration but will require access to capital. The recent credit rating downgrades continue to pose a challenge to accessing unsecured capital markets on favorable terms, although SP revised the outlook for both HEI and Hawaiian Electric to Positive from Negative on March 7, 2025, signaling potential improvement.

Outlook and Key Considerations

The outlook for HEI is centered on executing its strategic shift, finalizing the wildfire settlement, and investing in the future of Hawaii's energy grid. The expected completion of the settlement's administrative steps and the first payment in early 2026 will provide greater clarity on the financial impact of the wildfires. The ongoing efforts to secure supportive legislation, particularly regarding a wildfire liability cap and securitization for safety investments, are critical to managing future risks and financing costs.

The utility's capital expenditure plan signals a period of significant investment aimed at enhancing safety, resilience, and accelerating the clean energy transition. The upcoming PBR rebasing process, expected to commence with a filing in late 2025 using a 2026 test year, will be a key determinant of future revenues and allowed returns, including a potential re-evaluation of the allowed ROE and equity ratio.

While management expresses optimism about the investment thesis, several risks remain pertinent. The final resolution of subrogation insurer claims and obtaining court approval for the settlement are necessary conditions for the payments to proceed. The ability to successfully raise the necessary capital for the remaining settlement installments is crucial, and while management is confident, success is not assured. Regulatory outcomes, including the extent of cost recovery for wildfire-related expenses and the results of the PBR review, could impact financial performance. Operational risks, including the increasing threat of extreme weather events and potential supply chain disruptions for critical equipment, could affect reliability and costs.

Despite these challenges, HEI's focus on its core utility business, coupled with strategic investments in grid resilience and renewable energy, positions it to play a vital role in Hawaii's energy future. The progress made on the settlement and strengthening liquidity provide a foundation, but successful execution of the capital plan, favorable regulatory outcomes, and effective risk management will be key determinants of its long-term financial health and the realization of its strategic vision.

Conclusion

Hawaiian Electric Industries stands at a critical juncture, actively reshaping its future in the wake of unprecedented challenges. The strategic decision to focus on its core regulated utility business, divest non-core assets, and prioritize wildfire risk mitigation and clean energy transition underscores a commitment to long-term resilience and sustainability in Hawaii. Significant strides have been made towards resolving the financial uncertainties stemming from the Maui wildfires through a definitive settlement, backed by bolstered liquidity to fund the initial payments.

The path forward involves substantial capital investment in grid modernization and renewable integration, leveraging technological advancements to meet ambitious state energy goals. While facing inherent competitive disadvantages related to scale and geographic isolation compared to mainland peers, HEI's unique market position and regulatory framework provide a foundation for stability. The success of its strategy hinges on finalizing the settlement, securing necessary financing for future obligations and capital expenditures, navigating regulatory processes effectively, and continuing to enhance operational safety and resilience in the face of evolving environmental risks. For investors, the story of HEI is one of a focused utility working to recover, rebuild, and transition, with the potential for long-term value creation tied to its ability to execute on these critical initiatives and adapt to the unique dynamics of the Aloha State's energy landscape.