Executive Summary / Key Takeaways

• Crisis-Forced Transformation: The August 2023 Maui wildfires, while inflicting a $1.99 billion legal settlement and severe operational damage, have catalyzed Hawaiian Electric's strategic evolution into a simplified, pure-play regulated utility, divesting non-core banking and renewable assets to focus exclusively on its core electric franchise serving 95% of Hawaii's population.

• Regulatory Inflection Point: New legislative framework (Act 258) establishing an aggregate liability cap for future wildfires and authorizing securitization for safety investments, combined with a pending rate rebasing proceeding (proposal due January 2026), could normalize returns and transform wildfire mitigation costs from a regulatory lag risk into predictable rate base growth.

• Financial Rehabilitation in Progress: Q3 2025 results show the underlying utility generating $37 million in net income versus an $83 million loss in the prior year period (which included wildfire accruals), though core utility earnings are declining due to elevated wildfire program expenses, insurance costs, and legal fees, highlighting margin pressure during the transition.

• Binary Outcome Scenario: The investment case hinges on two pivotal events over the next 12-18 months: successful completion of the Maui settlement funding (first $479 million installment expected early 2026) and the PUC's decision on rate rebasing for the second multi-year rate period beginning January 2027, which will determine whether HE can earn its authorized ROE on a rebased capital structure.

• Valuation Discount Reflects Uncertainty: Trading at 0.70x sales and 4.19x operating cash flow—significant discounts to mainland utility peers—HE's valuation embeds a crisis premium that could compress if regulatory reforms deliver predictable returns, but could expand if execution falters or Hawaii's deteriorating economic conditions weaken demand.

Setting the Scene: Hawaii's Regulated Monopoly at a Crossroads

Hawaiian Electric Industries, founded in 1891 and headquartered in Honolulu, operates as a geographically isolated regulated utility serving approximately 95% of Hawaii's population across five separate island grids. The company generates revenue through rate-regulated electricity sales, with costs for fuel oil and purchased power passed through to customers via adjustment clauses. This business model, while providing monopoly protection and recurring revenue, faces unique structural challenges: extreme geographic isolation driving premium fuel costs, 100% renewable portfolio standard mandated by 2045, and exposure to catastrophic weather events.

The August 8, 2023 Maui windstorm and wildfires represent the inflection point that redefined HE's strategic trajectory. The fires caused widespread fatalities and property damage, triggering thousands of lawsuits and forcing the company to accrue $1.69 billion in tort-related claims in 2024. This crisis did not merely damage assets—it shattered the company's conglomerate structure. Management responded by initiating a complete strategic simplification: divesting 90.1% of American Savings Bank for $405.5 million in December 2024, selling Pacific Current's renewable assets (Hamakua Energy, solar and battery facilities) in 2025, and committing to divest the remaining 9.9% bank stake within a year. The Utilities are now HEI's sole operating company, transforming a hybrid utility-financial services conglomerate into a pure-play regulated electric utility.

This simplification matters because it concentrates management focus and capital allocation on the core franchise at precisely the moment when regulatory reforms could redefine the risk-return profile. Unlike mainland peers such as Portland General Electric (POR) or IDACORP (IDA) that operate in interconnected regional grids with diverse resource options, HE's island isolation creates both vulnerability and pricing power. The company must self-supply reliability, yet faces no retail competition. The wildfire crisis exposed the fragility of this model; the regulatory response may ultimately strengthen it.

Technology and Strategic Differentiation: Resilience as a Regulated Asset

HE's technological transformation is not about breakthrough innovation but about operational resilience becoming a codified regulatory asset. The company's $450 million wildfire safety strategy (2025-2027), encompassing 447,000 advanced meters (95% deployment), 100% completion of weather stations and AI-assisted high-definition video cameras, and a new in-house meteorology watch office, represents a systematic hardening of the grid. These investments, while substantial, are being transformed from operational expenses into recoverable capital expenditures through recent legislative action.

Act 258, enacted July 2025, authorizes securitization for up to $500 million in wildfire safety and resilience investments. This is the critical "so what" for investors: rather than facing traditional regulatory lag in recovering these costs through base rates, HE can now finance them through securitized bonds backed by customer charges, ensuring timely cost recovery and reducing regulatory risk. Management explicitly states this securitization is for utility CapEx, not settlement funding, creating a clean separation between liability resolution and infrastructure investment.

The Integrated Grid Planning process, culminating in PUC acceptance in March 2024 after five years of stakeholder engagement, provides the roadmap for this investment. The plan aligns with Hawaii's 100% renewable mandate by 2045 and the interim 40% renewable portfolio standard target by 2030 (HE achieved 36% in 2024, up from 33%). The technology mix—solar, wind, battery storage, and firm generation repowering—addresses the island grids' unique challenge of maintaining reliability with intermittent renewables.

This strategic differentiation from mainland peers is stark. While POR and IDA benefit from hydroelectric baseload and regional grid interconnections, HE must build island-specific resilience. The company's ability to securitize wildfire investments creates a financing tool that competitors lack, potentially accelerating rate base growth while reducing earnings volatility. The risk is execution: if these investments fail to prevent future catastrophic events, the regulatory compact could fracture, exposing HE to uncapped liability despite Act 258's protections.

Financial Performance: Evidence of Underlying Stability Amid Transformation

HE's financial results demonstrate a utility emerging from crisis-induced losses but facing margin pressure from elevated safety investments. For the nine months ended September 2025, consolidated revenues declined 6% to $2.27 billion, primarily from lower fuel oil prices ($134 million reduction) that flow through to customers via adjustment clauses without impacting margins. More telling is the operating income swing: from a $1.69 billion loss in 2024 (driven by wildfire accruals) to $203 million in 2025 income, revealing the underlying utility's profitability once one-time charges are excluded.

However, the core utility earnings trend is concerning. Utility core net income fell to $39.6 million in Q3 2025 from $43.7 million in Q3 2024, driven by higher wildfire mitigation program expenses, increased insurance costs, and elevated legal/consulting fees that were deferred in the prior year. This 9% decline in core earnings, despite a 2% increase in kilowatt-hour sales (aided by Maui recovery and warmer Oahu weather), shows that safety investments are currently compressing margins rather than enhancing them.

The "All Other" segment, comprising corporate operations and remaining Pacific Current assets, posted a $6.24 million net loss in Q3 2025, a significant improvement from the $40.6 million loss in 2024 that included a $35.2 million Pacific Current impairment. The sale of Hamakua Energy (March 2025) and solar/BESS facilities (August 2025) generated a $13.2 million loss but eliminated operational risk from these assets. The strategic review of the remaining Mahipapa biomass plant continues, with full divestiture expected within a year.

Liquidity management reflects prudent crisis response. HE raised $558 million in equity in September 2024, repaid $384 million of holding company debt in April 2025, and increased revolving credit facilities to $300 million. The company has prefunded the first $479 million settlement installment into restricted cash via GLST1, LLC, with remaining $1.44 billion classified as noncurrent. This prefunding, while dilutive, removes near-term liquidity risk and demonstrates commitment to settlement execution.

The balance sheet remains leveraged with debt-to-equity of 1.87, but this is improving through debt repayment and equity infusion. Operating cash flow of $465 million (TTM) covers interest but falls short of the combined settlement and CapEx requirements, necessitating continued external financing. Management's guidance of $400 million CapEx in 2025, rising to $550-700 million in 2026 and $1.8-2.4 billion through 2028, implies substantial financing needs that will test capital market access.

Outlook and Guidance: The Rebasing Decision Defines the Future

Management's commentary reveals a company at a regulatory crossroads with binary outcomes. The most critical event is the rate rebasing proposal due January 7, 2026, which will establish target revenues for the second multi-year rate period (MRP2) beginning January 1, 2027. As Senior Vice President Joe Viola stated, the goal is "setting a new starting point" that allows the utility to "begin to earn our authorized ROE" with efficient performance. This is management's explicit admission that current revenues are insufficient to generate authorized returns.

The rebasing process is HE's attempt to avoid a traditional rate case, which would be more time-consuming and adversarial. If successful, it could rebase rates to reflect the new capital structure post-settlement and the securitized wildfire investments, normalizing earnings. If unsuccessful, HE would file a 2027 test year rate case in late 2026, introducing regulatory lag and uncertainty. The outcome will determine whether HE can achieve the 12.80% ROACE reported for the twelve months ended September 2025 on a sustainable basis.

Management refuses to reinstate earnings guidance until settlement final approval, citing the need to assess "steady-state" performance. This prudence, while frustrating for investors, acknowledges that the rebasing outcome will fundamentally alter the earnings power. The guidance that does exist—CapEx forecasts and financing plans—suggests a utility preparing for massive investment: $400 million in 2025, $550-700 million in 2026, with wildfire and resilience CapEx of $50-100 million annually to be securitized under Act 258.

The settlement timeline remains the key overhang. While management insists the process is "on track" and the Hawaii Supreme Court's March 2025 opinion clarifying insurer subrogation satisfies a key condition, the first $479 million payment is expected "no sooner than early 2026." Any delay could compress liquidity and force additional equity issuance, diluting shareholders at a time when the stock trades at a discount to peers.

Risks and Asymmetries: What Could Break the Thesis

The investment case faces three material, interconnected risks that could derail the transformation narrative.

Settlement Execution Risk: While HE has prefunded the first installment, the remaining $1.44 billion liability remains contingent on final court approval. Management's statement that additional liabilities "could be material to the Company's results of operations, financial position, and cash flows" is not boilerplate. If the settlement structure is challenged or if individual plaintiffs opt out, HE could face uncapped exposure that overwhelms its $300 million credit facilities and ATM program. The prefunded cash, while prudent, represents $479 million of capital that cannot be deployed for grid investment, creating opportunity cost.

Regulatory Rebasing Failure: The January 2026 rebasing proposal faces an uncertain PUC reception. If the commission rejects the collaborative approach or sets inadequate target revenues, HE would enter MRP2 unable to earn its authorized ROE. This would compress margins further, impairing the utility's ability to dividend cash to the holding company for settlement payments. The asymmetry is stark: successful rebasing could normalize returns and support multiple expansion; failure could trap HE in a cycle of under-earning and forced equity issuance.

Hawaii Economic Deterioration: UHERO's forecast of a "mild recession" in Hawaii, driven by weak tourism (international visitors 22% below 2019 levels, Japanese visitors 40% below) and trade policy impacts, creates demand risk. While utilities are typically defensive, HE's 2% sales growth in Q3 2025 could turn negative if tourism-related commercial demand contracts. This would reduce the revenue base over which fixed costs are spread, compressing margins at the worst possible time—during peak settlement and CapEx funding needs.

These risks are mitigated by legislative support. Act 191 allows state backstop for IPP payments, addressing credit rating concerns. Act 301 appropriates state funds for the settlement, demonstrating political commitment. However, mitigation does not eliminate risk: the utility's 6.69% operating margin remains well below mainland peers (POR: 18.38%, IDA: 27.33%, ALE (ALE): 8.35%, MGEE (MGEE): 30.77%), reflecting both Hawaii's cost structure and the ongoing wildfire investment burden.

Competitive Context and Positioning: Discounted Island Monopoly

HE's competitive positioning is unique among U.S. utilities. Unlike mainland peers that compete for capital in regional transmission organizations and face retail choice pressures, HE operates as a pure monopoly in geographically isolated markets. This creates both advantages and disadvantages relative to comparables.

Scale and Efficiency Disadvantage: HE's $3.22 billion revenue base is smaller than POR ($5.46B market cap) and IDA ($6.85B), limiting bargaining power with suppliers. The company's 6.69% operating margin trails all identified peers: POR (18.38%), IDA (27.33%), ALE (8.35%), and MGEE (30.77%). This reflects Hawaii's isolated fuel costs, wildfire safety expenses, and smaller customer density. The 7.02% ROE is below IDA (9.41%) and MGEE (10.80%), indicating inferior capital efficiency.

Regulatory Advantage: While mainland peers face increasing wildfire risk (POR's Oregon territory, ALE's Minnesota exposure), none have secured legislative liability caps and securitization authorization. Act 258's $500 million securitization capacity is a tool competitors lack, potentially accelerating rate base growth while reducing earnings volatility. HE's 100% renewable mandate by 2045, while costly, provides guaranteed capital investment opportunities that mainland peers must compete for through RFP processes.

Valuation Discount: HE trades at 0.70x price-to-sales versus peers ranging from 1.56x (POR) to 3.96x (MGEE). The 4.19x price-to-operating-cash-flow multiple is reasonable but reflects uncertainty. The 1.87 debt-to-equity ratio is higher than IDA (1.05) and MGEE (0.65), but improved from crisis levels through equity issuance and debt repayment.

The competitive synthesis: HE is a lower-quality utility from an operational efficiency standpoint, but its regulatory environment is becoming more supportive post-crisis. The valuation discount appropriately reflects execution risk, but successful transformation could close the gap. Unlike peers that must justify every rate increase, HE's wildfire investments are legislatively mandated and securitization-eligible, creating a more predictable recovery path.

Valuation Context: Crisis Discount with Regulatory Optionality

At $11.25 per share, HE trades at a market capitalization of $1.94 billion and an enterprise value of $4.39 billion, reflecting net debt and settlement liabilities. The valuation metrics must be interpreted through the lens of transformation:

Revenue Multiple: 0.70x price-to-sales is a 55-82% discount to mainland peers (POR: 1.56x, IDA: 3.80x, MGEE: 3.96x). This is not a normal utility discount; it reflects the $1.99 billion settlement overhang and execution uncertainty. If the settlement is finalized and rebasing succeeds, the multiple should normalize toward 1.5-2.0x, implying 115-185% upside on revenue alone.

Cash Flow Multiple: 4.19x price-to-operating-cash-flow appears attractive but masks the cash drain from settlement payments. The $465 million TTM operating cash flow is insufficient to cover the $479 million annual settlement installments plus $400-700 million in annual CapEx, requiring external financing. This is not a free cash flow yield story until the settlement is behind the company.

Balance Sheet: Debt-to-equity of 1.87 is elevated but manageable for a capital-intensive utility. The $300 million expanded credit facility and $250 million ATM program provide liquidity, but continued reliance on external financing dilutes equity and increases financial risk. The 12.80% ROACE for the twelve months ended September 2025 is respectable but must be sustained through the rebasing process.

Path to Normalization: The valuation implies a binary outcome. Success looks like: settlement finalized, rebasing approved, securitization utilized, ROE normalized to 9-10%, and multiple expansion to 1.5-2.0x sales, suggesting a stock price of $25-35. Failure looks like: rebasing rejection, additional liabilities, economic recession compressing demand, and potential equity impairment below $5.

Conclusion: A Regulated Utility at Its Most Pivotal Moment

Hawaiian Electric Industries is not a turnaround story in the traditional sense—the underlying utility franchise remains profitable and essential. It is a regulatory rehabilitation story, where crisis has forced legislative and structural changes that could ultimately strengthen the business model. The Maui wildfires, while devastating, have catalyzed a strategic simplification that concentrates management on the core regulated utility at the precise moment when Act 258's liability cap and securitization framework could transform wildfire risk from an earnings wildcard into predictable rate base growth.

The investment thesis hinges on two variables over the next 12-18 months: successful completion of the $1.99 billion settlement funding and the PUC's decision on rate rebasing. If both proceed favorably, HE will emerge as a pure-play island monopoly with legislated cost recovery mechanisms, justifying valuation normalization toward mainland utility multiples. If either falters, the combination of high leverage, massive CapEx requirements, and Hawaii's economic headwinds could impair equity value.

For investors, HE represents a rare combination: a regulated utility trading at a crisis discount with a clear regulatory catalyst. The 0.70x sales multiple appropriately reflects execution risk, but the legislative tailwinds and forced simplification create optionality that mainland peers lack. The story is attractive for its potential to close a significant valuation gap, but fragile due to the binary nature of the upcoming regulatory decisions. The next year will determine whether HE becomes a reformed, resilient utility or remains a structurally challenged island anomaly.