INTERVIEW: Legal Advisors discuss possible Hawaiian Electric bankruptcy filing

Discussion of a possible bankruptcy filing by Hawaiian Electric picked up steam this week after the utility filed an investor update that confirmed it was speaking with advisors in the aftermath of the Maui wildfires. Bloomberg reported the utility engaged Guggenheim to help it assess wildfire exposure.

In a statement to NPM about the potential bankruptcy decision, Hawaiian Electric said it is focused first on restoring power to its customers, supporting residents in Maui, and developing a long-term recovery plan.

“Given the amount of work we have underway, we are not in a position to comment on these issues at this time,” the statement read.

NPM spoke with legal advisors Allan Marks from Milbank and Jeffrey Testa from McCarter & English to review the situation, outline any parallels to be drawn from the PG&E bankruptcy case and what the potential implications might be for continued project development on Hawaii.

The first thing both lawyers agreed on was that the process to determine the utility’s actual liability could take time.

In the situation that powerlines owned by Maui Electric, a subsidiary of Hawaiian Electric, caused the fire, there was still a chain of events that led to the property damage and loss of life which needs to be fully uncovered, said Marks.

Depending on the time necessary for a full investigation, a bankruptcy filing would impose an automatic stay on creditors from enforcing claims against the utility while the process plays out. A bankruptcy case would also bring some order to the growing number of class action lawsuits being filed against the utility by consolidating them into a single venue overseen by a bankruptcy judge.

“Assume for a second their equipment sparked the fire and assume there is enough liability, and a bankruptcy court is considered,” he said. “Then you have interplay between bankruptcy court decisions.”

An in-court process would also provide the utility with the opportunity to evaluate contracts, such as ones the utility has agreed to with contractors and project developers. It can use the process to determine which contracts it wants to keep. During the PG&E bankruptcy process, contracts related to project development were prioritized.

“At the end of the day, those contracts are not usually adversely affected,” Marks said.

Jeffrey Testa, partner at McCarter & English, echoed this. The utility should be able to continue working through ongoing PPA negotiations and upcoming solicitations for resources, even if it files for bankruptcy.

It should be “business as usual,” Testa said, as long as the utility has the “funding and the ability” to service existing contracts or execute new ones.

California wildfire parallels

Pacific Gas and Electric’s (PG&E) bankruptcy filing in January 2019 in the aftermath of the California wildfires shared some similarities to the situation Hawaiian Electric is now in, according to Testa. Ultimately, PG&E ended up with some 80,000 fire claimants, according to Testa.

“Hopefully, [Hawaiian Electric] will be significantly less at the end of the day,” he said.

Through the bankruptcy process, PG&E set up a fund where each claim could be considered individually by a claim administrator, Testa said. If Hawaiian Electric opts for the same path, the restructuring will likely be a drawn-out process.

“So even once a bankruptcy plan is confirmed — which, I have to believe at a minimum would take up to a year — it's going to take some time to get payments out the door to the victims, while the company is also dealing with bondholders and lenders, dealing with all the government agencies and insurance companies,” Testa said. “It would certainly be a complex process.”

Marks said that in the PG&E bankruptcy case, every single power purchase agreement (PPA) was assumed and stayed in place. Additionally, all money owed for purchasing power and capacity for ancillary services were paid in full.

Next steps

Hawaiian Electric will likely try to evaluate the total amount of damage and potential claims it could face “to see if there's any way that they can come up with an alternate avenue,” Testa said.

“I think, for any company, bankruptcy is your last option,” Testa said. “Although in a situation like this, where you're obviously going to have thousands and thousands of claims, likely, and potentially billions in liability, you certainly have to weigh that option seriously.”

In a bankruptcy scenario, one of the biggest questions that Hawaiian Electric will likely face is where to find enough liquidity to help it manage the case, fund ongoing operations and address claims, according to Marks.

Since Hawaiian Electric is a regulated entity, its cost of service is covered by rates, but the wildfire would potentially present a new liability.

And if victims are compensated, there will be questions about how payments will be funded. Those payments could potentially be passed through to ratepayers or shareholders, and “that’s the fight,” Marks said.

In California, he said PG&E was able to socialize compensation through a state wildfire insurance fund that spread the cost. The state also set up a wildfire fund for the future, so utilities have extra liquidity to underground lines and have redundancies to shut lines down when there are high winds to reduce wildfire risks rather than just compensate victims for past fires.

“Hawaii doesn’t have any of that,” Marks said.

Developer impacts

When asked what might happen to open RFPs if Hawaiian Electric does file for bankruptcy, Marks said they will likely be allowed to continue because it is prudent for the business.

“There’s only value for creditors if the utility continues operating as a normal utility,” he said. “Everyone has interest in that: the PUC, ratepayers, customers, the creditors will all want it to continue operating.”

Regarding any active self-build projects, if construction is active during a potential bankruptcy filing, then that is an executory contract. In bankruptcy, there is a period of time, usually up to a year, to decide if the utility will assume or reject the contract.

If assumed, the contractor may say work won’t continue unless they get a “performance bond.” If the utility then goes to the bankruptcy court and asks for a performance bond, the court may ask what it would cost and if approved, then the contractor is protected.

“But you need the court’s permission to do these things,” Marks said. “For contracts like self-builds, there will be a question if there is enough money to pay for people, but usually they’ll say there is because they’ll be damaged more if they don’t.”

Beyond short term uncertainty, Marks anticipates that there will be a doubling down in the commitment of DG in Maui, especially solar and solar + storage.

In Puerto Rico after its past hurricanes, the utility went bankrupt and there was the question on how new generation would be built.

“DG for any island is an increasingly important part of the mix,” he said, adding that energy storage and microgrids are as well but pose their own challenges when trying to scale significantly.

*This story was originally published exclusively for NPM subscribers.


New Project Media (NPM) is a leading data, intelligence and events company dedicated to providing origination led coverage of the renewable energy market for the development, finance, advisory & corporate community.