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Hawaiian Electric credit rating downgraded to junk after wildfire lawsuit

Hawaiian Electric Industries’ stock plummeted more than 30% Tuesday after S&P Global downgraded the company’s credit rating to junk.

S&P Global downgraded Hawaiian Electric (HE)and all of its subsidiaries to BB-, after a class action lawsuit alleged that strong winds knocked over the electric company’s energized power lines, causing the devastating wildfires that killed nearly 100 people.

A BB- rating is considered below investment grade – commonly known as “junk.” That tells investors that lending money to the company is a risky bet, because the company has a high risk of default.

In a statement, S&P Global said the wildfires have placed the company at a higher risk of default and that there is potential for further credit downgrades.

“The wildfires destroyed a significant segment of HEI’s customer base that will take many years to restore, and as such, we expect a long-term weakening in the company’s profitability measures,” S&P said in a statement.

More lawsuits could arise, further jeopardizing the company’s credit rating depending on how successful the plaintiffs are.

There is precedence in California. Pacific Gas and Electric (PCGPRA)agreed to several settlements totaling $12 billion after a state government probe found that its electrical equipment had caused the 2018 Camp Fire.

But unlike California, Hawaii doesn’t legally hold utility companies strictly liable for damages caused by their equipment – regardless of whose fault it was, according to a separate report from Moody’s Investors Service.

That doesn’t mean HEI would be totally off the hook.

“Nevertheless, there could be a finding of negligence or even gross negligence against the utility as the investigations related to the wildfires unfold,” Moody’s said.

Additionally, none of HEI’s major power plants or developing wind and solar projects were affected by the fires, Moody’s said, easing restoration costs.

Class action suits could hurt the company’s prospects

A class action lawsuit filed over the weekend claimed HEI “chose not to deenergize its power lines during the High Wind Watch and Red Flag Warning conditions for Maui before the Lahaina Fire started,” even though it knew the wildfire risks.

Hawaiian Electric vice president Jim Kelly told CNN Sunday via email that, “as has always been our policy, we don’t comment on pending litigation.”

“Our immediate focus is on supporting emergency response efforts on Maui and restoring power for our customers and communities as quickly as possible. At this early stage, the cause of the fire has not been determined and we will work with the state and county as they conduct their review,” Kelly said.

S&P said that the class action lawsuits could increase risk for the company and deteriorate its credit quality. It expressed concerns about the company’s finances if the lawsuits against HEI go in the plaintiffs’ favor.

The utility powers 95% of Hawaii’s residents.

HEI’s stock has fallen more than 58% since the wildfires broke out on August 8.

S&P also placed HEI and its entities on CreditWatch with negative implications, which means the utility’s credit rating could be further downgraded in the near future.

“This could occur if it is determined that the company contributed to the wildfires or the company loses consistent access to the capital markets,” S&P said.

CNN has reached out to HEI on Tuesday for comment on the credit downgrade.

CNN’s Eva Rothenberg contributed to this report.

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