Hawaiian Electric (NYSE:HE) recently reported second-quarter net income of $123.2 million, or $0.71 per share, but a closer look reveals that this gain is largely attributed to a non-cash Maui wildfire settlement adjustment, not the underlying business. Core net income actually dropped once this adjustment is stripped out, indicating a more complex story beneath the surface.

The quarter highlights the utility’s efforts to make real regulatory progress on wildfire recovery and grid investment, but its day-to-day operating costs continue to rise. One of the key milestones achieved by the company is the Public Utilities Commission’s approval of recovery of roughly $350 million in Wildfire Mitigation Plan spending in June. Hawaiian Electric now plans to finance this spending through securitization under Act 258 rather than the more limited Exceptional Project Recovery Mechanism, a move it claims will lower the cost to customers.

Additionally, the commission accepted the company’s rate rebasing methodology in June, paving the way for a total base rate increase of $170 million phased in over two years. The company submitted a request for proposals on July 17, seeking nearly 1,650 gigawatt-hours of renewable energy, one of the largest competitive procurements in state history. This has caught the attention of credit agencies, with S&P upgrading Hawaiian Electric one notch in July, following Moody’s upgrade in April.

However, the cost side of the ledger paints a different picture. Core net income and earnings per share fell to $22.5 million and $0.13 in the quarter, down from $35.4 million and $0.20 a year earlier. Utility core net income slipped to $32.6 million from $42.5 million. Higher interest expense from last September’s high-yield debt issuance, along with increased spending on vegetation management, generation overhauls, and inspection and maintenance, are contributing factors. The company also lost a deferral it used last year for roughly $28 million in wildfire-related expenses, including insurance premiums, and is now absorbing storm response costs from the severe flooding that hit Hawaii in February and March.

Management expects to hit the maximum penalty under its Fuel Cost Risk Sharing Mechanism this year and to book a loss under its performance incentive mechanisms. Regulators are also pushing back in places, with the commission telling Hawaiian Electric that it needs to demonstrate a clear need before it can proceed with a proposed request for up to 500 megawatts of additional firm generation capacity on Oahu.

Hedge fund ownership rose from 25 funds to 28 in the most recent quarter, a modest sign of accumulating interest. Short sellers remain heavily positioned against the stock, with short interest at 12.44% of the float, reflecting real skepticism. Yet the stock trades at a forward price-to-earnings ratio of just 11.85, as of August 17, a discount that suggests the market has not fully priced in the regulatory progress management laid out this quarter.

The company’s second quarter shows a utility clearing real regulatory milestones while absorbing costs that are rising faster than its core earnings. For the bull case to hold, the securitization financing and rate rebasing need to land as filed and finally catch the utility’s cost structure up to its spending.

We acknowledge the potential of HE as an investment, but we believe certain AI stocks offer greater upside potential and carry less downside risk.