HE - Hawaiian Electric - Many Uncertainties After The Fire

2023-08-14 17:44:20 ET

Summary

• Shares of Hawaiian Electric Industries, Inc. have fallen by 40% after devastating fires hit the islands, resulting in 50% losses in just a few weeks.
• Scrutiny has arisen as the utility company did not have plans in place to shut off power lines during dangerous winds, potentially contributing to the fires.
• The company's involvement in the tragedy may have negative implications for shareholders, but it is too early to determine the long-term impact and potential claims.

Shares of Hawaiian Electric Industries, Inc. ( HE ) have been eviscerated. After the devastating fires which hit part of the islands, shares fell by 40%, marking 50% losses in the time frame of just a couple of weeks.

All of this corresponded with the Maui wildfires, which started ahead of the weekend, but only thereafter did the real extent and potential blame of the company become visible. By now, nearly one hundred people have lost their lives, with many more injured, and not all souls accounted for yet.

Moreover, scrutiny has arisen as the utility company reportedly did not have plans in place to shut off power lines in case of dangerous winds, a common practice in many other states. This came even after weather forecasters warned authorities and residents about dangerous wind gusts ahead of their arrival.

This has been really painful, as these decisions might not be the (sole) reason for the fires, but they certainly have not improved the situation. Knocked down poles complicated evacuations and in some cases might have sparked fires as well.

Note that in a similar situation, that of the 2018 Californian Camp Fire, the Pacific Gas & Electric Company was found liable, and these liabilities were part of the reasons why the company filed for bankruptcy in 2020.

Shedding Some Perspective

The issue is that the company's involvement in such tragedies often looks worse at first sight than it might turn out to be for shareholders. While Pacific Gas & Electric of course ended up going bankrupt, there were many other reasons for that as well, as in this case the state depends heavily on the utility company for providing power. In fact, the company has a near monopoly to provide electricity on the islands.

What perhaps is not that well known to many is that despite its name, Hawaiian Electric is actually a utility business and bank under a single roof. Days ahead of the tragedy, the company posted second quarter results, a quarter in which revenues of the utility business fell by 3% to $794 million, as operating profits rose in a modest fashion to $73 million.

The bank business grew revenues, thanks to higher interest rates, in a convincing manner, but a $97 million revenue contributing is much smaller. On the other hand, these activities are more profitable (on a relative basis) with operating profits reported at nearly $25 million.

After interest expenses, the company posted net earnings of $55 million, equal to $0.50 per share, two pennies ahead of last year, although that earnings so far this year are down by eleven cents to $1.00 per share.

With earnings power seen at $2 per share, it was understandable why shares traded at $40, but by now they have fallen to $19 at the moment of writing.

The Financial Numbers

With 108 million shares outstanding, the move from $40 to $19 has shed some $2.3 billion from the valuation of the firm here, as this is not just about a short term hit to earnings, but relates to concerns on claims and higher operating costs to run the business going forward.

The nature of the business, with a bank and utility operating under one roof, the balance sheet is quite long and hard to read into. The company reported total assets of $16.5 billion by the end of the quarter. More than $8 billion of the assets can easily be attributed to the bank, and some $6 billion to the utility business. The equity position of $2.2 billion is relatively modest in relation to the balance sheet, given that this is largely a non-bank business as well.

So while the business clearly will see some outages, that impact is likely limited, as the banking activities of the business could be hurt by the fires as well, with assets being lost, and funding costs on the rise amidst deposit migration, damages, and less rosy economic conditions for the island's economy.

What Now?

Clearly the human tragedy is enormous and the role of Hawaiian Electric is not yet known, but it does not appear to have been a favorable one.

On the other hand, it is too early to draw conclusion here, in the near-term impact, about the long-term earnings power of the business and the potential claims which might arise.

One thing is certain, that is that Hawaii needs these services of the company to thrive, and restoring electricity is key for the recovery of the islands.

For now, shares of Hawaiian Electric Industries, Inc. will likely see more pressure, including political outcry and legal battles. So, I have no interest in joining this battleground situation here, although this might change if shares prolong their pullback here.

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