HE - Hawaiian Electric: Risk-Reward Might Be Worth It

2023-10-20 09:04:16 ET

Summary

• Hawaiian Electric's stock has undergone a substantial two-thirds decline, attributed to potential liability arising from the Maui wildfires.
• Hawaiian Electric faces an uncertain future, from potential exoneration to fines of $5 billion and the threat of bankruptcy.
• Three scenarios are explored: unfavorable, moderate, and favorable, with bankruptcy deemed improbable but shareholders facing risks.

Hawaiian Electric (HE) is grappling with a significant challenge following the wildfires that occurred in Maui two months ago. According to the company's press release , it appears that there were two separate incidents-one in the morning at 6:30 am and another in the afternoon at 3:00 pm. Quoting from the release:

The Maui County Fire Department promptly responded to the morning fire, reporting it as "100% contained." Subsequently, they left the scene and later officially declared it "extinguished."

The company has also acknowledged that they had de-energized the lines approximately six hours before the afternoon fire, around 9 am. However, the cause of the devastating Afternoon Fire remains undetermined, as stated in the same press release.

It strikes me as highly improbable that the CEO would make such a public statement if she weren't reasonably certain about its accuracy.

Moreover, the narrative from the Maui Mayor appears somewhat perplexing. To quote him directly:

I'm not sure who was in charge. (Former Maui Emergency Management Administrator) Herman Andaya was still in charge. He just wasn't present. He was in contact with his team. I guess by phone. I don't know exactly how.

The initial confusion and lack of clarity in the Mayor's account raise questions about the handling of the situation.

Initially, there were reports circulating that HE was engaged in negotiations with a restructuring advisory firm . However, the company has explicitly stated that it has no plans for restructuring. This contradiction adds an element of uncertainty to the situation, making it crucial to closely monitor further developments for a clearer picture.

In brief, I am bullish on Hawaiian Electric amid challenges following Maui wildfires. The company asserts non-involvement, echoing a resilient stance. Despite potential risks, the absence of clear evidence and robust financial standing makes me optimistic about HE's future, aligning with a long position.

Scenario Analysis

Let's explore three possible scenarios: the unfavorable, the moderate, and the favorable. Let's delve into them.

Scenario 1: The unfavorable

As per Capston LLC , the total liabilities for HE might reach $4.9 billion. A brief review of HE's balance sheet reveals an annual net income of approximately $200 million for the company.

Furthermore, the company has halted dividend payments, and it already has $370 million readily available, as reported by Reuters .

Examining its long-term investments, it becomes evident that the company holds assets exceeding $2 billion.

It appears that the company is well-equipped with approximately $2.5 billion.

While my gaze extends far into the future, I ponder the scenario wherein American Saving Bank extends a mortgage of $2.5 billion to HE, offering a highly competitive rate, effectively allowing HE to settle its liabilities. As a utility company, securing such financial support seems plausible, and if the associated bank proves hesitant, other financial institutions may step in.

Building upon its existing relationship with Moelis & Company , there is potential for them to orchestrate a bond sale, effectively retiring the $2.5 billion in liabilities.

In the worst-case scenario, it appears that the stock might experience a further 50% decline from its current share price. Nonetheless, it doesn't seem to pose a threat of bankruptcy for the company.

Scenario 2: The moderate

It is probable that HE will be found partially liable for a portion of the liabilities. This seems to be the most plausible scenario given the political implications of the situation. Leaving HE entirely unpunished could be perceived negatively.

In the event that HE is held responsible for $2 billion and applying the same rationale suggests that the remaining $1.6 billion could be easily covered from the current Free Cash Flow or by liquidating some long-term investments. However, there is a likelihood of a long-term bond being issued with the assistance of Moelis & Company.

In such a scenario, the market has likely already factored in the liabilities into the current stock price. In fact, the market might be overly pessimistic, as the difference between market cap and enterprise value exceeds $3 billion.

If this unfolds, I project that the price for HE should be approximately $25 per share.

Scenario 3 - The Favorable

In the best-case scenario, the company is absolved of guilt, and its value is re-established at a level slightly below the previous price.

While I acknowledge that this outcome might not be the most probable, I still hold the belief that it is more likely than the first scenario.

Risk

Admittedly, shareholders face the risk of substantial losses, yet, from the available evidence, there is no concrete indication that HE is guilty of the fires. The allegations appear more speculative than substantiated at this point.

Conclusion

In conclusion, Hawaiian Electric faces a substantial challenge post-Maui wildfires. Their press release strongly denies involvement in the fire. Although a worst-case scenario hints at a potential stock decline, bankruptcy seems improbable, resonating with Mohnish Pabrai's "Heads, I win, tails I don't lose much." Shareholders bear risks, underscoring the need for vigilant monitoring to better comprehend HE's trajectory amid these intricate scenarios.

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