Hawaiian Electric Industries: Very Strong Finances, But Litigation Risks Cast A Shadow

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Hawaiian Electric Industries is the largest electric utility in Hawaii, providing 95% of the state's electricity.The company has suspended its dividend and taken measures to strengthen its balance ...

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James O'Neil Hawaiian Electric Industries, Inc. (NYSE:HE) is an electric utility that, as the name implies, serves the U.S. state of Hawaii. In fact, the company has nearly a monopoly on the provision of electricity, as it provides roughly 95% of all of the electricity consumed in the state. The company also owns the American Savings Bank, which is one of the largest banks in Hawaii. Unfortunately, the company has also been at the focal point of litigation regarding the Maui wildfire last year. I published an article last August following this event, in which I suggested that investors avoid the stock. Anyone who took that advice has saved themselves from an -11.39% loss:   Seeking Alpha I did suggest that the stock could have some appeal as a potential vulture investment play, and indeed that remains true. However, most income-focused investors are probably not the type to make risky plays in the hope of earning outsized returns. The majority of readers are likely retirees or others who want to earn a bit of money from their assets in order to maintain their lifestyles in today’s highly inflationary environment. Unfortunately, Hawaiian Electric Industries no longer has any ability to do that as the company suspended its dividend very shortly after my previous article was published. This is not exactly surprising, as the litigation surrounding an event like the wildfires is very expensive, and it is important to preserve cash in such an event. Admittedly, there are also likely to be some political issues here, as public figures would almost certainly level very vocal criticism against the company if it were to pay money to its shareholders following the disaster on Maui. The news announcement accompanying the dividend suspension seems to imply that the need to preserve its capital and minimize public admonishment were the reasons for this suspension:  Hawaiian Electric Industries on Thursday said it would suspend its dividend starting in the third quarter and announced other measures to strengthen its balance sheet, following scrutiny over its role in the Maui wildfires. … The Honolulu-based company also said it plans to take the $170 million and $200 million that Hawaiian Electric Industries and Hawaiian Electric withdrew from their credit accounts, and invest it in highly liquid investments to strengthen its balance sheets.  This appears to be the right choice right now, as it is still up in the air how exactly the litigation will play out. Indeed, it almost seems that things have been getting worse for the company year-to-date. We can actually see this in the chart above, as Hawaiian Electric stock actually outperformed the S&P 500 Index (SP500) during the final three months of 2023:   Seeking Alpha The company’s stock price declined precipitously this year, though, due to bad news that continually comes out of the investigation into the wildfire. This is without a doubt the biggest risk surrounding this stock right now, and it is, right now, very difficult to guess how it will pan out. I highly doubt that the company will cease to be an operating entity, as the state of Hawaii is far too dependent on it. Indeed, it seems highly unlikely that any eventual resolution will outright cripple the company for that reason. However, a restructuring or something similar may occur and that may wipe out the common shareholders. Honestly, my advice right now is for most people to avoid this company. While there could certainly be the potential for substantial upside here if things turn out in the company’s favor, that is a gamble. Investors who do wish to take a chance would be better off taking a small position and only risking money that they can afford to lose. About Hawaiian Electric Industries As mentioned in the introduction, Hawaiian Electric Industries is the largest electric utility in the U.S. state of Hawaii. The company is a de facto monopoly as it is the sole provider of electricity to 95% of the state’s population. This is important because electricity is generally considered to be a necessity for modern life. Thus, most people will opt to pay their electric bills before making discretionary expenses any time money gets a little tight. This has been one factor in enabling the company to maintain stable revenues:   Seeking Alpha (all figures in millions of U.S. dollars) As we can clearly see, the wildfire had no significant effect on the company’s revenues. Despite the negative publicity that it has been receiving since the event, people have continued to pay their electric bills, and as such, the company’s revenues have not really changed much since the Maui fire in August of 2023. We see a similar trend if we look at the company’s quarterly operating cash flow:   Seeking Alpha We do see that the company’s cash flows declined in the second and third quarters compared to earlier in the year, but they were not at all out of line with what the company had back in 2021 or much of 2022. Thus, overall, it does not appear that the fire or the litigation surrounding it has had much of an impact on the company’s ability to generate money. That becomes even more true if we look at the company’s net income:   Seeking Alpha Once again, we see that there has not been much of an impact on the company’s cash generation or profitability. However, that could change if the litigation eventually results in the company incurring substantial write-downs or restructuring expenses. On April 16, 2023, some news broke that could weaken the company’s ability to avoid substantial legal penalties. On that date, a report came out from the Hawaii Attorney General’s office that dispelled one potential argument that the company may have tried to use as a legal defense. In short, there were some suggestions that the firefighters and police who responded to the fire did not take appropriate measures to reduce the severity of it, and this failure was at least partially responsible for the death toll being as high as it was. The Attorney General’s report states that this was not, in fact, the case and that the responding firefighters, police, and other first responders took every reasonable and appropriate action to save lives and property. This news caused the company’s stock price to fall 9.89% on the day:   Seeking Alpha The reason for this decline is almost certainly that it removes one legal defense that Hawaiian Electric Industries may have tried to use in its defense. However, the Attorney General’s report did not place blame on the company. The report simply said that there was no possible method that the firefighters could have used to stop the fire due to the way that it was spreading. It did not state what the cause of the fire was, and in fact so far there has been no publicly disclosed information that provides us with a cause for the fire. As such, the implication here is that if the first responders had no blame at all for the severity of the fire, then Hawaiian Electric Industries is slightly more likely to have to shoulder the consequences. The Potential Consequences At this point, the obvious question that any investor might be asking is what the potential consequences could be. Hawaiian Electric Industries has long admitted that its equipment did start a small fire on the edge of Lahaina, Hawaii, but it was extinguished by firefighters. The company maintains that a second fire started in the same town several hours later, and it was that second fire that destroyed 80% of the town. If this is to be believed, the second fire is the one that was responsible for the 101 reported deaths as a result of this event. If we assume that this scenario is true and that the second fire had nothing to do with Hawaiian Electric Industries’ equipment, then investors who buy the stock now could see a pretty substantial potential upside. I will confess that I am somewhat pessimistic about that scenario. It seems more likely that the company will end up having to pay out some sort of financial penalty regardless of whether it is at fault or not. It has already contributed $75 million to the Maui Recovery Fund, but that is only a fraction of the $679.5 million in cash and equivalents that the company had on December 31, 2023. The Pacific Disaster Center and FEMA put the total property damage from the Maui wildfires at $5.52 billion:   Hawaiian News Now The absolute worst-case scenario would undoubtedly be Hawaiian Electric Industries having to pay all of that amount. As of today, the company has a market capitalization of $1.17 billion at a stock price of $9.52 per share. If it were to try and finance that amount solely through the issuance of new shares, it would need to issue roughly 579 million new shares (it would almost certainly have to be more, since the issuance of those shares would reduce the market price of each share). As of right now, the company has 110.2 million shares outstanding. Therefore, if it were to issue 579 million more shares and the current market capitalization stayed the same, then the stock would be trading at $1.69 after the dilution. That is an 82.25% decline from the current price. In actuality, the decline would almost certainly be more than that because the market would punish the stock prior to the new shares being issued, so it is unlikely that it could obtain a $9.52 per-share price. In short, this scenario would almost certainly result in current shareholders being wiped out. The company’s management has provided a somewhat different view. In the fourth-quarter conference call, Scott Seu, president and CEO of Hawaiian Electric Industries, stated the following: It’s clear that supporting Maui’s recovery and addressing the increasing risk of wildfires as our climate changes will take a whole of society approach. We’re seeing this whole of society view reflected in the One ‘Ohana Initiative Governor Josh Green announced last fall and in our state’s legislative session that is now underway. A “whole of society” approach suggests that both the company and the government will be held responsible for the wildfire, along with the insurance industry and individual property owners. However, I still have my doubts as to whether or not the $75 million that Hawaiian Electric Industries has promised to this initiative will be sufficient to cover its expected responsibility. From the beginning of this ordeal, I have been thinking about the consequences that California utility PG&E (PCG) faced following a series of wildfires. Ultimately, that company ended up seeking bankruptcy protection and paid out $25 billion overall to compensate for wildfire-related losses. There is no possible way that Hawaiian Electric Industries could afford that as the company only has total assets of $17.2438 billion. That is not a perfect comparison, though, as PG&E was considered at fault for a string of wildfires over the 2015 to 2020 period. There were also 70,000 victims of wildfire losses that were expected to have claims against the company. Hawaiian Electric Industries does not have any such track record of multiple wildfires. The Maui wildfire also only did $5.52 billion in property damage and left 4,500 to 5,000 people in need of shelter, a far cry from $70,000. As such, it seems highly unlikely that Hawaiian Electric Industries will be forced into a huge settlement as PC&E was. However, if the company is deemed at fault for the fire, then the ultimate payout could still be enough to effectively wipe out of the shareholders. Overall, it is still too soon to know what the potential consequences could be here for anyone who purchases shares of the stock right now. There could be a lot of potential upside if the company is deemed to be innocent of all liability. However, that is a risk that I would not recommend taking unless you are willing to risk losing any money that is invested in the stock. Litigation settlements are notoriously difficult to predict, especially when there are still a lot of facts about this situation that are not known. Balance Sheet Examination In various previous articles, I made a statement similar to the following: It is always important to analyze the way that a company finances its operations before making an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. This is usually accomplished by issuing new debt to repay the existing debt. That can cause a company’s interest expenses to increase following the rollover in certain market conditions. After all, very few companies have sufficient cash to completely repay their debt as it matures. As I have pointed out in a few previous articles, we have seen quite a few utilities experience rising interest expenses over the past year or so. This is largely because interest rates are currently higher than we have seen in nearly twenty-five years. However, Hawaiian Electric Industries is not a company that is in this boat. As we can see here, the company’s net interest expenses have remained remarkably stable since mid-2021:   Seeking Alpha However, we see that its interest and investment income has increased in the most recent period. This is due to the company’s increased cash position. In the introduction to this article, a quotation pointed out that the company withdrew some money from its line of credit and put it into cash equivalents and short-term investments. That naturally caused its interest income to increase sufficiently to offset the higher interest expenses that the company currently has compared to two years ago. The suspension of the dividend helps as well, as the firm is able to keep the cash that it would have otherwise paid out in a money market fund that earns interest. This is a very reasonable thing to do while we wait for the company’s current legal issues to be resolved. One ratio that we can use to analyze a company’s financial structure is the net debt-to-equity ratio. As of December 31, 2023, the company has a net debt of $3.3557 billion compared to $2.3791 billion of shareholders’ equity. This gives the company a net debt-to-equity ratio of 1.41x today. Here is how that compares to some of the other companies in the utility sector:   Company Net Debt-to-Equity Ratio   Hawaiian Electric Industries 1.41   DTE Energy (DTE) 1.89   Entergy Corporation (ETR) 1.77   Eversource Energy (ES) 1.87   Edison International (EIX) 1.95   Click to enlarge It is very important for Hawaiian Electric Industries to maintain as strong a balance sheet as possible right now. As we can see here, it does appear that the company is doing that when compared to its peers. As far as its balance sheet is concerned, the company is as well positioned as it can be for the current situation. HE Stock Valuation According to Zacks Investment Research, Hawaiian Electric Industries currently has a forward price-to-earnings ratio of 5.38. This is incredibly cheap compared to its peers, as might be expected:   Company Forward P/E Ratio   Hawaiian Electric Industries 5.38   DTE Energy 15.74   Entergy Corporation 14.17   Eversource Energy 12.87   Edison International 13.50   Click to enlarge As we can clearly see here, if Hawaiian Electric Industries manages to make it through its legal challenges relatively unscathed, then current shareholders could easily see the price more than double to bring its value in line with its peers. However, that is a tall order and there is still a great deal of uncertainty involved. Conclusion In conclusion, there is a lot of uncertainty surrounding Hawaiian Electric Industries right now. The share price drop earlier today (April 16) was driven by an event that added a bit of uncertainty, although there is still nothing definite. I am doubtful that Hawaiian Electric Industries will be liquidated due to the reliance of the island’s citizenry on its electricity. I also doubt that the eventual settlement will be anything that jeopardizes the company’s ability to earn a profit. However, the courts might still require some sort of “buy-in” from the company that will negatively affect current stockholders.  I am not sure what rating to give this stock right now. Truthfully, it could be a good opportunity for someone who wants to gamble a bit. The company should not even be on the radar of a traditional value investor as the risks could be too great. For now, I am going to give it a “hold” rating as nothing else seems appropriate and everyone who is still holding this stock probably may as well take the chance of a positive outcome.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428317168"}