So what's going in Hawaii for HEI investors?
Not good news for investors
The story in Hawaii after the devasting wildfires is still unfolding. I previously highlighted the press release from here.
Since then, HEI has withdrawn on revolvers and terminated dividends:
The more interesting news was released on 27 August, when the company started the blame game:
HEC says they are ‘disappointed’ in the county. They are also hinting that the fire department was at fault. I can’t see that going too well. Blaming firefighters for not doing their jobs properly would never work out well.
Their statement does make it sound like it was the fire department to blame:
More recently:
The U.S. Department of Energy has approved $95 million in federal funds in the wake of the Maui windstorms and wildfires to harden the energy grids on the five islands served by Hawaiian Electric and enable them to better withstand severe weather-related events fueled by climate change.
President Biden, who toured fire-ravaged West Maui last week, announced Wednesday that his administration would make the federal funding available under the Infrastructure Investment and Jobs Act (IIJA). The federal funding would pay for half of Hawaiian Electric’s proposed $190 million Climate Adaptation Transmission and Distribution Resilience Program, which was submitted to the Public Utilities Commission (PUC) for approval in June 2022 (Docket 2022-0135). The federal matching funds would reduce the cost of the program to customers by 50%.
Some considerations from discussions with a legal expert:
The US$95 million funding which is half of the 190 million - must not be eligible for rate base. That would be absurd, given the scenario.
Is the 190 million going to cover everything that needs to be resolved? Not really; the liabilities for HEI will be in the billions.
If the utility is found responsible for 50%+ of the damage, and the county is only at 30% fault, then negligence would be obvious on HECO.
From my understanding, this won’t be the same as gross negligence. (Again, I’m not a lawyer)HECO has liability insurance coverage, but the company isn't disclosing how much coverage they have, which is not a good sign. Furthermore, the payout: would it be uncapped? Probably not. Fire is a normal part of liability coverage, but I doubt it's unlimited
The Governance structure for HEI isn't independent. Many of the key stakeholders are intertwined. I don’t want to ramble too much on this point, but several bank analysts have articulated this point
The county filed suit quickly because HEI would quickly scoop up the good lawyers involved in this space
The immediate responses in the press releases from HEI make it clear that things are a bit tense
Perhaps a co-op or non-profit structure is better for HEI in the future. People aren't going to trust that a for-profit IOU is the best for HEI after this
HEIs credit rating isn't investment grade, and things might never return to the same state
They've bought some time, but I doubt the stock will rebound to its original price. Equity would be wiped out after the US$1 billion mark
If HEI is going to go bankrupt, it will be the whole utility and not parts of the firm
One inverse condemnation, some of the regulators will ask for an extension of law so they get treated under HI law
*The late-night press release occurred before the lawsuit. Which was strange to begin with. Why issue a press release before an answer? But they don't deny that a fire caused the first power failure; they acknowledge it is happening
*Many of the headlines after the news were that the company denied that their system wasn't energized. But we still don’t know today whether or not true
*The implication they are making is that the county sent people the wrong way, and the firefighting apparatus was insufficient or poorly directed
*The HECO is saying that the speed is 60-80 miles; that was the cause
*At the heart of inverse condemnation - certain functions are either so uniquely governmental or functionally equal - and IF (big IF) it was adopted, it would be an all-or-nothing type of situation
*It would be a nice simple path between the county and the utility to liability estimation
*Federal litigations - HI is not a federally regulated state of all. FERC has a presence in HI, but they can’t do much to change the outcome
The stock is down a lot, but I suspect it will end up going to zero eventually.
This will be a fascinating case to watch unfold. Consider, for example, that all of the following are true. Note these come from a variety of sources, including the company, but let’s just assume each is true:
#1: HE knew its system was fragile. Does this mean they were negligent? The U.S. grid is not exactly a standard of excellence - how fragile must a system be before there is a duty to make improvements? And does said duty extend regardless of circumstances? What if the improvements are too expensive to be made immediately but could be made gradually over time as funds are generated? How does continued payment of dividends during this incremental improvement period factor into this equation? Do I have a duty to suspend those dividends immediately to raise as much cash as possible as quickly as possible to fund the improvements, even if that would have negative implications for my equity value and resulting cost of capital, which in turn could impair my ability to make timely improvements in the future?
#2: Knowledge a storm was coming, and that wildfire threats were elevated. Is a failure to preemptively de-energize negligence? While this could likely change in the near future, most utilities today do not preemptively de-energize before a hurricane. But how do conditions being elevated for wildfires and the combination of #1 factor into that analysis?
#3: HE admits its lines caused the “morning fire.” However, they said they notified authorities immediately and were assured the fire had been extinguished. They said they then de-energized their lines hours prior to the “afternoon fire.” Assuming the afternoon fire was related somehow to the morning fire, does the fact they had been assured the morning fire was extinguished absolve them from any fault related to the afternoon fire? Or even if they are free of fault for the events that transpired between the morning fire and the afternoon fire, are they still nonetheless at fault given #1 and #2 which relate to circumstances known to HE before the morning fire?
If I inadvertently leave a dangerous (but nonetheless perfectly legal) weapon in a public space, call the police as soon as I realize my error, and am assured the weapon no longer poses a threat, am I off the hook if, despite police reassurances, someone nonetheless gets a hold of it and kills someone with it? Do I get allocated fault, despite the police reassurances, because I left it there in the first place and the whole chain of events could have been prevented if I hadn’t done that to begin with? Or do the police reassurances effectively absolve me 100% at that point in time and any unfortunate circumstances that subsequently transpire can no longer be attributed to me?
The whole case should be interesting. I hope there is a legal scholar out there somewhere who blogs his or her way through these and other facts as they unfold. That would make for a fascinating series of reads to take in as this case unfolds.