Hawaiian Electric Industries Inc. shares plummeted for a second straight day as the company faces a class-action lawsuit alleging negligence related to wildfires that killed at least 99 people and damaged 2,207 structures on the island of Maui.
Shares fell another 31% on Aug. 15 in more than 30x normal trading volume, settling at $14.79 after dropping 34% on Aug. 14.
Financial fallout for the utility holding company continues to come into focus, with equity analysts at Guggenheim noting Aug. 14 that Hawaiian Electric Industries (HEI) is at risk for a reorganization.
"Looking forward, we see a potential for the current company structure to change materially including partial asset buy-outs or government intervention (i.e., utility municipalization)," Guggenheim wrote. "In other words, given the size of the utility and the potential liabilities in front of it, it's hard for us to imagine if the company will emerge from this tragic incident in its current form."
S&P Global Ratings downgraded Hawaiian Electric Industries and all rated subsidiaries to junk in light of the lawsuit. The parent company, as well as subsidiaries Hawaiian Electric Co. Inc., Maui Electric Co. Ltd. and Hawaii Electric Light Co. Inc., are now rated BB-. Hawaiian Electric Co. was previously rated BBB-, just one notch above non-investment grade, and the subsidiaries were rated BBB.
"The severity of these wildfires demonstrate higher wildfire risk for the company than previously contemplated," the credit rating agency said Aug. 15. "The wildfires destroyed a significant segment of HEI's customer base that will take many years to restore, and as such, we expect a long-term weakening in the company's profitability measures, despite the company's use of a revenue decoupling mechanism for normal sales volume variations."
An Aug. 12 complaint filed with the Oahu District Court claiming that Hawaiian Electric equipment "foreseeably ignited the fastmoving, deadly, and destructive Lahaina Fire" also poses a significant risk, according to S&P Global Ratings.
"Both the Pacific Disaster Center and [the Federal Emergency Management Agency] have estimated that the cost for Hawaii to rebuild from these wildfires could approximate more than $5.5 billion, significantly greater than HEI's book equity of about $2.2 billion," the report noted. "While the full resolution of these lawsuits may take years, should the plaintiffs prevail, the company's financial measures would materially deteriorate."
S&P Global Ratings also placed Hawaiian Electric and its subsidiaries on credit watch negative to reflect the potential for future downgrades.
According to Hawaiian Electric management, "property and liability insurance coverages ... will protect the company against wildfire-related damages to its properties as well as wildfire-related claims made against it by third parties," Evercore ISI told clients Aug. 11, adding that "overhead and underground [transmission and distribution] systems, with the exception of substation buildings and contents, are uninsured unless those systems are located within 1,000 feet of a Hawaiian Electric-insured location (i.e. generating facility or substation)."
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