Hawaiian Electric: Investors Lose Confidence Amid Heightened Wildfire Risk; Lowering Fair Value

We are lowering our fair value estimate for Hawaiian Electric Industries HE to $23 per share from $34 after assessing numerous press reports over the weekend that suggest Hawaiian Electric’s equipment may have been responsible for the recent Lahaina fire in the utility’s service territory. The cause of the fire remains under investigation and no official cause has been determined.

Our decision to raise our cost of capital to 7.3% from 6.4% led to our fair value estimate decrease. Hawaiian Electric’s cost of capital is becoming a critical issue, with the stock down nearly 30% since Aug. 7, including the premarket drop of 16% at the time of this writing on Aug. 14. This new cost of capital is one of the highest in our coverage list. The loss of the market’s confidence is a key near-term concern and will likely remain elevated for many years as the company works through responsibility and any liability for the recent wildfires across Hawaiian Electric’s service territory.

The Lahaina fire has killed more than 90 people and destroyed 2,200 structures with an estimated cost of approximately $5.5 billion, according to a damage report released over the weekend by the Pacific Disaster Center and the Federal Emergency Management Agency.

An important distinction between Hawaiian Electric and PG&E is the different legal standards under which the utilities operate. California’s inverse condemnation ultimately led to the bankruptcy of PG&E. In Hawaii, plaintiffs will be required to show that Hawaiian Electric was negligent or could have reasonably prevented a loss.