Shares of embattled utility Hawaiian Electric (HE -1.87%) fell 35.2% in August, according to data from S&P Global Market Intelligence.
The electric utility was hit late last year by the tragic wildfires of August 2023, which mired the company in a legal mess. Early in the month a payout settlement with plaintiffs was reached early in the month, which seemed favorable for the utility. But a company filing raised the prospects of bankruptcy, and the final settlement amount still remains in question.
"Going concern" language and ongoing legal headaches after July optimism
It should be noted that Hawaiian Electric's stock had soared in July, after it was reported that Maui County would take up a resolution to settle all claims against the defendants, the biggest of which was Hawaiian Electric. The prospect of a settlement encouraged investors that a deal would be reached that might hurt Hawaiian, but keep it solvent.
So after July's run, any hiccup had the potential to send Hawaiian's stock back down. On Aug. 2, the parties agreed to a $4 billion settlement, with Hawaiian's liability being about $2 billion, pretax. That is a steep sum, but didn't immediately affect the stock, as the company said it would likely raise the requisite amount of cash through either equity or debt raises.
What did send the stock down hard was the company's quarterly report, filed after its second-quarter earnings release, in which Hawaiian's bottom-line profits missed analyst estimates. In conjunction with the release, Hawaiian also inserted "going concern" language in its quarterly report. That language insinuates bankruptcy could still be a possibility if the company isn't able to raise the cash it needs. While investors had likely assumed the $2 billion would be doable, the capital markets can be, shall we say, emotional and unreliable at times.
In addition, Hawaiian's insurers are still going after the company to try and recoup their own losses, which is adding to the uncertainty over the finality of the settlement number. While a state Circuit Court judge ruled later in August that insurers would not be able to raid the settlement money or go after Hawaiian, the judge also agreed to refer the matter to Hawaii's Supreme Court. So, the matter remains unresolved.
Image source: Getty Images.
Hawaiian trades below book value, but be careful
It's quite possible that the state Supreme Court confirms the lower court's ruling that insurers can't go after Hawaiian or the settlement pool, and that the settlement goes forward as planned. However, Hawaiian will also need to raise the $2 billion needed for the settlement, while also investing to make its transmission lines more resilient.
If these matters get resolved and Hawaiian raises enough money without too much dilution, there could be lots of upside, as shares trade below Hawaiian's book value, even with the settlement figure factored in.
But while the stock trades below the value of its net assets, there is quite a lot of uncertainty. Only those experienced in distressed investing situations, perhaps with a legal background, should think about buying into Hawaiian shares just yet.
