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Hawaiian Electric Industries (HE) Shares Plummet Amid Wildfire Accusations

In a shocking turn of events, the shares of Hawaiian Electric Industries (HE) experienced a dramatic drop of 41% on Monday, following disturbing allegations linking downed power lines to a wildfire catastrophe that decimated Lahaina, Hawaii. This devastating incident resulted in a tragic loss of at least 93 lives. The stock concluded the day with a staggering 34% decrease.

Investigation into the Maui Wildfires

The state attorney general of Hawaii has declared the commencement of an investigation into the root cause of the catastrophic fires that wreaked havoc on Maui. While an official cause has yet to be determined, suspicions have arisen regarding Hawaiian Electric (HE), the largest power provider in the state, for allegedly neglecting safety precautions.

Despite Barron’s attempt to solicit a response from Hawaiian Electric, the company refrained from commenting. However, it did inform Bloomberg that it lacks information regarding the fire’s origin.

Legal Action and Safety Concerns

Over the weekend, a lawsuit seeking class-action status was lodged against the utility company. The lawsuit contends that although powerful winds had caused damage to Hawaiian Electric’s electric power lines, the company neglected to deactivate the power despite warnings from the National Weather Service regarding elevated fire risk conditions.

Fueled by an unusually arid summer and the strong winds generated by a passing hurricane, the fire rapidly spread, leaving many residents without adequate time to evacuate.

Extent of the Devastation

Lahaina, a historically significant town and an economic focal point of Maui, was tragically reduced to ashes within a matter of hours. The reported death toll of 93 is expected to rise as authorities continue their assessments.

Initial evaluations indicate that approximately 2,170 acres of land were consumed by the Lahaina fire, resulting in damage to or destruction of around 2,200 structures. An astonishing 86% of these structures were residential, according to a report from the Pacific Disaster Center and FEMA.

Governor Josh Green of Hawaii projected potential losses reaching up to $6 billion. FEMA, in a statement on Saturday, acknowledged that it is too early to ascertain the cost of reconstruction.

Financial Implications for Hawaiian Electric

Should Hawaiian Electric be found responsible for igniting the fire, it could potentially face billions of dollars in liabilities, as predicted by financial analysts. Additionally, a significant portion of the company’s infrastructure has been severely compromised, leading to a widespread power outage on Maui.

While the company’s insurance policies might offer some degree of protection, there is uncertainty as to whether these policies would entirely cover the incurred expenses if Hawaiian Electric is deemed liable. The specifics of the insurance deductibles and limits have not been disclosed by the company. Analysts at Wells Fargo estimate that the coverage probably falls below $1 billion. The relatively modest size of Hawaiian Electric might compound its financial woes if held accountable for the fires. Guggenheim’s utility analyst, Shahriar Pourreza, highlights the dilemma: “The costs are escalating to the point they’re substantially higher than what the company is even worth.”

Following the recent plummet in share prices, Hawaiian Electric’s market capitalisation has dwindled to a mere $2.4 billion. Beyond the potential legal ramifications, the company may encounter liquidity challenges as it strives to sustain its operations while recovering from the fire’s aftermath.

Comparisons to PG&E’s Situation

The decline in Hawaiian Electric’s stock price parallels the fate of Pacific Gas and Electric (PG&E) following the 2018 Camp Fire, a disaster that obliterated Paradise, Northern California, and claimed 85 lives.

PG&E, the utility provider in the region, was held accountable for the inferno due to equipment malfunctions and inadequate maintenance. The aftermath saw a wave of lawsuits and financial obligations that surpassed $30 billion. The resulting fiscal pressure compelled PG&E to seek Chapter 11 bankruptcy protection in 2019, allowing the company to restructure its debts while continuing its operations. The value of PG&E’s stock plummeted after the Camp Fire and never rebounded, ultimately losing 60% of its worth over five years.

Distinctive Factors in This Situation

In contrast to California’s stringent liability rule of “inverse condemnation,” which presumes utility companies guilty until proven innocent in cases of property damage from public sources, Hawaii lacks such regulations. Consequently, plaintiffs must demonstrate that utility companies inadequately managed their systems and failed to take reasonable precautions to avert destruction. Shahriar Pourreza explains, “Hawaii has a looser standard than California does, which makes it a little bit easier [for Hawaiian Electric to defend against the accusations].”

Hawaiian Electric acknowledges possessing records of equipment maintenance and vegetation management. Nevertheless, the company’s current focus remains on supporting first responders, aiding customers and employees, and swiftly restoring power.

Impact on Investors

Pourreza anticipates a reduction of the firm’s valuation by $2 billion from its pre-fire value, leading him to revise his price target from $32 to $18. The stock is likely to remain under pressure during the investigative and response periods. He asserts, “We anticipate a long road until investors can gain clarity from the incident and resulting claims.”

Looking ahead, significant structural changes within the company may transpire, such as partial asset buyouts or governmental intervention. Pourreza believes that considering the utility’s size and potential liabilities, it’s challenging to envision the company emerging from this tragedy unscathed in its current form.

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