Ignore the Washington Post: Hawaiian Electric Will Survive
and worsening storms won’t bring down the power sector
For electric utilities, storms are part of doing business. And companies now have 21st century tools to deal with them, including data science, artificial intelligence, drones and covered conductor technology.
You won’t read that in the mainstream media, where advocacy journalism is ascendant. And the Washington Post headline Sunday August 27 “Hawaiian Electric may face collapse”—asserting global warming has doomed your local utility—will attract far more attention than a sober piece on the current state of utilities’ storm preparedness.
But here goes nothing.
First off, each year there are literally hundreds of storms and wildfires in the US that cause significant property damage and cost lives. But in almost every case, electric utility systems have restored service to all but the worst affected within hours, with damages and lost revenue covered by insurance.
The notable exceptions—Hurricanes Katrina and Rita in 2005, Hurricane Maria in Puerto Rico in 2017, the 2018 Camp Fire in California and this year’s Maui Fire—are so horrific in part because they are so rare. But by overwhelming response systems, they always spur major changes at electric utilities.
Though they didn’t get a mention in today’s Post, California’s Big 3 utilities have radically changed the way they do wildfire response over the five years since the Camp Fire drove PG&E’s (NYSE: PCG) Pacific Gas and Electric unit into bankruptcy. And though this storm season brings new risks, the Golden State’s systems are quantitatively safer.
Edison International’s (NYSE: EIX) Southern California Edison utility unit, for example, reports 98 percent fewer structures destroyed and 92 percent fewer acres burned in its service territory for the period 2021-2022 than in 2017-18. And credit rater Moody’s estimates the company has reduced probability of losses from catastrophic wildfires by 85 percent compared to pre-2018 levels.
Early on, Edison relied on just shutting off power to communities, an understandably unpopular measure with its own potentially deadly consequences. Now it does that only 10 percent of the time. Management expects 76 percent of distribution wires in high risk areas to have “covered conductors” by the end of the year. And it’s also employing drones and AI to detect weakness while partnering with the state to restore health of wildfire-affected regions.
Hurricanes have historically been far more destructive to property and human life than wildfires. And as another season gets ready to kick off in the southeast, Florida’s NextEra Energy (NYSE: NEE) will again be tested. Still, it’s worth reflecting on the company’s success restoring service following 2022’s Hurricanes Ian and Nicole. And its deployment of microgrids, solar panels and harder transmission/distribution infrastructure further enhances preparedness this time around.
Hawaii regulators may now regret they rejected NextEra Energy’s (NYSE: NEE) takeover offer for state utility Hawaiian Electric (NYSE: HE) back in 2016. Not only does the Florida-based company have far greater resources. But management has learned so many lessons from storms—some the hard way—that it’s reasonable to assume Maui would have been better prepared for what did happen.
That was the devastating wildfire August 8. Dry hurricane force winds carried fire, reducing the town of Lahaina to rubble, killing over 100 people and leaving thousands homeless.
Hawaiian Electric has since restored power to the vast majority of affected customers. But like Pacific Gas & Electric following the 2018 Camp Fire, it’s facing damage lawsuits, with a potential liability of $3.8 billion according to credit rater Fitch. Last week, the company suspended its dividend. And its credit rating has plunged to junk status even from Fitch, which just a couple weeks prior had raised it to A-.
Speculation now is Hawaiian Electric’s utility unit will file bankruptcy, as Pacific G&E did in the previous decade. But there is a notable difference in this case.
Mainly, California utilities operate under an “inverse condemnation doctrine,” which holds them responsible for wildfire damages whenever their equipment is involved. That’s even if there’s no finding of negligence or a “standard of care” breach.
Hawaii also has inverse condemnation. But it’s never before been applied to utilities. There’s speculation state judges will be sympathetic to doing so in this case. But most likely plaintiff lawyers will have to prove not just that Hawaiian Electric’s power lines ignited the blaze, but also that its management was willfully negligent in its storm preparedness plan.
That second point may be tough to make stick. Hawaii state regulators have to approve utility spending. And the company had submitted a storm damage prevention plan some months ago the commission is still deliberating.
Also, no definitive link between power lines and ignition has yet been confirmed. And with plaintiff lawyers charging the utility in the press with removing evidence during power restoration efforts, whatever is found may be less conclusive than initially thought.
There’s also ring fencing. Hawaiian Electric’s utility unit on Maui is potentially liable for damage claims. But the parent company and the company’s banking unit are legally “ring fenced” and are not. That’s why the parent’s bonds don’t trade at distressed levels. It’s also possible the Maui unit is ring fenced from the utility units on other islands, though if claimed that would certainly be heavily litigated.
In any case, the state of Hawaii absolutely needs a healthy Hawaiian Electric. The utility is one of the state’s biggest employers. More than a few residents depend on pensions as well as holdings of company stock.
Also, Hawaii has a target of 100 percent renewable energy by 2045. It’s currently just 29 percent there and still heavily reliant on very expensive fuel oil. There’s simply no way 100 percent is achievable without a healthy Hawaiian Electric to make the needed grid investment, and to pay for power generated by AES Corp (NYSE: AES) and other companies now investing heavily in the state.
It was the need for a healthy utility that ultimately drove California’s grand bargain with PG&E, setting up the state’s $21 billion Wildfire Insurance Fund. Since exiting bankruptcy, the utility’s shares have recovered by more than 340 percent. And management has promised to resume paying dividends, possibly later this year.
PG&E is the latest testament to the ability of electric utilities to recover from any disaster, by repairing relations with communities and regulators and thereby balance sheets. In fact, no operating utility has gone out of business since Edison threw the first switch.
Instead, they’ve always pulled themselves back together, with spectacular results for investors.
The court of public opinion has found Hawaiian Electric guilty. That’s pretty clear from the Washington Post’s decision to publish a front-page article in its Sunday August 27 edition.
Hawaiians especially are justifiably feeling great pain and quite understandably looking for someone to blame. And that alone means the utility’s outlook is likely to darken before it gets brighter. Management certainly appears to be settling in for a long siege, drawing down credit lines, suspending dividends and employing outside legal and financial expertise.
That means anyone speculating in this stock now should be prepared to roll with the punches, which could come at considerable force. But history is still on the side of eventual recovery: Metropolitan Edison shares sold for a buck apiece after the Three Mile Island accident in 1978. A decade later, they were up 30-fold.