The beleaguered utility raised the prospect of bankruptcy after reaching a multibillion-dollar settlement this month.
Shares of Hawaiian Electric (HE -1.04%) fell 12.8% through Thursday of this week, according to data from S&P Global Market Intelligence.
Hawaiian Electric is still reeling from the fallout of the disastrous wildfires of August 2023, which claimed 100 lives and caused about $5.5 billion in damages, according to the U.S. Fire Administration.
While the stock had already been hammered in the aftermath, this new leg down stemmed from “going concern” language in the company’s quarterly report filed late last Friday, which caused the stock to sell off on Monday of this week.
Needing another $2 billion
It’s usually not a great sign when a company files an important disclosure late on a Friday. Last week, Hawaiian Electric filed its second-quarter 10-Q, which contained “going concern” language that suggested bankruptcy is a possibility.
Earlier this month, Hawaiian Electric and other parties reached a settlement agreement with plaintiffs on all tort claims resulting from the wildfire, amounting to $4 billion. Hawaiian Electric’s share of the settlement liability is $1.99 billion.
The problem is that Hawaiian Electric only had $550 million in cash on its balance sheet as of June 30, and is also paying a lot in capital expenditures toward future wildfire prevention measures. Hawaiian Electric has also said it won’t raise utility rates in order to account for the claims.
So, the utility will have to raise more cash. In a press release earlier this month, the company said it would come in the form of “a mix of debt, common equity, equity-linked securities, or other potential options.”
However, finding that financing still isn’t guaranteed. And in last Friday’s quarterly report, the company warned:
These conditions raise substantial doubt about HEI’s and the Utilities’ ability to continue as a going concern within one year after the date that financial statements are issued. The ability to continue as a going concern is dependent primarily upon the Company’s ability to raise the capital necessary to fund the contribution to the settlement of wildfire tort claims while also meeting their obligations to repay their liabilities arising from normal business operations when they become due.
Image source: Getty Images.
Hawaiian Electric takes specialized knowledge
Because of its mission-critical, regulated service, it is possible, and maybe even likely, that Hawaiian Electric will be able to dodge bankruptcy and come up with financing. Even in a bankruptcy scenario, it’s also possible equity holders may still retain some value. After all, even with the new tort liability on its balance sheet, the company still has roughly $1.2 billion in book value.
Still, the claims do potentially mean another debt raise or equity dilution. Moreover, the agreement has only been made in principle, and has not yet been finalized.
Absent any further surprises, it’s possible the stock is bottoming here. However, those looking for a deep value opportunity should only look at Hawaiian if one is experienced analyzing distressed companies. Otherwise, the risk is too high.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
