Why Hawaiian Electric fell 35.2% in August

Conflicting utility rates Hawaiian Electric (HE -3.38%) fell 35.2 percent in August, according to S&P Global Market Intelligence data.

The power company was hit late last year by the tragic fires of August 2023, which plunged the company into a legal mess. Earlier this month, Hawaiian Electric reached a payment agreement with the plaintiffs that appeared favorable to the utility. But a statement from the company raised the prospect of bankruptcy, and the final settlement amount is still in doubt.

“Going concern” language and ongoing legal hassles after July’s optimism

It should be noted that Hawaiian Electric stock soared in July after it was reported that Maui County would pass a resolution to settle all claims against the defendants, the largest of which was Hawaiian Electric. The prospect of a deal has encouraged investors to reach a deal that could hurt Hawaiian but keep it solvent.

So after the July run, any hiccup had the potential to send Hawaiian’s stock back down. On August 2, the parties agreed to a $4 billion settlement, with Hawaiian’s liability of about $2 billion, excluding fees. That’s a steep amount, but it didn’t immediately hurt the stock, as the company said it would likely raise the necessary amount of cash through capital raises or debt.

What caused the stock to fall sharply was the company’s quarterly report, filed after the release of second-quarter earnings, in which final profits did not miss analysts’ estimates. Along with the launch, Hawaiian also inserted “going concern” language into its quarterly report. That language hints bankruptcy could still be a possibility if the company isn’t able to raise the cash it needs. While investors probably assumed the $2 billion would be achievable, capital markets can be, shall we say, emotional and uncertain at times.

In addition, Hawaiian’s insurers continue to pursue the company to try to recoup their own losses, adding to the uncertainty about how final the settlement number is. While a state Circuit Court judge ruled later in August that the insurers would not be able to pocket the settlement money or go after Hawaiian, the judge also agreed to send the matter to the Supreme Court in Hawaii. So the matter remains unresolved.

Image source: Getty Images.

Hawaiian trades below book value, but beware

It’s entirely possible that the state Supreme Court will uphold the lower court’s ruling that the insurers cannot pursue Hawaiian or the settlement group and that the settlement moves forward as planned. However, Hawaiian will also need to raise the $2 billion needed for the settlement while investing to make its shipping lines more resilient.

If those issues are resolved and Hawaiian raises enough cash without too much dilution, there could be plenty of upside, as the stock trades below the company’s book value, even with the settlement figure taken into account.

But while the stock is trading below its net asset value, there is quite a bit of uncertainty. Only those experienced in difficult investment situations, perhaps with legal experience, should still consider buying Hawaiian stocks.