Hawaiian Electric and Maui Fires

[Saluki]

This company is down for $40 to $12 yesterday, and is up about 15% today on this news:  

 

https://finance.yahoo.com/news/hawaiian-electric-takes-expert-help-112122259.html

 

Hawaiian Electric said in the filing that unlike in California, there was no precedent in Hawaii of applying an "inverse condemnation" to a private party like an investor-owned utility.

An "inverse condemnation" exposes California utilities to liabilities from wildfires regardless of their negligence, as long as their equipment is involved.

 

I don't think this means what they think it means. They didn't say "Hawaii courts don't recognize [i.e. have rejected] the inverse condemnation legal doctrine." It said that there is no precedent for it in Hawaii.  If the plaintiff's win, there will be a precedent.  Maybe the state will provide aid to those affected in exchange for not suing the utility, but this is a stretch.  And even IF the court's say that the utility is not liable regardless of negligence, as long as it was caused by your equipment, they still might have been negligent.  After they heard about the California wildfires, they had years to harden their infrastructure to prevent the same thing from happening. 

 

I've never worked with anyone from Hawaiian Electric, but I did have a client who is an electric utility on one of the other islands.  And lets just say that I wasn't bowled over by their ability to dot every "I" and cross every "T".  

 

 

 

[Dinar]

It is a binary situation.  It is either a zero or it does really well.  If the utility caused the fire, I don't care what the law says, it is a zero.  The destruction is horrific, and loss of life is immense.  Many kids died.  

[Gregmal]

I know nothing of the situation but is the playbook now really just anywhere you have a fire to blame and hold liable the electricity companies? Remind me to never invest in one. 

[cubsfan]

It’s worse than that- the fire fighters were denied water by the island’s water board. Most hydrants were dry when tapped. The board’s director was “reassigned” today. On the website it says he was the proponent of “water equity “ - what ever that means.

 

By the time they released water to the fire fighters, it was too late.

[fareastwarriors]

How about the bonds?

 

@thepupil

[thepupil]

34 minutes ago, fareastwarriors said:

How about the bonds?

 

@thepupil

I looked at shorting the short maturities, but couldn’t get borrow….no view here

[KPO]

6 hours ago, Gregmal said:

I know nothing of the situation but is the playbook now really just anywhere you have a fire to blame and hold liable the electricity companies? Remind me to never invest in one. 

Exactly. And it makes me worry about anything that touches public utilities….even Berkshire has exposure as we’ve seen recently in the the Pacific Northwest, albeit evidently hived off from the parent company. 

[Saluki]

21 minutes ago, KPO said:

Exactly. And it makes me worry about anything that touches public utilities….even Berkshire has exposure as we’ve seen recently in the the Pacific Northwest, albeit evidently hived off from the parent company. 

One of my small positions is a company called Anterix, which has FCC approval to use part of their bandwidth for private 4G LTE for utilities to do Internet of things.  One of the use cases is that it can detect when a line breaks then remotely turn of the power to the downed line before it even reaches the ground. Maybe this will speed up adoption of the technology?

[KPO]

7 hours ago, Saluki said:

One of my small positions is a company called Anterix, which has FCC approval to use part of their bandwidth for private 4G LTE for utilities to do Internet of things.  One of the use cases is that it can detect when a line breaks then remotely turn of the power to the downed line before it even reaches the ground. Maybe this will speed up adoption of the technology?

I’m familiar with them. Given the existential (at least for equity holders) tail risk it seems like a no brainer business case for the utilities. 

[thepupil]

15 hours ago, Gregmal said:

I know nothing of the situation but is the playbook now really just anywhere you have a fire to blame and hold liable the electricity companies? Remind me to never invest in one. 

so as y’all know I keep an eye on long duration high quality fixed income. If you look at Fidelity’s offerings (which tend to feature lots of adverse selection l) the highest yield for the rating is in utilities, clearly people trying to decrease their weight to “low risk” utility bonds, including Berkshire related ones. 
 

on the margin, I’m a buyer, but at very small size, stuff like BRKHEC 2054 at $85 / 6.6%. Not recourse to the mothership, but it’s still be a pretty momentous decision for Berkshire to give up an important subsidiary. For a small portion of capital, I’d bet that won’t happen. 
 

I think taking advantage of peoe

ligjtening up in related securities may be the better option than running to the literal fire.

Edited August 19, 2023 by thepupil

[Spekulatius]

8 hours ago, KPO said:

I’m familiar with them. Given the existential (at least for equity holders) tail risk it seems like a no brainer business case for the utilities. 

The problem is that the regulator needs to approve capital expenses including those for fire mitigation.

[RedLion]

On 8/18/2023 at 2:17 PM, Dinar said:

It is a binary situation.  It is either a zero or it does really well.  If the utility caused the fire, I don't care what the law says, it is a zero.  The destruction is horrific, and loss of life is immense.  Many kids died.  

Agreed.

 

But I think it’s going to get crucified at jury trial on negligence based on the conscious decision not to harden their infrastructure or de energize in these conditions. 
 

If bankruptcy doesn’t come first. 
 

The damages are going to be over $12 billion minimum if negligence is established and there’s no way the stockholders recover anything from there I wouldn’t think. And victims probably get 30-45 cents on the dollar. 
 

Hawaii doesn’t have inverse condemnation, but it’s not necessary if plaintiffs can establish negligence. And an electric company has a heightened standard of care due to the inherently dangerous nature of their business. Oregon doesn’t have ic either, and yet the utility just lost at jury trial with punitive damages even. 

Edited August 19, 2023 by RedLion

[RedLion]

19 hours ago, Saluki said:

One of my small positions is a company called Anterix, which has FCC approval to use part of their bandwidth for private 4G LTE for utilities to do Internet of things.  One of the use cases is that it can detect when a line breaks then remotely turn of the power to the downed line before it even reaches the ground. Maybe this will speed up adoption of the technology?

Pcg is using this technology extensively going so far as to stop trimming trees In a recent press release. 

[Spekulatius]

HE is a Holdco which actually owns a bank too. That bank generated ~$80M in income in 2022. So even if the utility is a zero, the Holdco has another cash flowing asset unlike other utility Holdco where there are little assets and often just another layer of debt.

 

So, HE should be worth something even if the utility is a zero. 

[shhughes1116]

On 8/19/2023 at 7:44 PM, RedLion said:

Agreed.

 

But I think it’s going to get crucified at jury trial on negligence based on the conscious decision not to harden their infrastructure or de energize in these conditions. 
 

If bankruptcy doesn’t come first. 
 

The damages are going to be over $12 billion minimum if negligence is established and there’s no way the stockholders recover anything from there I wouldn’t think. And victims probably get 30-45 cents on the dollar. 
 

Hawaii doesn’t have inverse condemnation, but it’s not necessary if plaintiffs can establish negligence. And an electric company has a heightened standard of care due to the inherently dangerous nature of their business. Oregon doesn’t have ic either, and yet the utility just lost at jury trial with punitive damages even. 

This is going to be an interesting court case, and likely a series of court cases as everyone sues everyone.  
 

Lahaina exists within the rain shadow of the West Maui mountains, so it is a fairly dry place in a normal year.  Dora added high winds to the mix.  You have to ask why the fire department or emergency management agency didn’t have a fire watch going, or if it was, how they could have missed the fire.  This is negligent.

 

You have to ask why the Maui Emergency Management Agency didn’t sound the sirens.  Bullsh*t people would have been confused.  Bullsh*t people wouldn’t have been able to hear them.   This is negligent.  
 

You have to ask why water was not diverted by the through irrigation ditches at the request of the municipal water authority. You have to ask why the water resource commission thought the most pressing matter was “understanding impact on downstream users” by diverting water to reservoirs that serve Lahaina.  This is negligent.

 

I’m sure they will find a way to blame HE.  But this tragedy could have been prevented or at least mitigated if they had competent people at the helm of the Emergency Management Agency and the water resource commission.

 

 

 

 

[Spekulatius]

A couple of loosely connected thought on this tragedy:

 

There is a lot of bad takes on this. One thing we hear is that colonialism is to blame for the fire and lack of water but how can this be? Colonialsms ceased to exist more than 100 years ago - so there was no time to fix whatever issue this may have caused? There is also very little agriculture in Maui any more - most pineapple planting are long gone (too expensive I guess).

 

Also over - tourism is to blame/ Lahaina is more of a visitors than a hotel destination. We visited the town for a daytrip  on our Maui stay in 2021 and that's pretty typical. With no / or less tourist visiting, how are people going to make a living there. There are plenty of rich people living there but the working population needs tourism as there are virtually no other jobs there.

 

Then related - i think this is a second strike after PG&E where an utility got gets blamed to cause a fire when in reality there are many confounding factors. it is likely that a down power line caused the fire (there are online video footage suggesting so) but then again what is an utility going to do about. Do they shut down the power every time there is a fire hazard condition? Are they going to harden the grid moving power lines under ground? That would need to be paid by power customers and electricity is already very expensive on the Island. Also, al these things have to be approved by the regulator which if they had foresight they could have required the utlity company to do something beforehand, but of course that would have resulted in even higher rates.

 

Then on some broader implications this tail risk is going to be real pressure on valuation of utility stocks, imo. The higher bond yield are bad enough but how can you live with utility stocks yielding 3-3.5% and significant tail risk while you can get ~6% bond yields in high grade bond funds and very little risk. This relative disconnect makes no sense to me and I think utility stocks will look fairly ugly in the future.

Edited August 21, 2023 by Spekulatius

[thepupil]

1 hour ago, Spekulatius said:

A couple of loosely connected thought on this tragedy:

 

There is a lot of bad takes on this. One thing we hear is that colonialism is to blame for the fire and lack of water but how can this be? Colonialsms ceased to exist more than 100 years ago - so there was no time to fix whatever issue this may have caused? There is also very little agriculture in Maui any more - most pineapple planting are long gone (too expensive I guess).

 

Also over - tourism is to blame/ Lahaina is more of a visitors than a hotel destination. We visited the town for a daytrip  on our Maui stay in 2021 and that's pretty typical. With no / or less tourist visiting, how are people going to make a living there. There are plenty of rich people living there but the working population needs tourism as there are virtually no other jobs there.

 

Then related - i think this is a second strike after PG&E where an utility got gets blamed to cause a fire when in reality there are many confounding factors. it is likely that a down power line caused the fire (there are online video footage suggesting so) but then again what is an utility going to do about. Do they shut down the power every time there is a fire hazard condition? Are they going to harden the grid moving power lines under ground? That would need to be paid by power customers and electricity is already very expensive on the Island. Also, al these things have to be approved by the regulator which if they had foresight they could have required the utlity company to do something beforehand, but of course that would have resulted in even higher rates.

 

Then on some broader implications this tail risk is going to be real pressure on valuation of utility stocks, imo. The higher bond yield are bad enough but how can you live with utility stocks yielding 3-3.5% and significant tail risk while you can get ~6% bond yields in high grade bond funds and very little risk. This relative disconnect makes no sense to me and I think utility stocks will look fairly ugly in the future.

 

agree completely. If we think of Utilities as a perpetual TIP, then we've seen the competing 10-30 yr TIPS go from negative yields to 2%+ with little corresponding de-rating from utilities and that's just from rates alone. When you add in the asymmetry regarding these liabilities, it really seems unattractive. Why pay 200% of book value for a 8-9% ROE (4% earnings yield with a slow inflaiton increase) when you can get 2% real from TIPS or 6-7% nominal from bonds. 

 

Here's the 2006-2022 and 2012-2022  Per share growth in fundamental metrics. Maybe go forward's a bit better if we have higher inflation, but certainly a shitty starting point. This argument is probably stronger than the staples discussed in the KVUE thread because utilities have just as weak long term growth w/ far greater capital intensity. 

 

Another way to think about it is the utilities index returned about 9% / yr w/ divvies reinvested over the last 10 years. over that time frame the index re-rated from 1.5x book to 2.0x book, so you had a nice ~3% / yr from re-rating. If you think that's goes from a positive to negative, then the total return prospects for utility stocks are quite low. 

 

 

Edited August 21, 2023 by thepupil

[RedLion]

Does anyone have an investment position in this? Or a derivative type play like real estate? 

 

I feel like one play here is to just buy "affordable" housing on maui. There will be a huge demand for rentals as these fire victims move out of their short term hotel accommodations. There's already an extremely tight rental market and very favorable property tax regime for long term rentals. 

 

Insurance companies should be paying to house victims during the rebuild. And the rebuild is going to soak up all the available contractors/labor on the market. It was already incredibly difficult to build more affordable options in Maui because all the skilled workforce is working on mega mansions. 

 

Obviously there will also be a lot of people getting cash payouts from their insurance, and those will likely buy up the little remaining housing stock on the island. 

 

I've always wanted to own real estate on Maui, but I've got to say the setup in terms of supply/demand seems extremely favorable right now even though prices are quite high. I'm seeing condos in Kihei that looks like you should be able to do about a 4.5% CAP rate with a property manager in place (long term rentals), and that's based on pre-fire rents which most likely see some significant upside particularly since insurance companies should be on the hook. If I can buy something at a 4.5% CAP rate in one of the most desirable locations in the world with huge barriers to building new supply, and some short term tailwinds in terms of NOI upside potential, I'm all over that. 

 

 

 

 

[Spekulatius]

2 hours ago, RedLion said:

Does anyone have an investment position in this? Or a derivative type play like real estate? 

 

I feel like one play here is to just buy "affordable" housing on maui. There will be a huge demand for rentals as these fire victims move out of their short term hotel accommodations. There's already an extremely tight rental market and very favorable property tax regime for long term rentals. 

 

Insurance companies should be paying to house victims during the rebuild. And the rebuild is going to soak up all the available contractors/labor on the market. It was already incredibly difficult to build more affordable options in Maui because all the skilled workforce is working on mega mansions. 

 

Obviously there will also be a lot of people getting cash payouts from their insurance, and those will likely buy up the little remaining housing stock on the island. 

 

I've always wanted to own real estate on Maui, but I've got to say the setup in terms of supply/demand seems extremely favorable right now even though prices are quite high. I'm seeing condos in Kihei that looks like you should be able to do about a 4.5% CAP rate with a property manager in place (long term rentals), and that's based on pre-fire rents which most likely see some significant upside particularly since insurance companies should be on the hook. If I can buy something at a 4.5% CAP rate in one of the most desirable locations in the world with huge barriers to building new supply, and some short term tailwinds in terms of NOI upside potential, I'm all over that. 

 

 

 

 

I think they need to repurpose apartment targeted for tourists (like the 1.5 room we rented in Kihei) to bridge over the now homeless people in Laheina. There are tons of tourist apartments in Maui and my guess is that demand will take a little bit of a damper there anyways. Lahaina's population is only 12.7k people and not all of them have lost their homes.

[RedLion]

25 minutes ago, Spekulatius said:

I think they need to repurpose apartment targeted for tourists (like the 1.5 room we rented in Kihei) to bridge over the now homeless people in Laheina. There are tons of tourist apartments in Maui and my guess is that demand will take a little bit of a damper there anyways. Lahaina's population is only 12.7k people and not all of them have lost their homes.

I'm sure they will repurpose these, but they're renting out at the low end for about $5000-$6000 a month whereas the long term rental rates are closer to $3000 for a 2 bedroom. I doubt they will be making serious price concessions on the short term rentals, because most likely the insurance companies will foot the bills. But the question becomes whether it makes sense to put someone up for 2 years in a short term rental. It probably does because there's no where else to find housing for everyone. 

[fareastwarriors]

https://www.cnbc.com/2023/08/28/hawaiian-electric-points-finger-at-maui-county-over-wildfires.html