Breakingviews - Climate change turns US utilities grimly exciting - Reuters

Climate change turns US utilities grimly exciting | Reuters

Climate change turns US utilities grimly exciting

U.S. President Joe Biden and first lady Jill Biden accompanied by Hawaii Governor Josh Green and Jaime Green, First Lady of Hawaii, visit the fire-ravaged town of Lahaina on the island of Maui in Hawaii, U.S., August 21, 2023. REUTERS/Kevin Lamarque Acquire Licensing Rights

NEW YORK, Aug 31 (Reuters Breakingviews) - Investing in a utility is supposed to be as boring and reliable as turning on the lights. A hotter and stormier world is making life unpleasantly exciting for shareholders, as Hawaiian Electric Industries (HE.N) shows.

The holding company for the state’s largest electricity provider faces multiple lawsuits alleging its power lines set an increasingly drought-stricken landscape on fire earlier this month. The blaze destroyed the town of Lahaina in Maui, killing over 100. The company says its gear apparently did set a fire, but firefighters left and declared it extinguished, and a later fire in the same area caused the damage.

Nevertheless, HEI has suspended its dividend while both the parent company and its subsidiary have drawn down revolving loans. That may not be enough. If the company is found liable, potential damages could exceed $3.8 billion according to Fitch, possibly forcing HEI to seek protection from its creditors. That’s what happened to California’s PG&E (PCG.N) in 2019. The largest utility in the United States eventually paid over $25 billion to settle wildfire-related claims. Little wonder that HEI shares have lost two-thirds of their value in the past month, shrinking its market value to $1.5 billion.

The Hawaiian disaster is a confluence of two trends: a warming planet, and the American penchant for suing companies. Risks vary by jurisdiction: PG&E’s bankruptcy was largely because Californian utilities are liable for fires set by their equipment, even if the company is not negligent. Hawaiian law allows the same legal notion, though applying it to a utility is novel.

The United States also suffers heightened threats from climate change. Weather-related losses in the Americas usually exceed those in Europe. Yet while European firms have buried power lines underground to avoid damage from storm and fires, American utilities have generally balked.

Utilities in less litigious places will also be affected, though. The industry is capital-intensive, much of its gear is exposed to the elements, and customers expect the lights to stay on. Hurricanes, storms, and intense heat make providing electricity more difficult. According to U.S. government data, outages are more common and last longer.

Increased investment is only a partial solution. The Lawrence Berkeley National Lab estimates that if U.S. utilities aggressively spend to put electric lines underground and increase maintenance, the cost to consumers from outages might be limited to about $200 billion annually by the end of the century. That figure, which doesn’t account for the indirect economic effects and ironically excludes Hawaii and Alaska, is about three times higher than today.

Even so, the electricity industry is upping spending. The 28 biggest U.S. utilities will invest about $475 billion in capital equipment from 2022 to 2024, 25% more than in the previous three years, estimates Moody’s.

Extra spending typically benefits investors, as regulators allow utilities to earn a regulated return on their investment by charging higher rates. But there are limits to squeezing consumers. Hawaii’s retail electricity prices are already the most expensive in the United States, at over 2.5 times the national average. Raising rates to rebuild, let alone strengthen the grid, will be politically unpalatable, even in a state where Governor Josh Green has said climate change is amplifying costs. That may leave taxpayers or shareholders to shoulder the extra costs – or the increased risk of future problems.

Some firms appear particularly at risk. California utilities PG&E and Edison International (EIX.N) grapple with wildfires, while New York-based Consolidated Edison (ED.N) and Entergy (ETR.N), which serves states including Arkansas, Louisiana, and Texas, are at risk from coastal flooding. All four have been walloped in recent years, and the total return on their shares has lagged the Dow Jones Utility Average Index (.DJU) over the past decade.

But investors may be taking note more generally. Over the past five years, total returns for the index have averaged 7% annually, down from an average of 10% over the past 20 years. For shareholders in utilities, a supposedly reliable investment is increasingly becoming a hot and sticky mess.

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CONTEXT NEWS

Maui county in Hawaii sued Hawaiian Electric on Aug. 24, alleging the utility’s negligence caused wildfires that destroyed the town of Lahaina, killing over 100 people.

The county alleges the utility didn’t properly maintain its electric grid and failed to shut down power lines on Aug. 7 despite warnings of high-speed winds. The county said fallen lines sparked wildfires.

The utility says its equipment did start a blaze, but the fire department responded and later said it was extinguished. The firm said a second fire began in the same area several hours later, after the utility had turned off local power lines.

Separately, Hawaiian Electric Industries, the parent company of Hawaiian Electric, said on Aug. 24 it had suspended its dividend. The company said HEI had withdrawn $170 million and Hawaiian Electric had withdrawn $200 million from their existing revolving unsecured credit facilities to strengthen their balance sheets.

Editing by Peter Thal Larsen, Sharon Lam and Aditya Sriwatsav

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