Horizon Kinetics: Hawaiian Electric ($HE) Investment Case
In their Q1 2025 market commentary, Horizon Kinetics presents Hawaiian Electric Industries Inc. ($HE) as a compelling example of their “equity yield curve” investment philosophy. The firm highlights HE as a direct demonstration of how temporary market dislocations can create significant opportunities for patient investors. Horizon Kinetics emphasizes their approach of identifying predictive rather than descriptive attributes in investments, focusing on companies where short-term challenges obscure long-term normalized earnings potential. Their investment in Hawaiian Electric reflects their commitment to finding overlooked value in situations where market participants lack the patience to see through temporary disruptions to underlying business fundamentals.
Investment Highlight: Hawaiian Electric Industries Inc. ($HE)
Business Overview
- Pure-play utility company serving Hawaiian islands
- Operates under performance-based regulation framework with local public utility commission
- Recently divested 90.1% stake in American Savings Bank (sold December 31, 2024)
- No longer subject to bank capital regulation, now simplified utility structure
- Maintained uninterrupted dividend payments from 1901 until Q3 2023
Market Position
- Regional monopoly status with regulated revenue and profit structure
- Annual revenue adjustment mechanism and earnings-sharing framework
- Limited growth potential but historically low risk profile
- Unique complexity of securing energy for remote island location
Performance Analysis
- Current Financial Impact:
- Stock declined 74% intramonth (August 8-25, 2023): $37.36 to $9.66
- Dividend suspended since Q3 2023 to preserve capital for legal liabilities
- Core income from electric utility segment: $180.7 million in 2024
- Q4 2024 GAAP utility income comparable to Q4 2022 levels
- Settlement and Capital Structure:
- $1.92 billion settlement agreement over four years
- $479 million annual payments beginning Q4 2025
- Company committed to not raising rates in response to settlement
- Earnings-sharing agreement temporarily suspended
Normalized Earnings Potential
- Core business capable of generating at least $150 million annually
- Additional upside from future tax benefits on prior losses
- Management believes liquidity measures have alleviated going-concern risks
- Underlying utility operations remain largely unchanged from pre-crisis levels
Capital Allocation and Financing
- $1.44 billion required for remaining wildfire liabilities
- $600 million contribution from normalized earnings over four years
- $380 million available from American Savings Bank sale proceeds
- Additional $523 million liquidity through various facilities:
- At-the-market equity program ($250 million)
- Utility accounts receivable-backed credit facility ($239 million)
- Credit facility capacity ($34 million)
Valuation Analysis
- Current price represents one-quarter of pre-crisis valuation
- Potential shareholder dilution to approximately 80% ownership (conservative scenario)
- Four-year discount rate application for regulated utility appears excessive
- Normalized dividend resumption likely once settlement obligations completed
Investment Thesis – Equity Yield Curve Application
- Market lacks patience for temporary disruption resolution
- Visibility into normalized dividends and capital requirements
- Clear timeline for settlement obligations (four years)
- Fundamental business operations unchanged from pre-crisis period
Risks
- Potential shareholder dilution from equity financing
- Regulatory restrictions on rate increases
- Continued legal or operational challenges
- Extended timeline before dividend resumption
- Market sentiment and reputational overhang
Other Key Points
- Temporary suspension of earnings-sharing agreement noted by management
- Simplified business structure following bank divestiture
- Clear settlement timeline provides investment visibility
- Regulated utility framework limits downside risk in normal operations
Horizon Kinetics views Hawaiian Electric as a prime example of how short-term market dislocations can create attractive long-term opportunities for patient capital. They believe the market’s focus on temporary limitations obscures the underlying value of a regulated utility with predictable normalized earnings potential, presenting an opportunity to acquire quality assets at significant discounts to intrinsic value.
