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30 Jul 2010
Approximately $1.4 Billion of Debt Securities Affected.
New York, July 30, 2010 -- Moody's Investors Service affirmed the ratings of Hawaiian Electric Industries,
Inc. (HEI: Baa2 senior unsecured) and its subsidiary,
Hawaiian Electric Company, Inc. (HECO: Baa1 senior
unsecured), and changed the rating outlook to stable from negative
at HEI, HECO, HECO Capital Trust III, Hawaiian Electric
Industries Capital Trust II, and Hawaiian Electric Industries Capital
"The ratings affirmation and outlook change to stable reflects the
progress being made by the company and various stakeholders within the
state to transform the regulatory framework for HEI's electric utilities
to a structure that will reduce sales volume risk and produce more timely
recovery of invested capital and operations and maintenance (O&M)
costs," said A.J. Sabatelle, Senior Vice
President at Moody's.
The ratings affirmation factors in the continued implementation of the
Hawaiian Clean Energy Initiative (HCEI), adopted in 2008,
which is intended to reduce the state's reliance on fossil fuels
for electric production, increase the use of renewable resources,
and expand existing conservation measures in the state. To facilitate
this transition, the Public Utilities Commission of the State of
Hawaii (Hawaii PUC), in February 2010, granted HEI's
utilities' request for revenue decoupling which encourages energy
efficiency programs while insulating the utility from declines in sales
volumes. The decoupling order also allows the utilities to recover
increases in O&M costs and in rate base additions through an annual
rate adjustment mechanism. Moody's believes this decoupling
order, when fully implemented, should set the stage for more
stable earnings and cash flow as it should mitigate the company's
current exposure to regulatory lag and sales volume declines that can
happen within HEI's service territory.
Moody's observes that HEI's and HECO's financial metrics
for 2009 and for LTM March 31, 2010 remain somewhat weak for their
current ratings reflecting the degree of regulatory lag that persists
in the existing regulatory model along with the impact that the recession
had on kilowatt hour sales and related revenues. However,
we believe that the Hawaii PUC's granting of interim rate relief
in the HECO 2009 rate case during February 2010 and August 2009 and in
the Maui Electric Company, Limited (MECO) 2010 rate case (rendered
on July 27th) should help stabilize current year financial results.
This is especially true once the Hawaii PUC provides a final sign-off
on the decoupling order. For more information on the regulatory
developments at HECO and its subsidiaries, please refer to the HECO
Credit Opinion, which can be found on moody's.com under
The rating affirmation also factors in the improvement occurring at American
Savings Bank, FSB (ASB: A3 senior unsecured; stable outlook),
HEI's other primary holding. Over the past eighteen months,
management initiatives have improved the bank's profitability,
which when combined with the bank's strong capital base and other
balance sheet restructuring measures completed during 2008 and 2009,
provided HEI with approximately $158 million of dividends during
these two years. Receipt of ASB dividends, HEI's issuance
of $115 million of common stock during 2008, and an ongoing
HEI dividend reinvestment program have helped to provide equity capital
in support of HECO's substantial capital investment program and
to fund HEI's dividend to shareholders. With respect to HEI's
dividend, which exceeded earnings in 2009 and LTM March 31,
2010, we believe that a fully implemented decoupling order at the
utilities plus sustainable bank profitability should enable the dividend
payout ratio to reduce to a level that is more in line with its utility
holding company peers.
The stable rating outlook at HEI and HECO incorporates our belief that
the regulatory transition underway in Hawaii will proceed in an orderly
fashion with the Hawaii PUC issuing the final decoupling order during
2010. The stable rating outlook factors in our expectation that
profitability initiatives at ASB will produce fairly predictable earnings
enabling the bank to provide regular dividends to HEI without jeopardizing
the bank's strong capital position.
Given the capital growth programs contemplated at the utilities under
HCEI, HECO is expected to provide a higher proportion of HEI's
future earnings and cash flow, particularly since ASB faces competitive
challenges in growing earnings within Hawaii. As such, any
rating change for HEI will largely be driven by the utility's performance.
HECO's ratings could be upgraded if the regulatory transition is
executed in a way that leads to an improvement in credit metrics such
that the utility's cash flow to debt exceeds 22% and its
cash flow coverage of interest is in excess of 4.5x on a sustainable
The ratings could be downgraded if the Hawaii PUC does not follow through
with the regulatory transformation contemplated under the HCEI,
including all elements of the decoupling mechanism. Quantitatively,
the ratings could be downgraded if the utilities' cash flow to debt
declined to below 17% on a sustainable basis and its cash flow
coverage of interest fell below 3.5x.
The last rating action on HECO and HEI was on July 20, 2009,
when the rating outlooks were changed to negative from stable.
The principal methodologies used in rating HEI and HECO was Rating Methodology:
Regulated Electric & Gas Utilities, published in August 2009,
and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in Honolulu, Hawaii, HECO and its subsidiaries,
MECO and Hawaii Electric Light Company, Inc (HELCO) supply power
to 95% of the Hawaii electric public utility market. HECO
serves the island of Oahu; MECO serves the islands of Maui,
Molokai, and Lanai; and HELCO serves the island of Hawaii.
HECO is 100% owned by HEI, a holding company whose principal
subsidiaries are engaged in the electric utility and banking businesses
operating primarily in Hawaii.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's affirms Hawaiian Electric's ratings; outlook stable
No Related Data.
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