Approximately $1.6 billion of debt outstanding
New York, April 20, 2021 -- Moody's Investors Service ("Moody's") today upgraded Hawaiian
Electric Company, Inc.'s (HECO) senior unsecured rating
and issuer rating to Baa1 from Baa2 and affirmed its P-2 short-term
rating for commercial paper. At the same time, we upgraded
parent company Hawaiian Electric Industries, Inc.'
(HEI) short-term rating for commercial paper to P-2 from
P-3. The outlook of both entities is stable. HECO's
senior unsecured rating applies to its industrial revenue bonds,
which are issued through a conduit entity. See rating list below
for the full list of rating actions.
RATINGS RATIONALE
"The upgrade reflects Hawaiian Electric's considerable progress
in adding renewable resources to its energy supply mix and the improving
regulatory relationship with Hawaii Public Utilities Commission (HPUC),"
said Toby Shea, VP - Sr. Credit Officer. "We
view the performance based regulation (PBR)[1] framework approved
in December 2020 as an indication that the HPUC intends to balance the
interests of various stakeholders, while providing meaningful incentives
for the utility to improve its performance," added Shea.
Parent company HEI's credit profile primarily reflects the strength
of its utility subsidiary HECO and, to a lesser extent, its
banking subsidiary -- American Saving Bank (ASB), which we
view as having an investment-grade credit profile. HEI derives
about 80% of its cash flow from operations and 75% operating
income from HECO. HEI's holding company debt comprises about 25%
of its consolidated debt.
HECO's credit profile reflects its regulated utility operations
and adequate cash flow metrics. HECO has a higher business risk
profile than most utilities because it is small and its remote location
makes it expensive to provide electric service. The company also
faces considerable pressure from regulators and investors to replace its
fuel-oil-dominated generation base with renewable energy
and battery storage.
HECO's relationship with the HPUC and other stakeholders has improved
significantly over the past few years, as HECO has aggressively
pursued renewable generation and battery storage. In 2020,
the utility achieved a renewable portfolio standard (RPS) of 34.5%,
exceeding the 30% statutory milestone. At the end of 2020,
the HPUC issued an order implementing a set of performance-based
regulations (PBR) that will allow HECO to profit from improved performance.
HECO generates adequate cash flow from operations to support its debt
burden. The utility's adjusted funds from operations (FFO) to debt
ratio has fluctuated between 18% and 19% over the past four
years and the company should be able to maintain its FFO to debt ratio
in this range going forward. However, the company CFO pre-WC
is lower and more volatile than its FFO due to adjustments to assets and
liabilities associated with asset retirement obligations. On average,
we anticipate that HECO's CFO pre-WC to debt will be about
200 basis points lower than its FFO to debt, which will continue
to constrain its credit profile.
In addition, HECO's cash flow to debt ratios are heavily burdened
by an unusually large underfunded pension liability. The pension
adjustment raises HECO's debt by about 32%, while it
lowers HECO's cash flow to debt metrics by a substantial 500 to
600 basis points.
HEI's cash flow to debt ratios are adequate for its rating.
It generally tracks HECO's cash flow to debt ratios, but is
about 100 to 200 basis points lower due to the level of parent company
debt.
Liquidity
We expect HEI and HECO to maintain an adequate liquidity profile over
the next 12-18 months.
The consolidated company generates enough cash flow from operations to
cover most of its capital expenditures. HECO has access to a $200
million revolving credit facility, and HEI has access to a $150
million revolving credit facility, both of which expire on 30 June
2022. The companies are in the process of renewing and extending
these credit facilities. At yearend 2020, both credit facilities
were undrawn, but a portion of HEI's revolving credit facility was
used to support $65 million of commercial paper outstanding.
HECO and HEI's revolving credit facilities do not contain any rating triggers
that would affect access to the commitments and do not require a material
adverse change (MAC) representation for borrowings. HEI's credit
facility does contain a financial covenant requiring HEI to maintain a
debt to capitalization ratio (on a non-consolidated basis) of less
than 50%. For HECO's revolving credit facilities,
the requirement is to maintain at least 35% equity at consolidated
HECO. Both HEI and HECO have capitalization ratios that are well
within their covenant requirements.
The company has prefunded its 2021 debt maturities and will have about
$241 million of debt due in 2022.
At yearend 2020, HEI had an unrestricted cash balance of $341
million on a consolidated basis.
Rating outlook
HEI and HECO's stable outlooks reflect HECO's progress in growing
its renewable generation, adequate financial metrics for the rating,
and a credit supportive regulatory environment in Hawaii, including
the recently implemented performance based regulations.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
We could take positive rating action on HECO if the company generates
CFO pre-WC to debt above 20% on a sustained basis and continues
with its progress on renewable energy transition. An upgrade of
HEI's commercial paper rating could occur if there is a multiple
notch upgrade of HECO's senior unsecured rating to A1 or higher.
Factors that could lead to a downgrade
We could take negative rating action on HECO if its regulatory relationship
deteriorates or the utility experiences material reliability issues or
setbacks with its renewable energy transition. We could also take
negative rating action should HECO's CFO pre-WC to debt ratio fall
below 16% on a sustained basis.
HEI's commercial paper rating would likely be downgraded if HECO's
senior unsecured rating falls to Baa2 or HEI's CFO pre-WC
to debt ratio falls below 14%.
Upgrades:
..Issuer: Hawaiian Electric Company, Inc.
.... Issuer Rating, Upgraded to Baa1
from Baa2
....Preferred Stock, Upgraded to Baa3
from Ba1
..Issuer: Hawaii Department of Budget & Finance
....Senior Unsecured Revenue Bonds,
Upgraded to Baa1 from Baa2
....Senior Unsecured Underlying Revenue Bonds,
Upgraded to Baa1 from Baa2
..Issuer: Hawaiian Electric Industries, Inc.
.... Commercial Paper, Upgraded to P-2
from P-3
Affirmations:
..Issuer: Hawaiian Electric Company, Inc.
.... Commercial Paper, Affirmed P-2
Outlook Actions:
..Issuer: Hawaiian Electric Company, Inc.
....Outlook, Changed To Stable From
Positive
..Issuer: Hawaiian Electric Industries, Inc.
....Outlook, Changed To Stable From
Positive
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] PUC Hawaii Decision and Order No. 37507 23-Dec-2020
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
