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Rating Action:

Moody's upgrades Hawaiian Electric Company to Baa1; outlook stable

20 Apr 2021

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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

No Related Data.
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