Fitch Assigns Initial Ratings to Hawaiian Electric Industries & Hawaiian
NEW YORK -- January 21, 2014
Fitch Ratings has assigned initial ratings to Hawaiian Electric Industries,
Inc. (HEI) and Hawaiian Electric Company (HECO) as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt BBB;
--Short-term IDR 'F3';
--Commercial paper 'F3'.
--Long-term IDR 'BBB+';
--Senior unsecured debt 'A-';
--Subordinated debt 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
HEI is the parent of HECO and American Savings Bank FSB, a $5 billion bank
headquartered in Honolulu, Hawaii with branch offices throughout the Hawaiian
Islands. Due to the uncommon business mix of a utility and bank and
incompatibility of key financial statement and performance metrics, Fitch
analyzes and assigns ratings to HEI based on its cash flows, in the form
dividends received from HECO and ASB, as opposed to its consolidated financial
HEI KEY RATING DRIVERS
--Ownership of two investment grade subsidiaries;
--Subordination of cash flows;
--Moderate degree of parent level debt leverage.
HEI's credit profile reflects that of its investment grade subsidiaries, HECO
and ASB with ratings pressured by a moderate amount of parent level debt
leverage and a moderately high common dividend payout ratio. HECO is the
larger of the two subsidiaries, accounting for approximately two thirds of
earnings and cash flows. Fitch normally factors in cash flow subordination for
utility parent companies which are reliant on dividends from subsidiaries; for
HEI, such subordination is elevated as dividends from ASB are subject to
various federal regulatory restrictions and/or approvals.
HEI exhibits strong financial flexibility. In Fitch's base case and stress
case models, HEI's contractual obligations consist only of debt service on
parent level debt averaging approximately $20 million per annum, while the
common dividend to shareholders (approximately $100 million per annum)
represents the majority of HEI's cash use. Fitch has assumed an upstream
dividend rate to HEI equal to 70% of HECO's and ASB's net income providing a
small cushion to meet HEI's cash needs. HECO's earnings and cash flows reflect
substantial stability and predictability based on a revenue decoupling
mechanism, while ASB's earnings can be more volatile, it performed well during
the recent financial crisis and is entering a more stable macroeconomic
environment which should result in continued stable performance.
HECO will be free cash flow negative through 2015 reflecting a large capital
investment plan and will be dependent on HEI for equity infusions in order to
manage its capital structure currently at regulatory authorized levels at a
56% to 57% equity component. HEI, in turn, will require external financing to
meet its equity commitment to HECO and has entered into an equity forward
agreement with third parties. In December 2013, HEI drew $32 million under the
forward agreement to downstream as equity to HECO. Fitch also expects HEI to
issue debt to partially meet its equity commitment to HECO consistent within
the existing consolidated capital structure.
Fitch uses the multiple of equity investment in subsidiaries to consolidated
equity as a proxy for double leverage. At year-end 2012, HEI's investment in
HECO and ASB totaled $1,970 million while its consolidated equity was $1,594
million resulting in parent/subsidiary leverage of 1.24x. Fitch expects parent
level leverage to remain steady through the elevated capex program at HECO.
Liquidity is adequate. HEI has an upcoming $100 million debt maturity of
relatively high coupon 6.51% debt which Fitch models to be refinanced at a
coupon approximately 150bps lower than the maturing debt. Fitch believes HEI
has ready access to public and private placement markets. Short-term liquidity
is provided by a $125 bank credit facility maturing in 2016 which also
supports a commercial paper program.
Credit concerns are principally centered on the higher risk business profile
through ownership of a bank especially in contrast with the low risk business
profile of HECO. Financially, HEI is dependent on upstream dividends from ASB
in order for HEI to continue its financial management strategies, including
maintaining the common dividend which totals approximately $100 million per
annum and represents over 70% of consolidated earnings. The dependence on ASB
dividends will be particularly acute over the 2013 to 2015 time period when
HECO will be free cash flow negative.
HECO KEY RATING DRIVERS
Constructive regulatory environment: Fitch considers the regulatory
environment in Hawaii to be constructive and progressive. HECO enjoys full
revenue decoupling, fuel and purchased power pass-through recovery, rates
based on forward test years, a strong 56% equity component in its authorized
capital structure, and recovery of increases in certain operating expenses and
capital investments between rate cases through riders. These key features
reduce regulatory lag and afford earnings and cash flow stability.
Fitch expects HECO to file two General Rate Cases in 2014, one for its Oahu
utility operation and another for the Maui Electric subsidiary. Fitch has not
factored in material changes to the tariff or recovery mechanisms in its
Solid credit profile: Historical and projected credit measures are strong and
are modestly in excess of Fitch's target credit metrics for 'BBB+' integrated
electric utilities. Over the financial forecast period through 2015, Fitch
estimates EBITDA/Interest and Funds from Operations (FFO)/Interest will
average more than 6.0x and 5.0x, respectively, with FFO/Debt more than 20% and
Debt/EBITDA at approximately 3.0x. The strong performance reflects
expectations of parental support to retain the existing 56% capital structure
and adequate and timely recovery of proposed capital investments.
Elevated capital investment cycle: Fitch expects capex at HECO to approach
$950 million over the two-year 2014 to 2015 time horizon. Fitch expects HECO
to retain its present capital structure and leverage profile with periodic
equity infusions from HEI during the build-out period.
Atypical power/retail electricity market structure: HECO operates in isolated
island markets with separate power grids which result in a higher operating
cost structure and necessary investment in redundant infrastructure.
Electricity generation remains predominantly fuel oil based, resulting in high
power prices as imported fuel oil in Hawaii is typically 25% to 30% above
mainland pricing benchmarks. HECO's retail electricity rates at approximately
$0.32 per kwh are more than 2.5x the national average. While Hawaii has fairly
aggressive Renewable Portfolio Standards (RPS), due to the high cost of
existing generation and good wind resource, renewable generation can
economically replace existing fossil fuel generation. Consequently, Fitch does
not have specific concerns over the RPS requirement.
Emerging competitive landscape: A number of emerging industry issues are
playing out in Hawaii today. HECO's retail electricity sales have declined
approximately 8% over the five year period from 2008 to 2012 and continue to
be under pressure in 2013. While revenue decoupling protects HECO's margins,
declining sales further pressures unit costs. Declining electricity sales is
attributable to customers using self-generation through rooftop solar
photovoltaic (PV) systems (distributed generation), and to a lesser extent,
energy efficiency. Given the high retail price of electricity, distributed
generation and efficiency investments are economical even without subsidies.
Approximately 8% to 9% of HECO's customers have rooftop PV systems that
substantially reduces their own consumption of utility supplied power and
through net metering, allows customers to sell excess generation back to the
utility. With utility system operating and maintenance expenses largely
collected based on consumption, there is some measure of cost shifting to
non-net metering customers. This in turn further pressures unit costs and
improves the economics of new distributed generation and efficiency
investments that will further reduce electricity sales. Continued declines in
electricity sales would pressure HECO's credit profile even with continued
revenue decoupling and residential rate design changes that address cost
Fitch maintains a private rating opinion on ASB to support its credit analysis
and rating of HEI. ASB exhibits a strong financial profile weighed against its
relatively small size and market concentration. ASB is the third largest bank
in Hawaii, a highly concentrated banking market. Notably, ASB's financial
performance was fairly stable during the recent financial crisis.
Future developments that may individually or collectively lead to positive
rating action include:
--A positive rating action for HEI is not considered likely given its present
business mix. A positive rating for HECO post completion of its elevated capex
program in 2015 is possible.
Future developments that may individually or collectively lead to a negative
rating action include:
--HEI is dependent on dividends from HEI and ASB. If operating performance or
regulatory restrictions reduce dividend payments, HEI's ratings would be
--An inability to earn an adequate and timely recovery of invested capital
would likely lead to lower ratings at HECO and pressure ratings at HEI.
--Accelerating competitive inroads by distributed generation and energy
efficiency would pressure HECO's ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 18, 2013;
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Recovery Ratings and Notching Criteria for Utilities
Global Financial Institutions Rating Criteria
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