���������ֳ�

���������ֳ�-New York-30 August 2018: ���������ֳ� has affirmed the Issuer Default Rating (IDR) for Hawaiian Electric Industries, Inc. (HEI) at 'BBB' and the IDR of Hawaiian Electric Company (HECO) at 'BBB+' with a Stable Outlook.

The affirmation of HEI reflects the stable operating performance of its electric and banking subsidiaries over the forecast period as well as modest incremental holding company leverage. HECO is the core subsidiary, providing approximately 65%-75% of net income with the balance coming from upstream dividends from ASB. The ratings affirmation for HECO is supported by the balanced regulatory environment in Hawaii that provides relatively stable cash flows and earnings. The move toward performance-based rate making (PBR) to be implemented by the HPUC by 2020 is an intermediate concern. While Hawaii's long-term renewable portfolio standards (RPS) are aggressive, HECO's capital plans to meet and exceed the 30% target by 2020 presents, in ���������ֳ�'s view, modest execution and financing risk. ���������ֳ� expects HECO to maintain strong credit metrics compared with its 'BBB+' peers over the 2018-2020 period, including adjusted debt to EBITDAR and adjusted FFO leverage around 3.0x-3.3x

KEY RATING DRIVERS

Key Rating Drivers for HEI
Supported by Stable Subsidiaries: HEI's ratings are supported by the stable credit profiles of its primary subsidiaries, HECO and American Savings Bank FSB (ASB). HECO has historically represented approximately 65% to 75% of HEI's net income, with upstream dividends from ASB accounting for the remainder.

Predictable Utility Earnings: ���������ֳ� views the regulatory construct in Hawaii as generally balanced toward HECO but evolving. HECO's earnings and cash flows reflect substantial stability and predictability based on a revenue decoupling and rate adjustment mechanism, as well as fuel (at HECO covering 98% of costs with any gains or losses from the balance capped at $2.5 million), purchased power adjustment and capital projects recovery clauses. ���������ֳ� expects the resumption of the triennial rate case cycle will support modest EBITDAR growth over the forecast period. The growth of rooftop solar photovoltaic (PV) systems, eroding electricity demand, and aggressive renewable portfolio standards (RPS) pressuring capex are intermediate to long-term credit concerns but not material rating drivers over the rating horizon.

Consistent Bank Performance: ASB exhibits solid profitability and high-quality deposit mix weighed against its relatively small size and market concentration. ASB is the third-largest bank in Hawaii, a highly concentrated but stable banking market. Additionally, ASB has maintained appropriate levels of capital, with Tier 1 leverage and total capital ratios at 8.6% and 13.9%, respectively, as of June 30, 2018. ���������ֳ� views these capital levels as adequate to offset any unexpected credit losses given the company's benign loss history.

Adequate Financial Flexibility: Low parent-level debt, stable dividend stream from ASB, modest equity needs at HECO and full availability under committed lines of credit underpin HEI's financial flexibility. ���������ֳ� expects HEI to refinance upcoming debt maturities and incur modest incremental parent-level debt to support growth initiatives in 2018-2020.

Parent Subsidiary Rating Linkage: ���������ֳ� considers HECO to be stronger than HEI due to the low risk business arising from the regulated utility operations, predictable cash flow and low leverage. While operational and strategic ties are robust, a prescribed regulatory capital structure for HECO leads to moderate linkage with HEI allowing for HECO's IDR to be notched above HEI's. However, HECO remains the primary driver of earnings and cash flow to support parent level dividends and its rating reflects its stand-alone credit profile while HEI's ratings reflect a consolidated credit profile. ���������ֳ� has applied a bottom-up approach in rating HEI and HECO and would limit the notching difference between the IDRs of HEI and HECO to one notch.

Key Rating Drivers for HECO
Balanced Regulatory Framework: ���������ֳ� views the regulatory construct in Hawaii as balanced but evolving in response to political pressure to more rapidly move to PBR and renewable power. Many progressive regulatory mechanisms smooth earnings, including revenue decoupling and rate adjustment, forward test years, fuel adjustment, capital projects recovery and purchased power adjustment clauses, as well as a surcharge mechanism for the recovery of renewable energy infrastructure investments. However, the loss of 100% recovery of fuel costs at HECO, a move away from cost of service ratemaking, and a historic 200 bp lag on earned ROE demonstrate are challenges presented by the regulatory construct.

General Rate Cases: Each utility returned to triennial general rate cases (GRC) over the last year and Hawaii Electric Light (HELCO) and HECO received rate orders from the HPUC in 2018. HECO and HELCO's GRCs had interim rate increases of 2.3% and 3.4%, respectively, and a modestly below-average 9.5% ROE. Refunds from the change in the federal income tax rate were refunded at the same time the GRCs were finalized in 2018, netting an overall decrease of $0.6 million and $59,000, respectively, at HECO and HELCO, in revenues. Restrictively, HECO's rate order revises the fuel recovery mechanism to recover 98% of costs, with the balance, both gains and losses, borne by the utility, and the potential loss capped at $2.5 million. Additionally, HECO recognized a $25 million revenue loss from the expiration of the accelerated inflation tracker (RAM) in 2017. Maui Electric (Maui) implemented the HPUC's approved interim rate increase in August 2018 of 3.82% and a 9.5% ROE. This settlement includes the lower corporate tax rate and the amortization of the unprotected excess ADIT but not the amortization of the excess protected ADIT. Under its base case scenario, ���������ֳ� assumes the terms from the interim settlement for Maui.

Aggressive Renewable Targets: The state of Hawaii has set aggressive renewable portfolio standards (RPS) with targets culminating at 100% in 2045. HECO is positioned to exceed the 30% renewable target by 2020 with renewable sources, meeting 27% of energy needs in 2017. A series of plans approved by HPUC lays out a path to exceed the 2020 RPS target. However, achieving the 100% renewable target by 2045 will require significant investments to modernize the electric infrastructure throughout the service area and presents execution and technological risks.

Challenging Political Environment: The recently approved law, The Ratepayer Protection Act (RPA), initiated by the legislature, requires the HPUC to implement PBR (known in Hawaii as performance incentive mechanism, PIM). The utility currently has limited PIMs, with incentive rewards and caps on penalties. Under the RPA, HPUC will study and develop a rate-making model to align investment incentives with RPS and other goals by January 2020, potentially moving away from cost of service, and shifting some risk to the utility to reduce customer rate volatility. ���������ֳ� believes a PIM-based rate-making model may add more uncertainty to cash flow and earnings compared with the current cost of service model.

Recovery of Storm Costs Determined by the HPUC: The full impact and cost to restore service caused by Hurricane Lane, which affected the islands beginning Aug. 22, 2018 is still being determined. HECO does not have a storm cost recovery mechanism in place. Some costs may be captured through the RAM mechanism and HECO may request cost recovery from the HPUC to recover the costs not covered by insurance.

High Penetration of DG: The rapid adoption of distributed generation (DG) has been fueled by high electricity prices, abundant solar resources and government financial incentives. Combined with energy efficiency, this resulted in a 9% decline in electric demand since 2011. Revised rate tariffs to encourage demand response and community solar will accelerate this trend. Revenue decoupling helps to protect margins, and over the longer term, the electrification of the transportation system, including deployment of electric vehicles to meet the local politicians' goal of 100% renewable ground transportation by 2045, may slow and reverse this trend. However, declining sales will pressure unit costs for customers and render investments to upgrade the electric grid more challenging in the near term.

Resilient Credit Metrics: Management expects investments in new generation assets, information technologies, smart grid and battery storage to total $1.3 billion-$1.5 billion over the next three years, up between 30%-50% compared with $1 billion invested in 2014 to 2016. ���������ֳ� expects the incremental revenues from the GRCs and recovery mechanisms for investments will offset the pressure on the credit metrics resulting in relatively stable credit metrics in 2018 to 2020, excluding the one-time impact of the expiration of the accelerated RAM recognition in 2017. Under its base case scenario, ���������ֳ� estimates HECO's adjusted debt to EBITDAR at 3.1x-3.3x and adjusted FFO leverage at 2.9x-3.2x over the forecast period.

DERIVATION SUMMARY

HEI is well positioned compared with its parent holding company peers, Cleco Corp (Cleco; BBB-/Stable), CMS Corp (CMS; BBB/Stable) and DTE (DTE; BBB+/Negative). While HEI, Cleco and CMS own low business risk, regulated businesses, CMS is better positioned with almost all of its income from its Michigan based utility, with only 5% from its bank. Similar to CMS, HEI also owns a bank, which ���������ֳ� considers a higher-risk business than regulated utilities and contributes a larger 25%-30% of operating income. Cleco receives about 30% of income from wholesale medium to long term contracts with cooperative and municipal electric systems. DTE's higher risk midstream operations contribute about 20%-25% of operating income. Like Cleco, CMS, and DTE, HEI's utilities benefit from constructive utility regulation and operate in a single jurisdiction; however, DTE has slightly more diversity as it owns a regulated electric and gas company. All have parent-only debt but HEI is better positioned with parent-level debt about 20% of the total in 2018, compared with approximately 30% for CMS, and an expected 50% for Cleco by 2021. HEI's financial performance is in line with the rating expectations, with FFO-adjusted leverage of 4.5x, similar to CMS at 4.4x, better than Cleco at 7.7x but higher than DTE at 3.8x as of March 31, 2018.

HECO is an integrated electric utility, much smaller in size compared with peers Arizona Public Service Co. (APS: A-/Stable), Nevada Power Company (NPC: A-/Positive) and Puget Sound Energy (PSE, BBB+/Stable). HECO's total assets of $5.7 billion at March 31, 2018 are smaller than APS's total assets of $16.9 billion, PSE's of $11.7 billion and NPC's assets of $8.3 billion. HECO, like its peers, operates in a single state, and has generally balanced regulation. PSE, in ���������ֳ�'s view, has a somewhat more challenging regulatory environment in Washington State. HECO is well positioned financially despite its high FFO-adjusted leverage of 3.8x at Dec. 31, 2017, reflecting the one-time loss of the accelerated RAM and return on pension assets in addition to the reduced cash flow from tax reform. ���������ֳ� expects HECO's leverage will improve to between 2.9x-3.3x during the forecast period, more favorable than NPC's FFO-adjusted leverage of 3.5x, APS's 3.6x and PSE's 3.3x at March 31, 2018.

KEY ASSUMPTIONS

���������ֳ�'s Key Assumptions Within the Rating Case for the Issuer
--HPUC approved GRC for HECO and HELCO and interim settlement for Maui, with ROE lag of about 100 bps over the forecast period;
--HECO capex ranging from $400 million-$500 million annually from 2018-2020, inclusive of the Schofield generation station, modest expansion of the generation fleet and investments in battery storage and smart grid;
--HECO capital structure of about 57% equity-to-capital, with debt issuances and equity contributions as needed to maintain regulatory capital structure;
--HEI capex for Pacific Current;
--To better represent the risk to the consolidated company, ���������ֳ� fully deconsolidated the bank and added the contributions as recurring dividends to HEI, a change from previous forecasts.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action
HEI
--An upgrade of HEI's ratings would be predicated upon an upgrade of HECO, which is unlikely over the next 12-18 months given the expected changes in the rate making methodology to be implemented by January 2020.

HECO
--An upgrade of HECO is considered unlikely over the next 12 to 18 months, given the expected change in rate making methodology, the execution and technical challenges to meeting the aggressive renewable energy standard and the potential on credit metrics.

Developments that May, Individually or Collectively, Lead to Negative Rating Action
HEI
--A change in financial strategy that disproportionately relies on debt funding;
--A material deterioration in HECO's regulatory environment.

HECO
--An inability to earn an adequate and timely recovery on invested capital, including adverse outcomes to pending and planned requests with the HPUC, including GRCs;
--Accelerating competitive inroads by distributed generation and energy efficiency;
--FFO-adjusted leverage greater than 5.0x on a sustained basis.

LIQUIDITY

Adequate Liquidity for HEI and HECO: HEI and HECO have ample liquidity, with $21 million of cash on hand at HECO and full availability under revolving credit facilities totaling $350 million at June 30, 2018. HEI has access to a $150 million revolving credit facility (maturing in June 2022), which also serves as a backstop for its commercial paper program. HECO maintains minimum cash on hand, as is typical for a regulated utility, and its revolving $200 million credit facility matures in June 2022.

HECO's credit facility has one financial covenant requiring consolidated (for HECO and its subsidiaries) funded debt to capitalization ratio not to exceed 65%. HECO serves as a guarantor for notes and bonds issued by HELCO and Maui. ���������ֳ� assigned no equity credit to HECO Capital Trust III's $51 million junior subordinated debentures due in 2034 and 50% equity credit to HECO's cumulative preferred stock ($34 million outstanding at June 30, 2018).

Debt maturities are modest over the rating horizon, but ���������ֳ� expects HECO to occasionally access the debt markets to fund its capex plans.


FULL LIST OF RATING ACTIONS

���������ֳ� affirmed the following ratings:
Hawaiian Electric Industries, Inc.
--Long-term IDR at 'BBB';
--Senior unsecured debt and revolver at 'BBB';
--Short-term IDR at 'F3';
--Commercial Paper at 'F3'.

Hawaiian Electric Company, Inc.
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'A-';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2'.

���������ֳ� affirmed the following rating, which was previously rated at Hawaiian Electric Company, Inc. and now is being rated at the following subsidiary:

HECO Capital Trust III
--Junior subordinated security at 'BBB'.

���������ֳ� assigns the following ratings:

Hawaii Electric Light Company, Inc.
--Senior unsecured debt 'A-'.

Maui Electric Company, Ltd.
--Senior unsecured debt 'A-'.

Contact:

Primary Analyst
Jodi Hecht
Director
+1-646-582-4969
���������ֳ�, Inc.
33 Whitehall St.
New York, NY 10004

Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351

Committee Chairperson
Philip Smyth
Senior Director
+1-212-908-0531

Date of Relevant Rating Committee: Aug. 29, 2018

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on
Applicable Criteria
Corporate Hybrids Treatment and Notching Criteria - Effective from 27 March 2018 to 9 November 2018 (pub. 27 Mar 2018)
Corporate Rating Criteria - Effective from 23 March 2018 to 19 February 2019 (pub. 23 Mar 2018)
Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)
Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy