Fitch affirms Hawaiian Electric after failed NextEra merger

Fitch Ratings said July 20 that it has affirmed Hawaiian Electric Industries, (NYSE:HEI) Long-Term Issuer Default Rating (IDR) at ‘BBB’ following the rejection by the Hawaii Public Utility Commission  of the proposed acquisition by NextEra Energy, (NYSE:NEE) and subsequent termination of the merger agreement.

“The ratings have been removed from Rating Watch Positive,” Fitch said. “Fitch placed the ratings for HEI on Positive Watch on Dec. 4, 2014 following HEI’s announced agreement to be acquired by Nextera. Fitch has also affirmed the Long-Term IDR of Hawaiian Electric Company, Inc (HECO) at ‘BBB+’. The Outlook for both companies is Stable.”

“The rating affirmation reflects Fitch’s view that the political and regulatory framework in Hawaii, while adverse to the proposed merger with NextEra, will remain ultimately supportive of HECO’s credit profile as the utility faces rising penetration of distributed generation and a capital intensive fleet modernization plan,” the ratings agency said.

“Fitch will closely monitor the outcomes of the ongoing and planned regulatory filings that include HECO’s Power Supply Improvement Plan (PSIP), approval for the 60 MW Hamakua Energy Partners plant purchase and the proposed rate cases to be filed by [Hawaiian Electric Cos.] HECO utilities in 2016,” according to the ratings agency.

“Fitch acknowledges that meeting the 100% renewable target by 2045 could be a daunting task for HECO, without NextEra’s capital and technological support,” the ratings agency said.

“However, it is still too early to determine what the fleet transformation plan would look like; what kind of capital investments will be required; and what the rate impact on customers would entail. The rapidly declining cost of renewables and of battery storage and the headroom provided by the decline in oil prices are currently working in HECO’s favor,” the ratings agency said.

Fitch believes HECO is well positioned to meet the 30% renewable target by 2020.

A key driver for future HECO ratings will be the high penetration of distributed generation. About 13% of HECO’s total customers had rooftop solar PV systems at year-end 2015 for a total of 487 MW of capacity.

The rapid adoption of rooftop solar in Hawaii was fuelled by a combination of high electricity prices, abundant solar resources and government financial incentives. Combined with energy efficiency initiatives, this resulted in a 6% decline in electric demand during 2011 – 2015, according to the Fitch analysis.

The state of Hawaii has set aggressive renewable portfolio standards (RPS) with targets culminating to 100% by 2045.

“HECO is well placed to achieve the 30% renewable target by 2020 with renewables sources (including distributive generation) meeting 23% of energy needs in 2015. Nonetheless, meeting the 100% renewable target by 2045 will require significant investments to modernize the electric infrastructure throughout the service area as well as presenting execution and technological risks,” Fitch said.

HECO operates in isolated island markets with separate power grids, which result in a higher operating cost structure and necessary investment in redundant infrastructure, Fitch said.

“Electricity generation remains predominantly fuel oil based, resulting in high power prices as imported fuel oil in Hawaii is typically 25% above mainland pricing benchmarks,” Fitch said. “While HECO’s retail electricity rates at approximately $0.23 per kWh at present have benefited from a sharp drop in oil prices since last year, these still remain about 2x the national average,” according to the ratings agency.


About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at