indebtedness, to fund investments in and loans to its subsidiaries to support their capital improvement or other requirements, to repay long-term and short-term indebtedness and for other corporate purposes. In March 2013, HEI entered into equity forward transactions in which a forward counterparty borrowed 7 million shares of HEI’s common stock from third parties and such borrowed shares were sold pursuant to an HEI registered public offering. On December 19, 2013, HEI settled 1.3 million shares under the equity forward for proceeds of $32.1 million (net of the underwriting discount of $1.3 million), which funds were ultimately used to purchase common stock of Hawaiian Electric. In November 2011, HEI filed an omnibus registration statement to register an indeterminate amount of debt and equity securities. Under Securities and Exchange Commission (SEC) regulations, this registration statement expires on November 4, 2014. HEI has a line of credit facility of $125 million. See Note 7 of the Consolidated Financial Statements. The credit agreement, amended in December 2011, contains provisions for revised pricing in the event of a ratings change. For example, a ratings downgrade of HEI’s Issuer Rating (e.g., from BBB/Baa2 to BBB-/Baa3 by Standard & Poor’s (S&P) and Moody’s Investors Service (Moody’s), respectively) would result in a commitment fee increase of 5 basis points and an interest rate increase of 25 basis points on any drawn amounts. On the other hand, a ratings upgrade (e.g., from BBB/Baa2 to BBB+/Baa1 by S&P or Moody’s, respectively) would result in a commitment fee decrease of 2.5 basis points and an interest rate decrease of 25 basis points on any drawn amounts. In addition to their impact on pricing under HEI’s credit agreement, the rating of HEI’s commercial paper and debt securities could significantly impact the ability of HEI to sell its commercial paper and issue debt securities and/or the cost of such debt. The rating agencies use a combination of qualitative measures (i.e., assessment of business risk that incorporates an analysis of the qualitative factors such as management, competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash flow, debt, interest coverage and liquidity ratios) in determining the ratings of HEI securities. On January 21, 2014, Fitch Ratings (Fitch) assigned initial ratings to HEI as noted in the table below. The key ratings drivers cited were (1) ownership of two investment grade subsidiaries, (2) subordination of cash flows and (3) moderate degree of parent level debt leverage. As a result of updating it ratings methodology, Moody’s placed the ratings of most U.S. regulated utilities and utility holding companies on review for upgrade. HEI was included in the list of companies on review for upgrade. Subsequently, on January 30, 2014, Moody’s confirmed HEI’s ratings as noted in the table below and indicated that despite their view that Hawaiian Electric, like many other regulated utilities in the U.S., received more credit supportive regulatory treatment over the years, HEI's and Hawaiian Electric’s cash flow to debt ratios are too weak to support an upgrade. HEI's ratings reflect the relatively stable earnings and cash flow historically provided by both the vertically integrated utility businesses at Hawaiian Electric and the stable banking operations at ASB. The ratings also recognize the challenges at Hawaiian Electric, which have some of the highest retail electric rates in the country and the heavy pressure from regulators and stakeholders to reduce rates and dependence on fuel oil. Moody’s indicated the rating could be downgraded or placed on negative outlook if Maui Electric’s poor rate case outcome spills over to Hawaiian Electric and Hawaii Electric Light. On February 10, 2014, S&P maintained its corporate credit ratings for HEI, as noted in the table below. S&P indicated that the "BBB-" issuer credit rating on HEI is derived from S&P's anchor of "bbb", based on a “strong” business risk and “significant” financial risk profile assessments for the company. The negative comparable rating analysis modifier resulted in a -1 notch adjustment to the anchor. S&P indicated that unfavorable comparable ratings analysis reflects the Utilities’ ongoing challenges to earn closer to the allowed returns and the need to continuously effectively manage regulatory risk; past challenges to complete major projects on budget and on schedule; and the potential threat from increasing roof-top solar penetration, relative to peers. The stable outlook reflects S&P’s understanding that “the decoupling mechanisms will remain largely unchanged and the company will successfully manage expenses, HECO will reach a constructive outcome in its next rate case filing, and HEI will maintain a balanced funding approach that continues to support the current credit profile.” As of February 10, 2014, the Fitch, Moody's and S&P ratings of HEI were as follows: Long-term issuer default and senior unsecured; senior unsecured; and corporate credit; respectively Commercial paper Outlook
Fitch
Moody’s
S&P
BBB
Baa2
BBB-
F3
P-2
A-3
Stable
Stable
Stable
The above ratings reflect only the view, at the time the ratings are issued, of the applicable rating agency, from whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating.
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