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Investing.com -- Fitch Ratings has upgraded the Long-term Issuer Default Rating (IDR) of Hawaiian Electric Industries (NYSE:HE), Inc. (HEI) to ’B+’ from ’B’. Hawaiian Electric Company, Inc. (HECO), Maui Electric Company Limited (MECO), and Hawaii Electric Light Company Inc. (HELCO) also saw their Long-Term IDRs upgraded to ’BB-’ from ’B’. Short-Term IDRs for HEI and HECO remained at ’B’. The Rating Outlook for all these entities is Positive.
In addition, Fitch upgraded HECO’s and MECO’s senior unsecured debt to ’BB’ from ’B+’ with a Recovery Rating of ’RR3’. HELCO’s senior unsecured debt was also upgraded to ’BB’ from ’BB-’/’RR2’.
These upgrades come in the wake of the expected execution of the $4.037 billion Maui wildfire settlement following a recent favorable ruling from the Hawaiian Supreme Court on insurers’ claims and the passage of HB1001, which secures the State of Hawaii’s funding for its share of the settlement. Courts are expected to finalize the settlement approval in late 2025 or early 2026.
HEI has strengthened its liquidity by prefunding the first settlement payment and reducing debt through selling a 90.1% stake in American Savings Bank and issuing $558 million in equity. HECO’s progress in wildfire mitigation efforts also contributed to the upgrade.
The Positive Outlook reflects the passage of SB897 by the Hawaii legislature. This bill directs the Hawaii Public Utilities Commission (PUC) to establish a liability cap for wildfire claims for the state’s electric utilities and to study the merits of a wildfire recovery fund. If implemented, the liability cap and/or the wildfire fund would significantly mitigate HECO’s financial exposure to catastrophic wildfires and could drive future positive rating actions. SB897 is currently awaiting the signature of Hawaii’s Governor to become law.
The settlement agreements between HEI, HECO, and other defendants and individual and class plaintiffs to resolve the 2023 Maui wildfire related tort lawsuits are likely to receive final court approval in late 2025 or early 2026. The final settlements were contingent on resolving insurance company claims with no additional payments from defendants. In February 2025, the Hawaii Supreme Court issued an order stating that once the settlement becomes final, the exclusive remedy for insurers seeking to recover amounts paid to settling plaintiffs is to assert liens against their policyholders.
The Hawaii legislature passed HB1001 in May 2025, which is critical for the settlement agreements to move forward. HB1001 appropriates State of Hawaii’s contribution to the settlement agreements, which comprises $807.5 million over four years as part of the global $4.037 billion settlement. HEI and HECO are responsible for $1.99 billion, of which $75 million was previously contributed to the ’One Ohana Fund’. Fitch views execution of the settlement agreements as crucial for resolving Maui wildfire related liabilities and for the companies’ ability to access capital markets at a reasonable cost.
A $558 million equity issuance in September 2024 and sale of HEI’s 90.1% stake in American Savings Bank in December 2024 bolstered HEI’s financial condition. HEI prefunded the first installment of the $479 million settlement payment and paid down $384 million of HEI debt and $66 million of HECO revolver borrowings. Pro forma for these transactions, HEI and HECO hold $245 million in unrestricted cash and maintain $133 million in availability under their revolving credit facilities as of end-April 2025. Additional liquidity is available via HECO’s $220 million asset-based lending facility and HEI’s $250 million ATM program. Near-term maturities are manageable.
The Hawaii legislature passed SB897 in May 2025. It directs the Hawaii PUC to set a liability cap for the state’s electric utilities that limits their financial exposure from future catastrophic wildfires if the utility has a PUC approved wildfire mitigation plan and is in compliance. The PUC must also recommend whether to establish a wildfire recovery fund along with proposed size, funding and eligibility. SB897 also permits utilities to issue securitization bonds to finance investments related to wildfire safety and resilience, a credit positive. HECO’s positive rating potential depends on the liability cap determination and wildfire fund establishment.
HECO is directing a substantial amount of its capex on wildfire mitigation and resilience. The company has implemented several mitigation measures like hardening the transmission and distribution system, installing fire detection cameras and weather stations, improving operational practices, engaging with stakeholder and community members, and instituting a public safety power shutoff program. HECO has developed a comprehensive wildfire mitigation plan for 2025-2027, which has been filed with the PUC.
Materially higher operating costs primarily driven by wildfire mitigation and increased insurance premiums have impacted HECO’s FFO leverage, which increased to 5.2x in 2024 compared to 3.5x-4.0x historically. The PUC has approved HECO’s request to file a rate case using a forward 2026 test year. A constructive outcome in the rate case could allow HECO to earn closer to its allowed return on equity (ROE). Fitch expects HEI and HECO’s FFO leverage to be pressured by settlement payments over 2026-2029. Excluding these payments, Fitch expects HEI’s and HECO’s adjusted FFO leverage to approach 4.6x and 4.1x, respectively by 2027.
Fitch considers HECO to have the stronger standalone credit profile (SCP) due to its lower leverage and lower operating risks as a regulated utility. As such, Fitch has followed the stronger subsidiary path. Legal ringfencing is porous given the general protections afforded by economic regulation, and access and control are also porous. Due to the linkage considerations, Fitch will limit the difference between HEI and HECO to two notches.
Fitch views HELCO and MECO, HECO’s subsidiaries, as weaker than HECO given their small-scale operations and limited capital-market access. HECO benefits from the ownership of multiple operating subsidiaries that provide scale, diversity, and stability to its cash flow. We consider legal incentives to be high as HECO guarantees its subsidiaries’ debt, resulting in HELCO’s and MECO’s IDR being equalized with HECO’s.
HEI is comparable to utility holding company PG&E (NYSE:PCG) Corporation (PCG; BB+/Positive) regarding ownership of a single operating subsidiary that operates in a state with high wildfire risk exposure. Like HEI and HECO, PCG’s wholly-owned utility subsidiary, Pacific Gas and Electric Company (PG&E; BB+/Positive) has experienced catastrophic wildfires in its service territory, which has constrained access to capital markets due to large, wildfire-related third-party liabilities.
PG&E has made substantial progress in reducing its wildfire risk since it experienced catastrophic wildfires in 2017-2018. However, the highly destructive wildfires in non-PG&E service territory in January 2025 that could have been sparked by utility equipment underscores the persistent threat of catastrophic wildfires in California. HECO is much smaller than PG&E in terms of area served. However, it is much smaller in rate base as well. The pending settlement agreements for the August 2023 Maui wildfire peg HECO’s liability at $1.99 billion, or approximately 50% of its year-end 2023 rate base.
Regulatory/legislative initiatives to protect PG&E and the other state IOUs from potential wildfire liabilities will be a critical determinant of future PCG and PG&E credit quality. Similarly, for HECO and HEI, a liability cap determination and creation of a wildfire recovery fund is key to mitigate HECO and HEI’s financial exposure to future wildfires. Unlike California, Hawaii has no precedent for applying inverse condemnation to an IOU, benefiting HEI and HECO.
In 2024, PCG’s FFO leverage improved to 4.6x from 6.9x in 2023, and Fitch estimates FFO leverage of 4.8x and 4.6x for 2025 and 2026, respectively. PG&E’s FFO leverage is expected to be somewhat stronger than PCG’s, with both anticipated to surpass their FFO leverage upgrade sensitivities, supporting Positive Rating Outlooks. HECO’s FFO leverage weakened to 5.2x in 2024 compared to 3.5x in 2023, driven by higher wildfire related operating costs. Excluding the four equal instalments of settlement payments from FFO over 2026-2029, Fitch expects HEI and HECO’s adjusted FFO leverage could improve to 4.6x and 4.1x, respectively, by 2027.
Fitch’s key assumptions include HECO capex significantly higher than historical spend due to wildfire mitigation spend; HECO’s ROE lag widening in 2026, primarily driven by higher O&M costs; constructive outcome of HECO’s 2026 rate case; funding of wildfire settlement payments in a credit supportive manner; HELCO’s and MECO’s operations form roughly 15% and 14% of HECO’s, respectively, consistent with historical levels; and no securitization assumed for HECO. SB897 allows for HECO to issue $500 million of securitization bonds to finance wildfire mitigation capex, which would reduce its reliance on external funding.
Factors that could lead to a downgrade in ratings for HEI, HECO, HELCO, and MECO include unwinding of the pending Maui wildfire settlements, inability to fund financial liability from Maui wildfires settlement agreements, difficulty in accessing capital markets and deterioration in liquidity, inadequate measures or non-compliance with PUC approved wildfire mitigation plan at the utility subsidiaries, and continuation of catastrophic wildfire activity at utility subsidiaries.
On the other hand, factors that could lead to an upgrade in ratings include finalization of the Maui 2023 wildfire settlement agreements coupled with the clear financing plan to fund the payments in a credit supportive manner, establishing a liability cap for HECO in accordance with SB897, creation of a wildfire recovery fund that materially mitigates financial risk for the utility subsidiaries against potential large wildfire-related claims, and constructive regulatory outcome in the 2026 rate case, which substantially eliminates the regulatory lag.
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