Electric utility segment

3 Months Ended

Mar. 31, 2017

Electric utility subsidiary [Abstract]

Electric utility segment

Electric utility segment

Revenue taxes. The Utilities’ revenues include amounts for the recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. However, the Utilities’ revenue tax payments to the taxing authorities in the period are based on the prior year’s billed revenues (in the case of public service company taxes and PUC fees) or on the current year’s cash collections from electric sales (in the case of franchise taxes). The Utilities included in the three months ended March 31, 2017 and 2016 approximately $46 million and $43 million, respectively, of revenue taxes in “revenues” and in “taxes, other than income taxes” expense.

Recent tax developments. The extension of bonus depreciation under the “Protecting Americans from Tax Hikes (PATH) Act of 2015” continues to be the most significant recent tax change. The PATH Act provides 50% bonus depreciation through 2017, phases down the percentage to 40% in 2018 and 30% in 2019 and then terminates bonus depreciation thereafter. Tax depreciation is expected to increase by approximately $121 million in 2017 due to bonus depreciation, which has the effect of increasing accumulated deferred tax liabilities. However, the rate of growth of accumulated deferred tax liabilities is decreasing over time as book depreciation “catches up” with the tax depreciation taken in the past.

Congressional action on tax reform for 2017 has not progressed sufficiently to estimate the impact of any such proposed reform on the Utilities’ future results of operation and financial condition.

Unconsolidated variable interest entities.

HECO Capital Trust III.  HECO Capital Trust III (Trust III) was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,0006.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal amount of $31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million, (iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto. The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034, which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric. Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not absorb the majority of the variability of Trust III, Hawaiian Electric is not the primary beneficiary and does not consolidate Trust III in accordance with accounting rules on the consolidation of VIEs. Trust III’s balance sheets as of March 31, 2017 and December 31, 2016 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for the three months ended March 31, 2017 consisted of $0.8 million of interest income received from the 2004 Debentures; $0.8 million of distributions to holders of the Trust Preferred Securities; and $25,000 of common dividends on the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004 Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.

Power purchase agreements.  As of March 31, 2017, the Utilities had five power purchase agreements (PPAs) for firm capacity and other PPAs with IPPs and Schedule Q providers (e.g., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs. Purchases from all IPPs were as follows:

	Three months ended March 31
(in millions)	2017		2016
Kalaeloa	$	40	$	29
AES Hawaii	29		38
HPOWER	17		16
Puna Geothermal Venture	8		7
HEP	7		11
Other IPPs 1	26		15
Total IPPs	$	127	$	116

¹  Includes wind power, solar power, feed-in tariff projects and other PPAs.

Some of the IPPs provided sufficient information for Hawaiian Electric to determine that the IPP was not a VIE, or was either a “business” or “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Other IPPs declined to provide the information necessary for Hawaiian Electric to determine the applicability of accounting standards for VIEs. Since 2004, Hawaiian Electric has continued its efforts to obtain from the other IPPs the information necessary to make the determinations required under accounting standards for VIEs. In each year from 2005 to 2016, the Utilities sent letters to the identified IPPs requesting the required information. All of these IPPs declined to provide the necessary information, except that Kalaeloa Partners, L.P. (Kalaeloa) later agreed to provide the information pursuant to the amendments to its PPA (see below). During the negotiations of an amendment to the PPA with AES Hawaii, Inc. (AES Hawaii), management determined that Hawaiian Electric was not the primary beneficiary of AES Hawaii and consolidation was not required (see below). Management has concluded that the consolidation of two entities owning wind farms was not required as Hawaii Electric Light and Maui Electric do not have variable interests in the entities because the PPAs do not require them to absorb any variability of the entities. If the requested information is ultimately received from the remaining IPPs, a possible outcome of future analyses of such information is the consolidation of one or more of such IPPs in the Consolidated Financial Statements. The consolidation of any significant IPP could have a material effect on the Consolidated Financial Statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs.

Purchase power adjustment clause. The PUC has approved purchased power adjustment clauses (PPACs) for the Utilities. Purchased power capacity, O&M and other non-energy costs previously recovered through base rates are now recovered in the PPACs and, subject to approval by the PUC, such costs resulting from new purchased power agreements can be added to the PPACs outside of a rate case. Purchased energy costs continue to be recovered through the ECAC to the extent they are not recovered through base rates.

Kalaeloa Partners, L.P.  In October 1988, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved by the PUC, which provided that Hawaiian Electric would purchase 180 megawatts (MW) of firm capacity for a period of 25 years beginning in May 1991. In October 2004, Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that Hawaiian Electric makes to Kalaeloa include: (1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil, (2) a fuel additives cost component and (3) a non-fuel component, with an adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to Kalaeloa are fixed in accordance with the PPA. Kalaeloa also has a steam delivery cogeneration contract with another customer, the term of which coincides with the PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.

Hawaiian Electric and Kalaeloa are in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith. The month-to-month term extensions shall end 60 days after either party notifies the other in writing that negotiations have terminated.

On August 1, 2016, Hawaiian Electric and Kalaeloa entered into an agreement that neither party will give written notice of termination of the Kalaeloa PPA prior to October 31, 2017.

Pursuant to the current accounting standards for VIEs, Hawaiian Electric is deemed to have a variable interest in Kalaeloa by reason of the provisions of Hawaiian Electric’s PPA with Kalaeloa. However, management has concluded that Hawaiian Electric is not the primary beneficiary of Kalaeloa because Hawaiian Electric does not have the power to direct the activities that most significantly impact Kalaeloa’s economic performance nor the obligation to absorb Kalaeloa’s expected losses, if any, that could potentially be significant to Kalaeloa. Thus, Hawaiian Electric has not consolidated Kalaeloa in its unaudited condensed consolidated financial statements. The energy payments paid by Hawaiian Electric will fluctuate as fuel prices change, but the PPA does not currently expose Hawaiian Electric to losses as the fuel and fuel related energy payments under the PPA have been approved by the PUC for recovery from customers through base electric rates and through Hawaiian Electric’s ECAC to the extent the fuel and fuel related energy payments are not included in base energy rates. As of March 31, 2017, Hawaiian Electric’s accounts payable to Kalaeloa for electricity purchased amounted to $11 million.

AES Hawaii, Inc. In March 1988, Hawaiian Electric entered into a PPA with AES Barbers Point, Inc. (now known as AES Hawaii, Inc.), which, as amended (through Amendment No. 2) and approved by the PUC, provided that Hawaiian Electric would purchase 180 MW of firm capacity for a period of 30 years beginning in September 1992. In November 2015, Hawaiian Electric entered into Amendment No. 3 for which PUC approval was requested and subsequently denied in January 2017. The payments that Hawaiian Electric makes to AES Hawaii for energy associated with the first 180 MW of firm capacity include a fuel component, a variable O&M component and a fixed O&M component, all of which are subject to adjustment based on changes in the Gross National Product Implicit Price Deflator.

Pursuant to the current accounting standards for VIEs, Hawaiian Electric is deemed to have a variable interest in AES Hawaii by reason of the provisions within the executed PPA. However, management has concluded that Hawaiian Electric is not the primary beneficiary of AES Hawaii because Hawaiian Electric does not have the power to control the most significant activities of AES Hawaii that impact its economic performance, including operations and maintenance of its facility. Thus, Hawaiian Electric has not consolidated AES Hawaii in its consolidated financial statements. As of March 31, 2017, Hawaiian Electric’s accounts payable to AES Hawaii for electricity purchased, amounted to $13 million.

ommitments and contingencies.

Fuel contracts.The Utilities have contractual agreements to purchase minimum quantities of low sulfur fuel oil (LSFO), medium sulfur fuel oil (MSFO), diesel fuel and biodiesel for multi-year periods, some through December 2019. Fossil fuel prices are tied to the market prices of crude oil fand petroleum products in the Far East and U.S. West Coast and the biodiesel price is tied to the market prices of animal fat feedstocks in the U.S. West Coast and U.S. Midwest.

On February 18, 2016, the Companies signed two fuel supply contracts with Chevron Products Company (Chevron) for: (1) Oahu’s LSFO and diesel (for purposes of blending with LSFO) to meet the Environmental Protection Agency’s Mercury and Air Toxic Standards; and (2) MSFO, diesel and ultra-low sulfur diesel for Oahu, Maui, Molokai and the island of Hawaii. The contract began on January 1, 2017, terminates on December 31, 2019, and may automatically renew for annual terms thereafter unless terminated earlier by either party. Both of these fuel contracts were recently assigned to Island Energy Services, LLC, a subsidiary of One Rock Capital Partners, L.P., who purchased Chevron’s Hawaii assets on November 1, 2016. Both of these fuel contracts replace prior fuel supply contracts with Chevron and Par Hawaii Refining, LLC (Par), which both expired on December 31, 2016.

Hawaii Electric Light also signed a contract with Chevron, now Island Energy Services, LLC, for terminalling services in Hilo, Hawaii for 2017 through 2019. The terminalling services were provided by Chevron as part of the fuel supply contract but as mentioned above, that contract expired December 31, 2016. Now Hilo terminalling services are contracted in a stand-alone contract.

The PUC approved all of the contracts with Chevron, now Island Energy Services, LLC. All of the costs incurred under these contracts are included in the Utilities’ respective Energy Cost Adjustment Clauses (ECACs) to the extent such costs are not recovered through the base rates.

Hawaiian Electric also has three contracts for biodiesel. Two of the contracts are with Pacific Biodiesel Technologies, LLC (PBT) and one contingency contract is in place with REG Marketing & Logistics, LLC (REG). PBT has agreed to supply biodiesel to Hawaiian Electric’s Campbell Industrial Park (CIP) generating facility through November 2017. The contract extends for one-year if either party does not give notice otherwise within 90 days of November 2017. While fuel is delivered to CIP, the contract provides that biodiesel can be trucked to the Honolulu International Airport Emergency Facility and to any other generating facility on Oahu owned by Hawaiian Electric. Hawaiian Electric intends to shift the biodiesel supply to Schofield generating station when that new facility comes online and as long as the PBT contract remains in effect. PBT also has a spot buy contract with Hawaiian Electric to purchase additional quantities of biodiesel at or below the price of diesel. Very few purchases of “at parity” biodiesel have been made; however, the contract remains in effect and was recently extended through June 2018.

Hawaiian Electric also has a contingency contract with REG. REG will supply biodiesel in the event PBT is unable to supply quantities above the contract maximum volume, should something unexpected occur. Hawaiian Electric did not purchase any biofuel from REG during 2016. Hawaiian Electric secured a one-year extension of this contract through November 2017.

The costs incurred under the Utilities’ biodiesel contracts are included in their respective ECACs, to the extent such costs are not recovered through the Utilities’ base rates.

The energy charge for energy purchased from Kalaeloa under Hawaiian Electric’s PPA with Kalaeloa is based in part on the price Kalaeloa pays PAR (formerly known as Hawaii Independent Energy, LLC) for LSFO in a fuel contract between the two parties.

Hawaiian Electric and Kalaeloa are currently in negotiations to address the PPA term that ended on May 23, 2016. See “Unconsolidated variable interest entities - Kalaeloa Partners, L.P.” above.

The costs incurred for LSFO under Hawaiian Electric's fuel contract with Kalaeloa is included in Hawaiian Electric's ECAC, to the extent such costs are not recovered through base rates.

AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years beginning September 1992, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, but Hawaiian Electric and AES Hawaii were not able to reach an agreement on the amendment. In June 2015, AES Hawaii filed an arbitration demand regarding a dispute about whether Hawaiian Electric was obligated to buy up to 9 MW of additional capacity based on a 1992 letter. Hawaiian Electric responded to the arbitration demand and in October 2015, AES Hawaii and Hawaiian Electric entered into a Settlement Agreement to stay the arbitration proceeding. The Settlement Agreement included certain conditions precedent which, if satisfied, would have released the parties from the claims under the arbitration proceeding. Among the conditions precedent was the successful negotiation and PUC approval of an amendment to the existing PPA.

In November 2015, Hawaiian Electric entered into Amendment No. 3 for which PUC approval was requested and subsequently denied in January 2017. Approval of Amendment No. 3 would have satisfied the final condition for effectiveness of the Settlement Agreement and resolved AES Hawaii's claims. Following the PUC's decision, the parties agreed to extend the stay of the arbitration proceeding, while settlement discussions continue.

Hu Honua Bioenergy, LLC.In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. Per the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction delays, failed to meet its obligations under the PPA and failed to provide adequate assurances that it could perform or had the financial means to perform. Hawaii Electric Light terminated the PPA on March 1, 2016. Hawaii Electric Light and Hu Honua were in discussions regarding the possibility of reinstating the PPA under revised terms and conditions. However, on November 30, 2016, Hu Honua filed a civil complaint in the United States District Court for the District of Hawaii which included claims purportedly arising out of the termination of Hu Honua’s PPA. The complaint named HEI, Hawaiian Electric and Hawaii Electric Light as defendants. HEI, Hawaiian Electric and Hawaii Electric Light believe the allegations in the complaint are without merit and intend to defend these lawsuits vigorously.

Utility projects.  Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC imposed caps on project costs are exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.

Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) Implementation Project. The Utilities submitted their Enterprise Information System Roadmap to the PUC in June 2014 and refiled an application for an ERP/EAM Implementation Project in July 2014 with an estimated cost of $82.4 million.

In October 2015, the PUC issued a decision and order (D&O) (1) finding that there is a need to replace the Utilities’ existing ERP/EAM system, (2) denying the Utilities request to defer the costs for the ERP software purchased in 2012 and (3) deferring any ruling on whether it is reasonable and in the public interest for the Utilities to commence with the project under two options (in consideration of the then potential merger with NEE). As a result, the Utilities expensed the ERP software costs of $4.8 million in the third quarter of 2015 and in April 2016, the Utilities filed additional information per the two options on the costs and benefits of the project and the Consumer Advocate subsequently submitted its reply.

On August 11, 2016, the PUC issued a second D&O approving the Utilities’ request to commence the ERP/EAM Implementation Project, subject to certain conditions, including a $77.6 million cap on cost recovery as well as a requirement that the Utilities pass onto customers a minimum of $244 million in savings associated with the system over its 12-year service life. Pursuant to the D&O and subsequent orders, the Utilities are required to file a bottom-up, low-level analysis of the project’s benefits; performance metrics and tracking mechanism for passing the project’s benefits on to customers by September 2017; and monthly reports on the status and costs of the project.

On March 31, 2017, the Utilities filed their proposed methods of passing on to customers the estimated monetary savings attributable to the project. The project is expected to go live by October 1, 2018.

Schofield Generating Station Project. In August 2012, the PUC approved a waiver from the competitive bidding framework to allow Hawaiian Electric to negotiate with the U.S. Army for the construction of a 50 MW utility owned and operated firm, renewable and dispatchable generation facility at Schofield Barracks. In September 2015, the PUC approved Hawaiian Electric’s application to expend $167 million for the project. In approving the project, the PUC placed a cost cap of $167 million for the project, stated 90% of the cap is allowed for cost recovery through cost recovery mechanisms other than base rates, and stated the $167 million cap will be adjusted downward due to any reduction in the cost of the engine contract due to a reduction in the foreign exchange rate. Hawaiian Electric was required to take all necessary steps to lock in the lowest possible exchange rate. On January 5, 2016, Hawaiian Electric executed window forward contracts, which lowered the cost of the engine contract by $9.7 million, resulting in a revised project cost cap of $157.3 million. Hawaiian Electric has received all of the major permits for the project, including a 35 year site lease from the U.S. Army. Construction of the facility began in October 2016, and the facility is expected to be placed in service in the first quarter of 2018.

Hamakua Energy Partners, L.P. (HEP) Asset Purchase Agreement. Hawaii Electric Light has been purchasing up to 60 MW (net) of firm capacity from HEP under a PPA that expires on December 30, 2030. The HEP plant currently contributes about 23% of the island of Hawaii’s generating capacity. On December 22, 2015, Hawaii Electric Light entered into an agreement, subject to PUC approval, to acquire the assets of HEP for approximately $84.5 million. If approved by the PUC, the agreement to purchase the existing HEP generating assets will terminate the existing PPA. The elimination of certain required capacity payments under the PPA is expected to result in lower costs to customers. Additionally, by owning the plant, Hawaii Electric Light will be able to manage HEP’s efficient generating units more productively, providing greater flexibility to cycle HEP’s generating units to more effectively manage the Hawaii Island grid. This increased operational flexibility will be essential to support and facilitate Hawaii Electric Light’s efforts to integrate more renewable energy onto the grid.

Hawaii Electric Light applied for approval of the Asset Purchase Agreement in February 2016. The Consumer Advocate has recommended approval of the application, subject to certain proposed conditions including a lower purchase price, and three participants in the proceeding have recommended denial of the application. A decision by the PUC on the application is pending.

Environmental regulation.  The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances. In recent years, legislative, regulatory and governmental activities related to the environment, including proposals and rulemaking under the Clean Air Act and Clean Water Act (CWA), have increased significantly.

Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases into the environment associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material adverse effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.

Clean Water Act Section 316(b). On August 14, 2014, the Environmental Protection Agency (EPA) published in the Federal Register the final regulations required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian Electric submitted the final site specific studies for the Honolulu and Waiau power plants to the Hawaii Department of Health (DOH) in December 2016, and the final site specific study for Kahe will be submitted to the DOH no later than October 2017. Hawaiian Electric will work with the DOH to identify the appropriate compliance methods for the 316(b) rule.

Mercury Air Toxics Standards. On February 16, 2012, the EPA published the final rule establishing the National Emission Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs) in the Federal Register. The final rule, known as the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power plants. MATS established the Maximum Achievable Control Technology standards for the control of hazardous air pollutants emissions from new and existing EGUs. Hawaiian Electric received a one-year extension to comply by April 16, 2016. Hawaiian Electric initially selected a MATS compliance strategy based on switching to lower emission fuels, but has since continued developing and refining its emission control strategy. Hawaiian Electric’s liquid oil-fired steam generating units that are subject to the MATS limits are able to comply with the new standards without a significant fuel switch in combination with a suite of operational changes.

Hawaiian Electric has proceeded with the implementation of its MATS Compliance Plan and has met all compliance requirements to date.

1-Hour Sulfur Dioxide National Ambient Air Quality Standard. On August 1, 2015, the EPA published the Data Requirements Rule for the 2010 1-Hour Sulfur Dioxide (SO₂₎ Primary National Ambient Air Quality Standard (NAAQS). Hawaiian Electric is working with the DOH to gather data the EPA requires through the installation and operation of two new 1-hour SO₂ air quality monitoring stations on the island of Oahu. This data will be integrated into the DOH’s statewide monitoring network and will assist the State’s development of its strategy to maintain the NAAQS and comply with the new 1-Hour SO₂ Rule in its State Implementation Plan. The two new 1-hour SO2 air quality monitoring stations have been installed and were placed into operation prior to the EPA regulatory deadline of January 1, 2017.

Potential Clean Air Act Enforcement. On July 1, 2013, Hawaii Electric Light and Maui Electric received a letter from the U.S. Department of Justice (DOJ) alleging potential violations of the Prevention of Significant Deterioration and Title V requirements of the Clean Air Act involving the Hill and Kahului Power Plants. In correspondence dated November 4, 2014, the DOJ also identified potential violations by Hawaiian Electric at its Kahe facility and proposed resolving the identified, potential violations by entering into a consent decree pursuant to which the Utilities would install certain pollution controls and pay a penalty. The Utilities continue to negotiate with the DOJ to resolve these issues, but are unable to estimate the effect or costs of a consent decree, if any, at this time.

Former Molokai Electric Company generation site.  In 1989, Maui Electric acquired by merger Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The EPA has since identified environmental impacts in the subsurface soil at the Site. Although Maui Electric never operated at the Site or owned the Site property, after discussions with the EPA and the DOH, Maui Electric agreed to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel to determine the extent of impacts of PCBs, residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $3.6 million as of March 31, 2017, representing the probable and reasonably estimated cost to complete the additional investigation and estimated cleanup costs at the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued investigation.

Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for cleanup of PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. The Navy has also requested that Hawaiian Electric reimburse the costs incurred by the Navy to investigate the area. The Navy has completed a remedial investigation and a feasibility study (FS) for the remediation of contaminated sediment at several locations in Pearl Harbor and issued its Final FS Report on June 29, 2015. On February 2, 2016, the Navy released the Proposed Plan for Pearl Harbor Sediment Remediation and Hawaiian Electric submitted comments. The extent of the contamination, the appropriate remedial measures to address it and Hawaiian Electric’s potential responsibility for any associated costs have not been determined.

On March 23, 2015, Hawaiian Electric received a letter from the EPA requesting that Hawaiian Electric submit a work plan to assess potential sources and extent of PCB contamination onshore at the Waiau Power Plant. Hawaiian Electric submitted a sampling and analysis (SAP) work plan to the EPA and the DOH. Onshore sampling at the Waiau Power Plant was completed in two phases in December 2015 and June 2016. The extent of the onshore contamination, the appropriate remedial measures to address it and any associated costs have not yet been determined.

As of March 31, 2017, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $5.0 million. The reserve represents the probable and reasonably estimable cost to complete the onshore and offshore investigations and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the results of the onshore investigation and assessment of potential source control requirements, as well as the further investigation of contaminated sediment offshore from the Waiau Power Plant.

Global climate change and greenhouse gas emissions reduction.  Concerns about climate change and the contribution of greenhouse gas (GHG) emissions (including carbon dioxide emissions from the combustion of fossil fuels) to climate change have led to regulatory action by the State of Hawaii to reduce GHG emissions.

In 2007, the State Legislature passed Act 234, which requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the statewide GHG emission levels in 1990. On June 20, 2014, the Governor signed the final regulations required to implement Act 234 (i.e., the final GHG rule), which went into effect on June 30, 2014. In general, Act 234 and the corresponding GHG rule require affected sources (that have the potential to emit GHGs in excess of established thresholds) to reduce their GHG emissions by 16% below 2010 emission levels by 2020. In accordance with the GHG rule, the Utilities submitted their Emissions Reduction Plan (EmRP) to the DOH on June 30, 2015, demonstrating how they will comply. The Utilities have committed to a 16% reduction in GHG emissions company-wide. Pursuant to the State’s GHG rule, the DOH will incorporate the proposed facility-specific GHG emission limits into each facility’s covered source permit based on the 2020 levels specified in Hawaiian Electric’s approved EmRP.

The GHG rule also requires affected sources to pay an annual fee that is based on tons per year of GHG emissions starting on the effective date of the regulations. The fee for the Utilities is estimated to be approximately $0.5 million annually. The latest assessment of the state GHG rules is that the continued growth in renewable power generation will significantly reduce the compliance costs and risk for the Utilities.

The Utilities have taken, and continue to identify opportunities to take, direct action to reduce GHG emissions from their operations, including supporting DSM programs that foster energy efficiency, using renewable resources for energy production and purchasing power from IPPs generated by renewable resources, burning renewable biodiesel in Hawaiian Electric’s Campbell Industrial Park combustion turbine No. 1 (CIP CT-1), using biodiesel for startup and shutdown of selected Maui Electric generating units, and testing biofuel blends in other Hawaiian Electric and Maui Electric generating units. The Utilities will continue to pursue the use of cleaner fuels to replace, at least in part, petroleum. Management is unable to evaluate the ultimate impact on the Utilities’ operations of more comprehensive GHG regulations that might be promulgated; however, the various initiatives that the Utilities are pursuing are likely to provide a sound basis for appropriately managing the Utilities’ carbon footprint and thereby meet state GHG reduction goals.

While the timing, extent and ultimate effects of climate change cannot be determined with any certainty, climate change is predicted to result in sea level rise. This effect could potentially result in impacts to coastal and other low-lying areas (where much of the Utilities’ electric infrastructure is sited), and result in increased flooding and storm damage due to heavy rainfall, increased rates of beach erosion, saltwater intrusion into freshwater aquifers and terrestrial ecosystems, and higher water tables in low-lying areas. The effects of climate change on the weather (for example, more intense or more frequent rain events, flooding, or hurricanes), sea levels and freshwater availability and quality have the potential to materially adversely affect the results of operations, financial condition and liquidity of the Utilities. For example, severe weather could cause significant harm to the Utilities’ physical facilities.

Asset retirement obligations.  Asset retirement obligations (AROs) represent legal obligations associated with the ultimate retirement of certain tangible long-lived assets, are measured as the present value of the projected costs for the future retirement of specific assets and are recognized in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The Utilities’ recognition of AROs have no impact on their earnings. The cost of the AROs is recovered over the life of the asset through depreciation. AROs recognized by the Utilities relate to obligations associated with the ultimate retirement of plant and equipment, including removal of asbestos and other hazardous materials.

Hawaiian Electric has recorded estimated AROs related to removing retired generating units at its Honolulu and Waiau power plants. These removal projects are ongoing, with activity and expenditures occurring in partial settlement of these liabilities. Both removal projects are expected to continue through 2017.

Changes to the ARO liability included in “Other liabilities” on Hawaiian Electric’s balance sheet were as follows:

	Three months ended March 31
(in thousands)	2017			2016
Balance, beginning of period	$	25,589		$	26,848
Accretion expense	3			3
Liabilities incurred	—			—
Liabilities settled	(403		)	(138		)
Revisions in estimated cash flows	—			—
Balance, end of period	$	25,189		$	26,713

Decoupling.In 2010, the PUC issued an order approving decoupling, which was implemented by Hawaiian Electric on March 1, 2011, by Hawaii Electric Light on April 9, 2012 and by Maui Electric on May 4, 2012. Decoupling is a regulatory model that is intended to facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The decoupling model implemented in Hawaii delinks revenues from sales and includes annual rate adjustments for certain O&M expenses and rate base changes. The decoupling mechanism has three components: (1) a sales decoupling component via a revenue balancing account (RBA), (2) a revenue escalation component via a rate adjustment mechanism (RAM) and (3) an earnings sharing mechanism, which would provide for a reduction of revenues between rate cases in the event the utility exceeds the ROACE allowed in its most recent rate case. Decoupling provides for more timely cost recovery and earning on investments. Under the decoupling tariff approved in 2011, the annual RAM is accrued and billed from June 1 of each year through May 31 of the following year.

As part of a January 2013 Settlement Agreement with the Consumer Advocate, which was approved by the PUC, for the RAM years 2014 - 2016, Hawaiian Electric was allowed to record RAM revenue beginning on January 1 and to bill such amounts from June 1 of the applicable year through May 31 of the following year (current accrual method). Subsequent to 2016, Hawaiian Electric reverted to the RAM provisions initially approved in March 2011—i.e., RAM is both accrued and billed from June 1 of each year through May 31 of the following year.

On May 31, 2013, as provided for in its original order issued in 2010 approving decoupling and citing three years of implementation experience for Hawaiian Electric, the PUC opened an investigative docket to review whether the decoupling mechanisms are functioning as intended, are fair to the Utilities and their ratepayers and are in the public interest. The PUC affirmed its support for the continuation of the RBA mechanism and stated its interest in evaluating the RAM to ensure it provides the appropriate balance of risks, costs, incentives and performance requirements, as well as administrative efficiency, and whether the current interest rate applied to the outstanding RBA balance is reasonable. In October 2013, the PUC issued orders that bifurcated the proceeding (into Schedule A and Schedule B issues).

On February 7, 2014, the PUC issued a D&O on the Schedule A issues, which made certain modifications to the decoupling mechanism. The D&O required a 90% limitation on the incremental current year Rate Base RAM adjustment effective with the Utilities’ 2014 decoupling filing and that effective March 1, 2014, the interest rate to be applied on the outstanding RBA balances to be the short term debt rate used in each Utilities last rate case (ranging from 1.25% to 3.25%), instead of the 6% that had been previously approved.

On March 31, 2015, the PUC issued an Order (the 2015 Decoupling Order) related to the Schedule B portion of the proceeding to make certain further modifications to the decoupling mechanism, and to establish a briefing schedule with respect to certain issues in the proceeding. The 2015 Decoupling Order modified the RAM portion of the decoupling mechanism to be capped at the lesser of the RAM revenue adjustment as then determined (adjusted to eliminate the 90% limitation on the current RAM Period Rate Base RAM adjustment that was ordered in the Schedule A portion of the proceeding) and a RAM revenue adjustment calculated based on the cumulative annual compounded increase in Gross Domestic Product Price Index (GDPPI) applied to the 2014 annualized target revenues (adjusted for certain items specified in the Order) (the RAM Cap). The 2014 annualized target revenues represent the target revenues from the last rate case, plus RAM revenues, offset by earnings sharing credits, if any, allowed under the decoupling mechanism through the 2014 decoupling filing. The triennial rate case cycle required under the decoupling mechanism continues to serve as the maximum period between the filing of general rate cases.

The RAM Cap impacted the Utilities' recovery of capital investments as follows:

• Hawaiian Electric's RAM revenues were limited to the RAM Cap in 2015 and 2016, and the RAM filing for 2017 reflects a limitation to the RAM Cap. In October, 2015, Hawaiian Electric filed an application to recover the revenue requirements associated with certain 2015 underground cable and transmission net plant additions through the RAM above the 2015 RAM Cap. In August 2016, the PUC dismissed Hawaiian Electric's October 2015 above the RAM Cap application because the application did not also request approval of the commitment of capital expenditures. Return on plant additions in excess of the amount provided by the RAM is being requested in the Hawaiian Electric 2017 test year rate case.

• Maui Electric's RAM revenues were limited to the RAM Cap in 2015 and 2016, however, the RAM filing for 2017 reflects RAM revenues below the RAM Cap.

• Hawaii Electric Light’s RAM revenues were below the RAM Cap in 2015 or 2016, and the RAM filing for 2017 continues to reflects RAM revenues below the RAM Cap.

On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order) related to Schedule B issues outstanding from the 2015 Decoupling Order. The 2017 Decoupling Order requires the establishment of specific performance incentive mechanisms and provides guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.

The performance incentive mechanisms to be established are:

• Service reliability performance standards to include: 1) System Average Interruption Duration Index based on the average customer interruption time and 2) System Average Interruption Frequency Index based on the average number of customer interruptions. Target performance for each is based on each utilities’ historical 10 year average performance with a dead band of one standard deviation. Management believes that the maximum penalty for each is 20 basis points of return on equity (or approximately $3 million for each of the standards in total for the three utilities). These performance standards have penalties only.

• Call Center Performance based on utility call center percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a dead band of 3% above and below the target. Management believes that the maximum incentive is based on 8 basis points of return on equity (or approximately $1.2 million in total for the three utilities).

The Utilities are required to file proposed tariffs for the performance incentive mechanisms and sample calculations based on hypothetical future performance within 30 days.

The Parties may file comments on the Utilities’ proposed tariffs and sample calculations within 60 days of the date of the 2017 Decoupling Order, after which the PUC is expected to issue an order on the tariffs.

The 2017 Decoupling Order also established guidelines for Major Project Interim Recovery (MPIR). Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including but not restricted to renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for net costs of approved eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism shall be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual Revenue Balancing Account tariff.

In the 2017 Decoupling Order, the PUC indicated that in pending and subsequent rate cases, the PUC intends to require all fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment mechanism rather than through base rates, and will consider adopting processes to periodically reset fuel efficiency measures embedded in the energy cost adjustment mechanism to account for changes in the generating system.

Annual decoupling filings.  On March 31, 2017, the Utilities submitted to the PUC, their annual decoupling filings for tariffed rates that will be effective from June 1, 2017, through May 31, 2018. The net annual incremental amounts proposed to be collected (refunded) were as follows:

($ in millions)	Hawaiian Electric			Hawaii Electric Light			Maui Electric
2017 Annual incremental RAM adjusted revenues	$	12.7		$	3.2		$	2.4
Annual change in accrued earnings sharing credits	$	—		$	—		$	—
Annual change in accrued RBA balance as of December 31, 2016 (and associated revenue taxes) (refunded)	$	(2.4	)	$	(2.5	)	$	(0.2	)
Net annual incremental amount to be collected under the tariffs	$	10.3		$	0.7		$	2.2
Impact on typical residential customer monthly bill (in dollars) *	$	0.60		$	0.15		$	1.18

* Based on a 500 kilowatthour (KWH) bill for Hawaiian Electric, Maui Electric, and Hawaii Electric Light. The bill impact for Lanai and Molokai customers is expected to be an increase of $0.95, based on a 400 KWH bill.

Hawaiian Electric consolidated 2014 test year abbreviated and 2017 test year rate cases. In December 2016, the PUC issued an order consolidating the Hawaiian Electric filings for the 2014 test year abbreviated rate case and the 2017 test year rate case. The order also found and concluded that Hawaiian Electric's abbreviated 2014 rate case filing did not comply with: (1) the Mandatory Triennial Rate Case Cycle requirement in the decoupling order that Hawaiian Electric file an application for a general rate case every three years and (2) the requirement that Hawaiian Electric file its 2014 calendar test year rate case application by June 27, 2014. The order then stated that: “[T]he determination and disposition of any rates, accounts, adjustment mechanisms, and practices that would have been subject to review in the context of a 2014 test year rate case proceeding are subject to appropriate adjustment based on evidence and findings in the consolidated rate case proceeding.”

In January 2017, Hawaiian Electric filed a motion for clarification and/or partial reconsideration of the PUC’s order. In March 2017, the PUC issued an order to address Hawaiian Electric’s motion, stating that the PUC is not initiating an investigation/enforcement proceeding against Hawaiian Electric regarding its compliance with the decoupling order, and the transfer and consolidation of Hawaiian Electric’s 2014 abbreviated rate case with the 2017 rate case is intended to ensure that ratepayers receive the attendant benefits of Hawaiian Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2014 test year. As directed, in April 2017, Hawaiian Electric filed a supplement to its 2017 rate case filing, addressing the items raised in the order and explaining why Hawaiian Electric’s forgoing of a general rate increase in the 2014 test year should not result in any further adjustments to Hawaiian Electric’s revenue requirement in the 2017 test year.

In April 2017, the PUC issued an Order regarding the supplement to Hawaiian Electric’s 2017 rate case filing, requesting updated pension and OPEB regulatory asset and liability schedules, by May 12, 2017, to reflect the use of the 2014 NPPC and NPBC for the pension and OPEB tracking mechanisms and with amortization of such regulatory assets and liabilities beginning May 1, 2015.

Hawaiian Telcom. The Utilities each have separate agreements for the joint ownership and maintenance of utility poles with Hawaiian Telcom, Inc. (Hawaiian Telcom), the respective county or counties in which each utility operates and other third parties, such as the State of Hawaii. The agreements set forth various circumstances requiring pole removal/installation/replacement and the sharing of costs among the joint pole owners. The agreements allow for the cost of work done by one joint pole owner to be shared by the other joint pole owners based on the apportionment of costs in the agreements. The Utilities have maintained, replaced and installed the majority of the jointly-owned poles in each of the respective service territories, and have billed the other joint pole owners for their respective share of the costs. The counties and the State have been reimbursing the Utilities for their share of the costs. However, Hawaiian Telcom has been delinquent in reimbursing the Utilities for its share of the costs.

Hawaiian Electric has initiated a dispute resolution process to collect the unpaid amounts from Hawaiian Telcom as specified by the joint pole agreement. For Hawaii Electric Light, the agreement does not specify an alternative dispute resolution process, and thus a complaint for payment was filed with the Circuit Court in June 2016. Maui Electric has not yet commenced any legal action to recover the delinquent amounts. As of March 31, 2017, total receivables under the joint pole agreement, including interest, from Hawaiian Telcom are $21.7 million ($14.5 million at Hawaiian Electric, $5.9 million at Hawaii Electric Light, and $1.3 million at Maui Electric). Management expects to prevail on these claims but has reserved for the accrued interest of $4.5 million on the receivables.

April 2014 regulatory orders. In April 2014, the PUC issued four orders that collectively address certain key policy, resource planning and operational issues for the Utilities. The Utilities addressed these orders as follows:

Integrated Resource Planning. The PUC did not accept the Utilities’ Integrated Resource Plan and Action Plans submission, and, in lieu of an approved plan, has commenced other initiatives to enable resource planning. The PUC directed each of Hawaiian Electric and Maui Electric to file their respective Power Supply Improvement Plans (PSIPs), which they did in August 2014. The PUC also provided its inclinations on the future of Hawaii’s electric utilities in an exhibit to the order. The exhibit provides the PUC’s perspectives on the vision, business strategies and regulatory policy changes required to align the Utilities' business model with customers’ interests and the state’s public policy goals.

Reliability Standards Working Group. The PUC ordered the Utilities to take timely actions intended to lower energy costs, improve system reliability and address emerging challenges to integrate additional renewable energy. In addition to the PSIPs mentioned above, the PUC ordered certain filing requirements, which include the following:

• Distributed Generation Interconnection Plan - the Utilities’ Plan was filed in August 2014.

• Plan to implement an on-going distribution circuit monitoring program to measure real-time voltage and other power quality parameters - the Utilities’ Plan was filed in June 2014.

• Action Plan for improving efficiencies in the interconnection requirements studies - the Utilities’ Plan was filed in May 2014.

• The Utilities are to file monthly reports providing details about interconnection requirements studies.

• Integrated interconnection queue for each distribution circuit for each island grid - the Utilities’ integrated interconnection queue plan was filed in August 2014 and the integrated interconnection queues were implemented in January 2015.

The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and policy issues associated with distributed energy resources (see “Distributed Energy Resources (DER) Investigative Proceeding” below) and (3) the Hawaii electricity reliability administrator, which is a third party position which the legislature has authorized the PUC to create by contract to provide support for the PUC in developing and periodically updating local grid reliability standards and procedures and interconnection requirements and overseeing grid access and operation.

Policy Statement and Order Regarding Demand Response Programs. The PUC provided guidance concerning the objectives and goals for demand response programs, and ordered the Utilities to develop an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers. The Utilities’ Plan was filed in July 2014. Subsequently, the Utilities submitted status updates and an update and supplemental report to the Plan. On July 28, 2015, the PUC issued an order appointing a special adviser to guide, monitor and review the Utility’s Plan design and implementation. On December 30, 2015, the Utilities filed applications with the PUC for approval of their proposed DR Portfolio Tariff Structure, Reporting Schedule and Cost Recovery of Program Costs. The Utilities filed an updated DR Portfolio on February 10, 2017.  In May 2017, the Utilities plan to file their reply to the statements of position submitted by the other parties in April 2017. In the DRMS proceeding, the parties filed Statements of Position in December 2016 and are awaiting a PUC decision.

Review of PSIPs. Collectively, the PUC's April 2014 resource planning orders confirm the energy policy and operational priorities that will guide the Utilities' strategies and plans going forward.

PSIPs for the Utilities were filed in August 2014. The PSIPs each included a tactical plan to transform how electric utility services will be offered to meet customer needs and produce higher levels of renewable energy. Each plan contained a diversified mix of technologies, including significant distributed and utility‑scale renewable resources, that are expected to result, on a consolidated basis, in over 65% of the Utilities’ energy being produced from renewable resources by 2030. Under these plans, the Utilities would support sustainable growth of private rooftop solar, expand use of energy storage systems, empower customers by developing smart grids, offer new products and services to customers (e.g., community solar, microgrids and voluntary “demand response” programs), switch from high-priced oil to lower cost liquefied natural gas, retire higher-cost, less efficient existing oil-based steam generators and lower full service residential customer bills in real dollars.

In November 2015, the PUC issued an order in the proceeding to review the PSIPs filed. The order provided observations and concerns on the PSIPs submitted. As required by the order, the Utilities submitted a Proposed Revision Plan in November 2015, which included a schedule and a work plan to supplement, amend and update the PSIPs in order to address the PUC’s observations and concerns. The parties and participants filed comments on the Utilities Proposed Revision Plan in January 2016. The updated PSIPs, filed by the Utilities on April 1, 2016, provide the Utilities’ assumptions, analyses and plans to achieve 100% renewable energy using a diverse mix of energy resources by 2045.

As required by the PUC, on December 23, 2016, the Utilities filed their PSIP Update Report: December 2016. The updated plans describe greater and faster expansion of the Utilities’ renewable energy portfolio than in the plans filed in April 2016 and emphasize work that is in progress or planned over the next five years on each of the five islands the Utilities serve. The final step in the procedural schedule was the filing of the parties and participants’ respective statements of position in February 2017.

Distributed Energy Resources (DER) Investigative Proceeding. In March 2015, the PUC issued an order to address DER issues.

On June 29, 2015, the Utilities submitted their final Statement of Position in the DER proceeding, which included:

(1) new pricing provisions for future private rooftop photovoltaic (PV) systems,

(2) technical standards for advanced inverters,

(3) new options for customers including battery-equipped private rooftop PV systems,

(4) a pilot time-of-use rate,

(5) an improved method of calculating the amount of private rooftop PV that can be safely installed, and

(6) a streamlined and standardized PV application process.

On October 12, 2015, the PUC issued a D&O establishing DER reforms that: (1) promote rapid adoption of the next generation of solar PV and other distributed energy technologies; (2) encourage more competitive pricing of distributed energy resource systems; (3) lower overall energy supply costs for all customers; and (4) help to manage DER in terms of each island’s limited grid capacity.

The D&O approved a customer self-supply tariff and a customer grid supply tariff to govern customer generators connected to the Utilities’ systems. These tariffs replace the Net Energy Metering (NEM) program.

In June 2016, the PUC approved the Utilities Advanced Inverter Test Plan and the Utilities submitted the results of the testing to the PUC.

Pursuant to a PUC order, in October 2016, the Utilities submitted tariffs for a Residential Interim Time of Use program, which is limited to 2 years and 5,000 customers. The primary objective is to encourage more efficient use of the electric system and enable more cost-effective integration of renewable energy by shifting customer load from the system’s higher cost, peak demand period to the mid-day period when relatively inexpensive renewable resources are abundant.

The DER Phase 2 of this proceeding is focused on further developing competitive markets for distributed energy resources, including storage. On December 9, 2016, the PUC issued an order, establishing the statement of issues and procedural schedule to govern Phase 2 of this proceeding. Technical track issues, including DER integration analyses and revisions to interconnection standards, will be addressed before the end of 2017. More complex market issues will be addressed in late 2018.

Pursuant to PUC order, in January and February 2017, the Utilities and various DER parties submitted tariff proposals to modify existing interim DER option and proposals, and interconnection standards to facilitate or enable interim DER options, as well as provided comments and reply comments on such tariff proposals. A PUC decision is pending.

Derivative financial instrument. On January 5, 2016, Hawaiian Electric executed window forward contracts to hedge the foreign currency risk associated with the anticipated purchase of engines from a European manufacturer to be included as part of the Schofield generating station. The generating station is expected to be placed into service in the first quarter of 2018.

	March 31, 2017					December 31, 2016
(dollars in thousands)	Notional amount		Fair value			Notional amount		Fair value
Window forward contracts	$	15,838	$	(277	)	$	20,734	$	(743	)

onsolidating financial information. Hawaiian Electric is not required to provide separate financial statements or other disclosures concerning Hawaii Electric Light and Maui Electric to holders of the 2004 Debentures issued by Hawaii Electric Light and Maui Electric to Trust III since all of their voting capital stock is owned, and their obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by Hawaiian Electric. Consolidating information is provided below for Hawaiian Electric and each of its subsidiaries for the periods ended and as of the dates indicated.

Hawaiian Electric also unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder and (c) relating to the trust preferred securities of Trust III. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income (unaudited)

Three months ended March 31, 2017

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	362,843		78,982		76,793		—	(7	)	$	518,611
Expenses
Fuel oil	98,001			17,257		29,012		—	—		144,270
Purchased power	100,147			18,589		8,388		—	—		127,124
Other operation and maintenance	67,278			15,516		17,446		—	—		100,240
Depreciation	32,722			9,685		5,809		—	—		48,216
Taxes, other than income taxes	35,040			7,450		7,333		—	—		49,823
Total expenses	333,188			68,497		67,988		—	—		469,673
Operating income	29,655			10,485		8,805		—	(7	)	48,938
Allowance for equity funds used during construction	2,056			115		228		—	—		2,399
Equity in earnings of subsidiaries	8,603			—		—		—	(8,603	)	—
Interest expense and other charges, net	(12,057		)	(3,004	)	(2,450	)	—	7		(17,504		)
Allowance for borrowed funds used during construction	749			45		95		—	—		889
Income before income taxes	29,006			7,641		6,678		—	(8,603	)	34,722
Income taxes	7,271			2,923		2,564		—	—		12,758
Net income	21,735			4,718		4,114		—	(8,603	)	21,964
Preferred stock dividends of subsidiaries	—			134		95		—	—		229
Net income attributable to Hawaiian Electric	21,735			4,584		4,019		—	(8,603	)	21,735
Preferred stock dividends of Hawaiian Electric	270			—		—		—	—		270
Net income for common stock	$	21,465		4,584		4,019		—	(8,603	)	$	21,465

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income (unaudited)

Three months ended March 31, 2017

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net income for common stock	$	21,465		4,584		4,019		—	(8,603	)	$	21,465
Other comprehensive income (loss), net of taxes:
Derivatives qualifying as cash flow hedges:
Reclassification adjustment to net income, net of tax benefits	454			—		—		—	—		454
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	3,618			503		466		—	(969	)	3,618
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(3,613		)	(503	)	(467	)	—	970		(3,613		)
Other comprehensive income (loss), net of taxes	459			—		(1	)	—	1		459
Comprehensive income attributable to common shareholder	$	21,924		4,584		4,018		—	(8,602	)	$	21,924

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income (unaudited)

Three months ended March 31, 2016

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	337,175		73,183		71,706		—	(12	)	$	482,052
Expenses
Fuel oil	74,085			14,374		25,281		—	—		113,740
Purchased power	91,917			16,797		7,145		—	—		115,859
Other operation and maintenance	69,558			16,441		17,909		—	—		103,908
Depreciation	31,522			9,449		5,810		—	—		46,781
Taxes, other than income taxes	32,684			6,891		6,863		—	—		46,438
Total expenses	299,766			63,952		63,008		—	—		426,726
Operating income	37,409			9,231		8,698		—	(12	)	55,326
Allowance for equity funds used during construction	1,406			127		206		—	—		1,739
Equity in earnings of subsidiaries	7,929			—		—		—	(7,929	)	—
Interest expense and other charges, net	(11,865		)	(2,965	)	(2,490	)	—	12		(17,308		)
Allowance for borrowed funds used during construction	529			49		84		—	—		662
Income before income taxes	35,408			6,442		6,498		—	(7,929	)	40,419
Income taxes	9,771			2,346		2,436		—	—		14,553
Net income	25,637			4,096		4,062		—	(7,929	)	25,866
Preferred stock dividends of subsidiaries	—			134		95		—	—		229
Net income attributable to Hawaiian Electric	25,637			3,962		3,967		—	(7,929	)	25,637
Preferred stock dividends of Hawaiian Electric	270			—		—		—	—		270
Net income for common stock	$	25,367		3,962		3,967		—	(7,929	)	$	25,367

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income (unaudited)

Three months ended March 31, 2016

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net incomefor common stock	$	25,367		3,962		3,967		—	(7,929	)	$	25,367
Other comprehensive income, net of taxes:
Derivatives qualifying as cash flow hedges:
Effective portion of foreign currency hedge net unrealized gain, net of taxes	1,002			—		—		—	—		1,002
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	3,236			458		418		—	(876	)	3,236
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(3,222		)	(458	)	(418	)	—	876		(3,222		)
Other comprehensive income, net of taxes	1,016			—		—		—	—		1,016
Comprehensive income attributable to common shareholder	$	26,383		3,962		3,967		—	(7,929	)	$	26,383

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet (unaudited)

March 31, 2017

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consoli- dating adjustments		Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	43,950		6,191		3,016		—	—		$	53,157
Plant and equipment	4,272,395			1,261,079		1,117,620		—	—		6,651,094
Less accumulated depreciation	(1,404,024		)	(511,473	)	(483,725	)	—	—		(2,399,222		)
Construction in progress	196,535			13,249		20,288		—	—		230,072
Utility property, plant and equipment, net	3,108,856			769,046		657,199		—	—		4,535,101
Nonutility property, plant and equipment, less accumulated depreciation	5,763			115		1,532		—	—		7,410
Total property, plant and equipment, net	3,114,619			769,161		658,731		—	—		4,542,511
Investment in wholly owned subsidiaries, at equity	552,688			—		—		—	(552,688	)	—
Current assets
Cash and cash equivalents	8,617			2,952		1,537		101	—		13,207
Advances to affiliates	—			6,500		2,500		—	(9,000	)	—
Customer accounts receivable, net	82,389			18,735		16,866		—	—		117,990
Accrued unbilled revenues, net	70,398			13,883		13,351		—	—		97,632
Other accounts receivable, net	24,489			2,526		1,125		—	(7,752	)	20,388
Fuel oil stock, at average cost	56,473			6,744		10,657		—	—		73,874
Materials and supplies, at average cost	32,195			8,494		16,356		—	—		57,045
Prepayments and other	21,150			4,621		3,163		—	—		28,934
Regulatory assets	73,548			4,210		4,194		—	—		81,952
Total current assets	369,259			68,665		69,749		101	(16,752	)	491,022
Other long-term assets
Regulatory assets	637,014			119,783		106,660		—	—		863,457
Unamortized debt expense	133			20		30		—	—		183
Other	44,598			13,120		14,151		—	—		71,869
Total other long-term assets	681,745			132,923		120,841		—	—		935,509
Total assets	$	4,718,311		970,749		849,321		101	(569,440	)	$	5,969,042
Capitalization and liabilities
Capitalization
Common stock equity	$	1,799,769		292,001		260,586		101	(552,688	)	$	1,799,769
Cumulative preferred stock—not subject to mandatory redemption	22,293			7,000		5,000		—	—		34,293
Long-term debt, net	915,175			213,732		189,964		—	—		1,318,871
Total capitalization	2,737,237			512,733		455,550		101	(552,688	)	3,152,933
Current liabilities
Short-term borrowings from non-affiliates	1,500			—		—		—	—		1,500
Short-term borrowings from affiliate	9,000			—		—		—	(9,000	)	—
Accounts payable	103,957			14,665		11,241		—	—		129,863
Interest and preferred dividends payable	18,172			4,007		3,997		—	(2	)	26,174
Taxes accrued	90,035			21,965		19,330		—	—		131,330
Regulatory liabilities	—			2,004		687		—	—		2,691
Other	42,721			7,938		13,326		—	(7,750	)	56,235
Total current liabilities	265,385			50,579		48,581		—	(16,752	)	347,793
Deferred credits and other liabilities
Deferred income taxes	532,497			109,733		103,572		—	215		746,017
Regulatory liabilities	288,748			96,380		32,121		—	—		417,249
Unamortized tax credits	58,691			16,941		15,380		—	—		91,012
Defined benefit pension and other postretirement benefit plans liability	440,246			74,100		79,510		—	—		593,856
Other	49,630			12,996		16,197		—	(215	)	78,608
Total deferred credits and other liabilities	1,369,812			310,150		246,780		—	—		1,926,742
Contributions in aid of construction	345,877			97,287		98,410		—	—		541,574
Total capitalization and liabilities	$	4,718,311		970,749		849,321		101	(569,440	)	$	5,969,042

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet (unaudited)

December 31, 2016

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consoli- dating adjustments		Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	43,956		6,181		3,016		—	—		$	53,153
Plant and equipment	4,241,060			1,255,185		1,109,487		—	—		6,605,732
Less accumulated depreciation	(1,382,972		)	(507,666	)	(478,644	)	—	—		(2,369,282		)
Construction in progress	180,194			12,510		19,038		—	—		211,742
Utility property, plant and equipment, net	3,082,238			766,210		652,897		—	—		4,501,345
Nonutility property, plant and equipment, less accumulated depreciation	5,760			115		1,532		—	—		7,407
Total property, plant and equipment, net	3,087,998			766,325		654,429		—	—		4,508,752
Investment in wholly owned subsidiaries,at equity	550,946			—		—		—	(550,946	)	—
Current assets
Cash and cash equivalents	61,388			10,749		2,048		101	—		74,286
Advances to affiliates	—			3,500		10,000		—	(13,500	)	—
Customer accounts receivable, net	86,373			20,055		17,260		—	—		123,688
Accrued unbilled revenues, net	65,821			13,564		12,308		—	—		91,693
Other accounts receivable, net	7,652			2,445		1,416		—	(6,280	)	5,233
Fuel oil stock, at average cost	47,239			8,229		10,962		—	—		66,430
Materials and supplies, at average cost	29,928			7,380		16,371		—	—		53,679
Prepayments and other	16,502			5,352		2,179		—	(933	)	23,100
Regulatory assets	60,185			3,483		2,364		—	—		66,032
Total current assets	375,088			74,757		74,908		101	(20,713	)	504,141
Other long-term assets
Regulatory assets	662,232			120,863		108,324		—	—		891,419
Unamortized debt expense	151			23		34		—	—		208
Other	43,743			13,573		13,592		—	—		70,908
Total other long-term assets	706,126			134,459		121,950		—	—		962,535
Total assets	$	4,720,158		975,541		851,287		101	(571,659	)	$	5,975,428
Capitalization and liabilities
Capitalization
Common stock equity	$	1,799,787		291,291		259,554		101	(550,946	)	$	1,799,787
Cumulative preferred stock—not subject to mandatory redemption	22,293			7,000		5,000		—	—		34,293
Long-term debt, net	915,437			213,703		190,120		—	—		1,319,260
Total capitalization	2,737,517			511,994		454,674		101	(550,946	)	3,153,340
Current liabilities
Short-term borrowings from affiliate	13,500			—		—		—	(13,500	)	—
Accounts payable	86,369			18,126		13,319		—	—		117,814
Interest and preferred dividends payable	15,761			4,206		2,882		—	(11	)	22,838
Taxes accrued	120,176			28,100		25,387		—	(933	)	172,730
Regulatory liabilities	—			2,219		1,543		—	—		3,762
Other	41,352			7,637		12,501		—	(6,269	)	55,221
Total current liabilities	277,158			60,288		55,632		—	(20,713	)	372,365
Deferred credits and other liabilities
Deferred income taxes	524,433			108,052		100,911		—	263		733,659
Regulatory liabilities	281,112			93,974		31,845		—	—		406,931
Unamortized tax credits	57,844			15,994		15,123		—	—		88,961
Defined benefit pension and other postretirement benefit plans liability	444,458			75,005		80,263		—	—		599,726
Other	49,191			13,024		14,969		—	(263	)	76,921
Total deferred credits and other liabilities	1,357,038			306,049		243,111		—	—		1,906,198
Contributions in aid of construction	348,445			97,210		97,870		—	—		543,525
Total capitalization and liabilities	$	4,720,158		975,541		851,287		101	(571,659	)	$	5,975,428

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Changes in Common Stock Equity (unaudited)

Three months ended March 31, 2017

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Balance, December 31, 2016	$	1,799,787		291,291		259,554		101	(550,946	)	$	1,799,787
Net income for common stock	21,465			4,584		4,019		—	(8,603	)	21,465
Other comprehensive income (loss), net of taxes	459			—		(1	)	—	1		459
Common stock dividends	(21,942		)	(3,874	)	(2,986	)	—	6,860		(21,942		)
Balance, March 31, 2017	$	1,799,769		292,001		260,586		101	(552,688	)	$	1,799,769

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Changes in Common Stock Equity (unaudited)

Three months ended March 31, 2016

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Balance, December 31, 2015	$	1,728,325		292,702		263,725		101	(556,528	)	$	1,728,325
Net income for common stock	25,367			3,962		3,967		—	(7,929	)	25,367
Other comprehensive income, net of taxes	1,016			—		—		—	—		1,016
Common stock dividends	(23,400		)	(3,302	)	(3,265	)	—	6,567		(23,400		)
Common stock issuance expenses	(4		)	(4	)	(1	)	—	5		(4		)
Balance, March 31, 2016	$	1,731,304		293,358		264,426		101	(557,885	)	$	1,731,304

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows (unaudited)

Three months ended March 31, 2017

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Cash flows from operating activities
Net income	$	21,735		4,718		4,114		—	(8,603	)	$	21,964
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiaries	(8,628		)	—		—		—	8,603		(25		)
Common stock dividends received from subsidiaries	6,910			—		—		—	(6,860	)	50
Depreciation of property, plant and equipment	32,722			9,685		5,809		—	—		48,216
Other amortization	914			442		593		—	—		1,949
Deferred income taxes	6,810			1,700		2,602		—	(48	)	11,064
Allowance for equity funds used during construction	(2,056		)	(115	)	(228	)	—	—		(2,399		)
Other	661			(138	)	(87	)	—	—		436
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	(10,724		)	1,239		685		—	1,472		(7,328		)
Increase in accrued unbilled revenues	(4,577		)	(319	)	(1,043	)	—	—		(5,939		)
Decrease (increase) in fuel oil stock	(9,234		)	1,485		305		—	—		(7,444		)
Decrease (increase) in materials and supplies	(2,267		)	(1,114	)	15		—	—		(3,366		)
Decrease (increase) in regulatory assets	7,711			(677	)	(1,125	)	—	—		5,909
Increase in accounts payable	59,861			2,735		1,578		—	—		64,174
Change in prepaid and accrued income taxes, tax credits and revenue taxes	(32,272		)	(5,352	)	(6,408	)	—	48		(43,984		)
Increase in defined benefit pension and other postretirement benefit plans liability	240			14		10		—	—		264
Change in other assets and liabilities	(4,249		)	805		197		—	(1,472	)	(4,719		)
Net cash provided by operating activities	63,557			15,108		7,017		—	(6,860	)	78,822
Cash flows from investing activities
Capital expenditures	(101,953		)	(16,890	)	(12,812	)	—	—		(131,655		)
Contributions in aid of construction	8,934			915		801		—	—		10,650
Other	2,352			78		272		—	—		2,702
Advances from affiliates	—			(3,000	)	7,500		—	(4,500	)	—
Net cash used in investing activities	(90,667		)	(18,897	)	(4,239	)	—	(4,500	)	(118,303		)
Cash flows from financing activities
Common stock dividends	(21,942		)	(3,874	)	(2,986	)	—	6,860		(21,942		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(270		)	(134	)	(95	)	—	—		(499		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	(3,000		)	—		—		—	4,500		1,500
Other	(449		)	—		(208	)	—	—		(657		)
Net cash used in financing activities	(25,661		)	(4,008	)	(3,289	)	—	11,360		(21,598		)
Net increase (decrease) in cash and cash equivalents	(52,771		)	(7,797	)	(511	)	—	—		(61,079		)
Cash and cash equivalents, beginning of period	61,388			10,749		2,048		101	—		74,286
Cash and cash equivalents, end of period	$	8,617		2,952		1,537		101	—		$	13,207

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows (unaudited)

Three months ended March 31, 2016

(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Cash flows from operating activities
Net income	$	25,637		4,096		4,062		—	(7,929	)	$	25,866
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiaries	(7,954		)	—		—		—	7,929		(25		)
Common stock dividends received from subsidiaries	6,592			—		—		—	(6,567	)	25
Depreciation of property, plant and equipment	31,522			9,449		5,810		—	—		46,781
Other amortization	1,045			268		461		—	—		1,774
Deferred income taxes	9,764			1,277		2,517		—	—		13,558
Allowance for equity funds used during construction	(1,406		)	(127	)	(206	)	—	—		(1,739		)
Other	1,386			154		162		—	—		1,702
Changes in assets and liabilities:
Decrease in accounts receivable	22,606			2,113		3,563		—	15		28,297
Decrease (increase) in accrued unbilled revenues	58			(326	)	(590	)	—	—		(858		)
Decrease in fuel oil stock	14,902			2,622		5,288		—	—		22,812
Decrease (increase) in materials and supplies	378			(27	)	(178	)	—	—		173
Increase in regulatory assets	79			397		1,109		—	—		1,585
Increase in accounts payable	24,827			1,652		1,287		—	—		27,766
Change in prepaid and accrued income taxes, tax credits and revenue taxes	(31,916		)	(1,634	)	(8,466	)	—	(2	)	(42,018		)
Increase in defined benefit pension and other postretirement benefit plans liability	177			13		15		—	—		205
Change in other assets and liabilities	15,249			5,562		169		—	(13	)	20,967
Net cash provided by operating activities	112,946			25,489		15,003		—	(6,567	)	146,871
Cash flows from investing activities
Capital expenditures	(97,363		)	(16,649	)	(11,171	)	—	—		(125,183		)
Contributions in aid of construction	11,585			969		1,207		—	—		13,761
Other	22			23		—		—	—		45
Advances from affiliates	—			3,000		500		—	(3,500	)	—
Net cash used in investing activities	(85,756		)	(12,657	)	(9,464	)	—	(3,500	)	(111,377		)
Cash flows from financing activities
Common stock dividends	(23,400		)	(3,302	)	(3,265	)	—	6,567		(23,400		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(270		)	(134	)	(95	)	—	—		(499		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	9,498			—		—		—	3,500		12,998
Other	8			(8	)	—		—	—		—
Net cash used in financing activities	(14,164		)	(3,444	)	(3,360	)	—	10,067		(10,901		)
Net increase in cash and cash equivalents	13,026			9,388		2,179		—	—		24,593
Cash and cash equivalents, beginning of period	16,281			2,682		5,385		101	—		24,449
Cash and cash equivalents, end of period	$	29,307		12,070		7,564		101	—		$	49,042