Edgar Filing: HAWAIIAN ELECTRIC INDUSTRIES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Exact Name of Registrant as	Commission	I.R.S. Employer
Specified in Its Charter	File Number	Identification No.
HAWAIIAN ELECTRIC INDUSTRIES, INC.	1-8503	99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC.	1-4955	99-0040500

State of Hawaii

(State or other jurisdiction of incorporation or organization)

Hawaiian Electric Industries, Inc. – 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813

Hawaiian Electric Company, Inc. – 900 Richards Street, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

Hawaiian Electric Industries, Inc. – (808) 543-5662

Hawaiian Electric Company, Inc. – (808) 543-7771

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Hawaiian Electric Industries, Inc. Yes x No o		Hawaiian Electric Company, Inc. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Hawaiian Electric Industries, Inc. Yes x No o		Hawaiian Electric Company, Inc. Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Hawaiian Electric Industries, Inc. Yes o No x		Hawaiian Electric Company, Inc. Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Hawaiian Electric Industries, Inc.	Large accelerated filer x	Hawaiian Electric Company, Inc.	Large accelerated filer o
	Accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Non-accelerated filer x
	(Do not check if a smaller reporting company)		(Do not check if a smaller reporting company)
	Smaller reporting company o		Smaller reporting company o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.



Class of Common Stock		Outstanding October 28, 2016
Hawaiian Electric Industries, Inc. (Without Par Value)		108,524,493 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)		15,805,327 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.

This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2016

TABLE OF CONTENTS



Page No.
ii	Glossary of Terms
iv	Cautionary Note Regarding Forward-Looking Statements

	PART I. FINANCIAL INFORMATION
1	Item 1.	Financial Statements

		Hawaiian Electric Industries, Inc. and Subsidiaries
1		Consolidated Statements of Income (unaudited) - three and nine months ended September 30, 2016 and 2015
2		Consolidated Statements of Comprehensive Income (unaudited) - three and nine months ended September 30, 2016 and 2015
3		Consolidated Balance Sheets (unaudited) - September 30, 2016 and December 31, 2015
4		Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - nine months ended September 30, 2016 and 2015
5		Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2016 and 2015
		Hawaiian Electric Company, Inc. and Subsidiaries
6		Consolidated Statements of Income (unaudited) - three and nine months ended September 30, 2016 and 2015
7		Consolidated Statements of Comprehensive Income (unaudited) - three and nine months ended September 30, 2016 and 2015
8		Consolidated Balance Sheets (unaudited) - September 30, 2016 and December 31, 2015
9		Consolidated Statements of Changes in Common Stock Equity (unaudited) - nine months ended September 30, 2016 and 2015
10		Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2016 and 2015
11		Notes to Consolidated Financial Statements (unaudited)
65	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
65		HEI consolidated
70		Electric Utilities
82		Bank
91	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
91	Item 4.	Controls and Procedures

	PART II.	OTHER INFORMATION
92	Item 1.	Legal Proceedings
92	Item 1A.	Risk Factors
93	Item 5.	Other Information
93	Item 6.	Exhibits
94	Signatures

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2016

GLOSSARY OF TERMS



Terms		Definitions
AES Hawaii		AES Hawaii, Inc.
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income/(loss)
ARO		Asset retirement obligation
ASB		American Savings Bank, F.S.B., a wholly-owned subsidiary of ASB Hawaii, Inc.
ASB Hawaii		ASB Hawaii, Inc. (formerly American Savings Holdings, Inc.), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
CIP CT-1		Campbell Industrial Park 110 MW combustion turbine No. 1
CIS		Customer Information System
Company		Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; HEI Properties, Inc. (dissolved in 2015); and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.).
Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
DER		Distributed Energy Resources
D&O		Decision and order
DG		Distributed generation
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOH		Department of Health of the State of Hawaii
DRIP		HEI Dividend Reinvestment and Stock Purchase Plan
DSM		Demand-side management
ECAC		Energy cost adjustment clause
EGU		Electrical generating unit
EIP		2010 Equity and Incentive Plan, as amended and restated
EPA		Environmental Protection Agency — federal
EPS		Earnings per share
ERISA		Employee Retirement Income Security Act of 1974, as amended
EVE		Economic value of equity
Exchange Act		Securities Exchange Act of 1934
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
federal		U.S. Government
FERC		Federal Energy Regulatory Commission
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FNMA		Federal National Mortgage Association
FRB		Federal Reserve Board
GAAP		Accounting principles generally accepted in the United States of America
GHG		Greenhouse gas

GLOSSARY OF TERMS, continued



Terms		Definitions
GNMA		Government National Mortgage Association
Hawaii Electric Light		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
Hawaiian Electric		Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.
HIE		Hawaii Independent Energy, LLC
HEI		Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., HEI Properties, Inc. (dissolved in 2015) and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.)
HEIRSP		Hawaiian Electric Industries Retirement Savings Plan
HELOC		Home equity line of credit
Hpower		City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
IPP		Independent power producer
Kalaeloa		Kalaeloa Partners, L.P.
KWH		Kilowatthour/s (as applicable)
LNG		Liquefied natural gas
LTIP		Long-term incentive plan
MATS		Mercury and Air Toxics Standards
Maui Electric		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Merger		As provided in the Merger Agreement, merger of Merger Sub I with and into HEI, with HEI surviving, and then merger of HEI with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary of NEE
Merger Agreement		Agreement and Plan of Merger by and among HEI, NEE, Merger Sub II and Merger Sub I, dated December 3, 2014
Merger Sub I		NEE Acquisition Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of NEE
Merger Sub II		NEE Acquisition Sub I, LLC, a Delaware limited liability company and a wholly owned subsidiary of NEE
MW		Megawatt/s (as applicable)
NEE		NextEra Energy, Inc.
NEM		Net energy metering
NII		Net interest income
O&M		Other operation and maintenance
OCC		Office of the Comptroller of the Currency
OPEB		Postretirement benefits other than pensions
PPA		Power purchase agreement
PPAC		Purchased power adjustment clause
PSIPs		Power Supply Improvement Plans
PUC		Public Utilities Commission of the State of Hawaii
PV		Photovaltaic
RAM		Rate adjustment mechanism
RBA		Revenue balancing account
RFP		Request for proposals
ROACE		Return on average common equity
RORB		Return on rate base
RPS		Renewable portfolio standards
SAR		Stock appreciation right
SEC		Securities and Exchange Commission
See		Means the referenced material is incorporated by reference
Spin-Off		The distribution to HEI shareholders of all of the common stock of ASB Hawaii immediately prior to the Merger
TDR		Troubled debt restructuring
Trust III		HECO Capital Trust III
Utilities		Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
VIE		Variable interest entity

iii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:

•

international, national and local economic conditions, including the state of the Hawaii tourism, defense and construction industries, the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by ASB, which could result in higher loan loss provisions and write-offs), decisions concerning the extent of the presence of the federal government and military in Hawaii, the implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international responses to those conditions, and the potential impacts of global developments (including global economic conditions and uncertainties, the effects of the United Kingdom’s referendum to withdraw from the European Union, unrest, the conflict in Syria, terrorist acts by ISIS or others, potential conflict or crisis with North Korea and potential pandemics);


•	the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling and monetary policy;


•	weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of climate change, such as more severe storms and rising sea levels), including their impact on the Company's and Utilities' operations and the economy;


•	the timing and extent of changes in interest rates and the shape of the yield curve;


•	the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile and challenging market conditions, and the cost of such financings, if available;


•	the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale;


•	changes in laws, regulations, market conditions and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;


•	the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated;


•	increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);

•

the impacts of the termination of the Merger with NextEra Energy, Inc. (NEE) and the resulting loss of NEE’s resources, expertise and support (e.g., financial and technological), including potentially higher costs and longer lead times to increase levels of renewable energy and to complete projects like Enterprise Resource Planning/Enterprise Asset Management (ERP/ERM) and smart grids, and a higher cost of capital;

•

the potential delay by the Public Utilities Commission of the State of Hawaii (PUC) in considering (and potential disapproval of actual or proposed) renewable energy proposals and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; and uncertainties surrounding technologies, solar power, wind power, proposed undersea cables, biofuels, environmental assessments required to meet renewable portfolio standards (RPS) goals and the impacts of implementation of the renewable energy proposals on future costs of electricity;

•

the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans and business model changes proposed and being developed in response to the four orders that the PUC issued in April 2014, in which the PUC: directed the Utilities to develop, among other things, Power Supply Improvement Plans, a Demand Response Portfolio Plan and a Distributed Generation Interconnection Plan; described the PUC’s inclinations on the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and the state’s public policy goals; and emphasized the need to “leap ahead” of other states in creating a 21st century generation system and modern transmission and distribution grids;


•	capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management (DSM), distributed generation (DG), combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;


•	fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs);


•	the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;


•	the impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;


•	the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;


•	the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities' electric systems and as customers reduce their energy usage;


•	the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);


•	the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;


•	the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements;


•	new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors;


•	new technological developments, such as the commercial development of energy storage and microgrids, that could affect the operations of the Utilities;


•	cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASB and the Utilities (including at ASB branches and electric utility plants) and incidents at data processing centers they use, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general information technology controls;

•

federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), the regulation of greenhouse gas (GHG) emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);


•	developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies;


•	discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight;


•	decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);


•	decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS);

•

potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);


•	the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;


•	the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);


•	changes in accounting principles applicable to HEI, the Utilities and ASB, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting and the effects of potentially required consolidation of variable interest entities (VIEs) or required capital lease accounting for PPAs with IPPs;


•	changes by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and the results of financing efforts;


•	faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage-servicing assets of ASB;


•	changes in ASB’s loan portfolio credit profile and asset quality which may increase or decrease the required level of provision for loan losses, allowance for loan losses and charge-offs;


•	changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;


•	the final outcome of tax positions taken by HEI, the Utilities and ASB;


•	the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits); and


•	other risks or uncertainties described elsewhere in this report and in other reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or Hawaiian Electric with the Securities and Exchange Commission (SEC).

Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, Hawaiian Electric, ASB and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands, except per share amounts)	2016			2015			2016			2015
Revenues
Electric utility	$	572,253		$	648,127		$	1,549,700		$	1,779,732
Bank	73,708			69,091			213,297			199,222
Other	94			(42		)	262			(4		)
Total revenues	646,055			717,176			1,763,259			1,978,950
Expenses
Electric utility	482,441			565,470			1,333,876			1,573,278
Bank	50,981			48,289			150,752			138,063
Other	7,191			6,322			18,883			28,278
Total expenses	540,613			620,081			1,503,511			1,739,619
Operating income (loss)
Electric utility	89,812			82,657			215,824			206,454
Bank	22,727			20,802			62,545			61,159
Other	(7,097		)	(6,364		)	(18,621		)	(28,282		)
Total operating income	105,442			97,095			259,748			239,331
Merger termination fee	90,000			—			90,000			—
Interest expense, net—other than on deposit liabilities and other bank borrowings	(19,365		)	(19,229		)	(56,792		)	(57,235		)
Allowance for borrowed funds used during construction	854			737			2,276			1,918
Allowance for equity funds used during construction	2,274			2,057			6,010			5,366
Income before income taxes	179,205			80,660			301,242			189,380
Income taxes	51,592			29,516			96,203			70,406
Net income	127,613			51,144			205,039			118,974
Preferred stock dividends of subsidiaries	471			471			1,417			1,417
Net income for common stock	$	127,142		$	50,673		$	203,622		$	117,557
Basic earnings per common share	$	1.17		$	0.47		$	1.89		$	1.11
Diluted earnings per common share	$	1.17		$	0.47		$	1.88		$	1.11
Dividends per common share	$	0.31		$	0.31		$	0.93		$	0.93
Weighted-average number of common shares outstanding	108,268			107,457			107,951			106,067
Net effect of potentially dilutive shares	204			281			220			280
Adjusted weighted-average shares	108,472			107,738			108,171			106,347

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2016			2015			2016			2015
Net income for common stock	$	127,142		$	50,673		$	203,622		$	117,557
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $1,417, $(2,543), $(5,413) and $(2,382) for the respective periods	(2,147		)	3,851			8,197			3,608
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, $238 and nil for the respective periods	—			—			(360		)	—
Derivatives qualified as cash flow hedges:
Effective portion of foreign currency hedge net unrealized gains, net of taxes of $205, nil, $368 and nil for the respective periods	321			—			578			—
Less: reclassification adjustment to net income, net of (taxes) benefits of $(110), $37, $(75) and $112 for the respective periods	(173		)	59			(119		)	177
Retirement benefit plans:
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $2,324, $3,583, $6,943 and $10,760 for the respective periods	3,641			5,611			10,877			16,850
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,109, $3,243, $6,327 and $9,729 for the respective periods	(3,311		)	(5,091		)	(9,934		)	(15,274		)
Other comprehensive income (loss), net of taxes	(1,669		)	4,430			9,239			5,361
Comprehensive income attributable to Hawaiian Electric Industries, Inc.	$	125,473		$	55,103		$	212,861		$	122,918

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)



(dollars in thousands)	September 30, 2016			December 31, 2015
Assets
Cash and cash equivalents	$	284,355		$	300,478
Accounts receivable and unbilled revenues, net	250,076			242,766
Available-for-sale investment securities, at fair value	996,984			820,648
Stock in Federal Home Loan Bank, at cost	11,218			10,678
Loans receivable held for investment, net	4,675,901			4,565,781
Loans held for sale, at lower of cost or fair value	26,743			4,631
Property, plant and equipment, net of accumulated depreciation of $2,416,937 and $2,339,319 at the respective dates	4,532,556			4,377,658
Regulatory assets	879,775			896,731
Other	459,187			480,457
Goodwill	82,190			82,190
Total assets	$	12,198,985		$	11,782,018
Liabilities and shareholders’ equity
Liabilities
Accounts payable	$	134,176		$	138,523
Interest and dividends payable	27,115			26,042
Deposit liabilities	5,380,721			5,025,254
Short-term borrowings—other than bank	—			103,063
Other bank borrowings	265,388			328,582
Long-term debt, net—other than bank	1,579,065			1,578,368
Deferred income taxes	721,470			680,877
Regulatory liabilities	400,479			371,543
Contributions in aid of construction	525,491			506,087
Defined benefit pension and other postretirement benefit plans liability	572,933			589,918
Other	489,466			471,828
Total liabilities	10,096,304			9,820,085
Preferred stock of subsidiaries - not subject to mandatory redemption	34,293			34,293
Commitments and contingencies (Notes 4 and 5)
Shareholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none	—			—
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,503,210 shares and 107,460,406 shares at the respective dates	1,657,421			1,629,136
Retained earnings	427,990			324,766
Accumulated other comprehensive loss, net of tax benefits	(17,023		)	(26,262		)
Total shareholders’ equity	2,068,388			1,927,640
Total liabilities and shareholders’ equity	$	12,198,985		$	11,782,018

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)



	Common stock			Retained			Accumulated other comprehensive
(in thousands, except per share amounts)	Shares	Amount		Earnings			income (loss)			Total
Balance, December 31, 2015	107,460	$	1,629,136	$	324,766		$	(26,262	)	$	1,927,640
Net income for common stock	—	—		203,622			—			203,622
Other comprehensive income, net of taxes	—	—		—			9,239			9,239
Issuance of common stock, net	1,043	28,285		—			—			28,285
Common stock dividends ($0.93 per share)	—	—		(100,398		)	—			(100,398		)
Balance, September 30, 2016	108,503	$	1,657,421	$	427,990		$	(17,023	)	$	2,068,388
Balance, December 31, 2014	102,565	$	1,521,297	$	296,654		$	(27,378	)	$	1,790,573
Net income for common stock	—	—		117,557			—			117,557
Other comprehensive income, net of taxes	—	—		—			5,361			5,361
Issuance of common stock, net	4,894	105,962		—			—			105,962
Common stock dividends ($0.93 per share)	—	—		(98,452		)	—			(98,452		)
Balance, September 30, 2015	107,459	$	1,627,259	$	315,759		$	(22,017	)	$	1,921,001

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



Nine months ended September 30	2016			2015
(in thousands)
Cash flows from operating activities
Net income	$	205,039		$	118,974
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	145,684			137,721
Other amortization	7,368			7,252
Provision for loan losses	15,266			5,436
Loans receivable originated and purchased, held for sale	(172,657		)	(226,081		)
Proceeds from sale of loans receivable, held for sale	168,490			231,509
Deferred income taxes	30,667			2,723
Share-based compensation expense	3,581			4,780
Excess tax benefits from share-based payment arrangements	(398		)	(1,012		)
Allowance for equity funds used during construction	(6,010		)	(5,366		)
Impairment of utility assets	—			4,828
Other	3,234			3,921
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net	(12,104		)	8,248
Decrease in fuel oil stock	6,736			35,942
Increase in regulatory assets	(2,251		)	(23,458		)
Increase (decrease) in accounts, interest and dividends payable	3,399			(34,171		)
Change in prepaid and accrued income taxes and utility revenue taxes	52,558			(8,458		)
Increase in defined benefit pension and other postretirement benefit plans liability	150			418
Change in other assets and liabilities	(39,850		)	(41,954		)
Net cash provided by operating activities	408,902			221,252
Cash flows from investing activities
Available-for-sale investment securities purchased	(354,165		)	(326,965		)
Principal repayments on available-for-sale investment securities	172,829			96,053
Proceeds from sale of available-for-sale investment securities	16,423			—
Purchase of stock from Federal Home Loan Bank	(2,773		)	(1,600		)
Redemption of stock from Federal Home Loan Bank	2,233			60,223
Net increase in loans held for investment	(175,303		)	(101,771		)
Proceeds from sale of commercial loans	37,946			—
Proceeds from sale of real estate acquired in settlement of loans	829			1,258
Proceeds from sale of real estate held-for-sale	1,764			7,280
Capital expenditures	(259,207		)	(276,186		)
Contributions in aid of construction	23,568			34,627
Other	112			4,084
Net cash used in investing activities	(535,744		)	(502,997		)
Cash flows from financing activities
Net increase in deposit liabilities	355,467			202,539
Net increase (decrease) in short-term borrowings with original maturities of three months or less	(103,063		)	53,020
Net increase (decrease) in retail repurchase agreements	(21,121		)	67,934
Proceeds from other bank borrowings	55,835			50,000
Repayments of other bank borrowings	(97,902		)	(40,000		)
Proceeds from issuance of long-term debt	75,000			—
Repayment of long-term debt	(75,000		)	—
Excess tax benefits from share-based payment arrangements	398			1,012
Net proceeds from issuance of common stock	10,901			104,437
Common stock dividends	(83,620		)	(98,452		)
Preferred stock dividends of subsidiaries	(1,417		)	(1,417		)
Other	(4,759		)	(4,453		)
Net cash provided by financing activities	110,719			334,620
Net increase (decrease) in cash and cash equivalents	(16,123		)	52,875
Cash and cash equivalents, beginning of period	300,478			175,542
Cash and cash equivalents, end of period	$	284,355		$	228,417

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2016			2015			2016			2015
Revenues	$	572,253		$	648,127		$	1,549,700		$	1,779,732
Expenses
Fuel oil	128,624			195,633			334,263			518,670
Purchased power	157,750			160,518			412,667			445,809
Other operation and maintenance	94,789			103,653			298,260			306,519
Depreciation	46,759			44,356			140,300			132,840
Taxes, other than income taxes	54,519			61,310			148,386			169,440
Total expenses	482,441			565,470			1,333,876			1,573,278
Operating income	89,812			82,657			215,824			206,454
Allowance for equity funds used during construction	2,274			2,057			6,010			5,366
Interest expense and other charges, net	(17,323		)	(16,557		)	(49,734		)	(49,170		)
Allowance for borrowed funds used during construction	854			737			2,276			1,918
Income before income taxes	75,617			68,894			174,376			164,568
Income taxes	28,145			25,390			64,682			60,351
Net income	47,472			43,504			109,694			104,217
Preferred stock dividends of subsidiaries	228			228			686			686
Net income attributable to Hawaiian Electric	47,244			43,276			109,008			103,531
Preferred stock dividends of Hawaiian Electric	270			270			810			810
Net income for common stock	$	46,974		$	43,006		$	108,198		$	102,721

The accompanying notes are an integral part of these consolidated financial statements.

HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2016			2015			2016			2015
Net income for common stock	$	46,974		$	43,006		$	108,198		$	102,721
Other comprehensive income (loss), net of taxes:
Derivatives qualified as cash flow hedges:
Effective portion of foreign currency hedge net unrealized gains, net of taxes of $205, nil, $368 and nil for the respective periods	321			—			578			—
Less: reclassification adjustment to net income, net of taxes of $110, nil, $110 and nil for the respective periods	(173		)	—			(173		)	—
Retirement benefit plans:
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $2,110, $3,245, $6,331 and $9,735 for the respective periods	3,314			5,095			9,941			15,285
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,109, $3,243, $6,327 and $9,729 for the respective periods	(3,311		)	(5,091		)	(9,934		)	(15,274		)
Other comprehensive income (loss), net of taxes	151			4			412			11
Comprehensive income attributable to Hawaiian Electric Company, Inc.	$	47,125		$	43,010		$	108,610		$	102,732

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)



(dollars in thousands, except par value)	September 30, 2016			December 31, 2015
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	53,175		$	52,792
Plant and equipment	6,483,562			6,315,698
Less accumulated depreciation	(2,343,601		)	(2,266,004		)
Construction in progress	236,608			175,309
Utility property, plant and equipment, net	4,429,744			4,277,795
Nonutility property, plant and equipment, less accumulated depreciation of $1,231 and $1,229 at respective dates	7,374			7,272
Total property, plant and equipment, net	4,437,118			4,285,067
Current assets
Cash and cash equivalents	22,977			24,449
Customer accounts receivable, net	134,418			132,778
Accrued unbilled revenues, net	95,167			84,509
Other accounts receivable, net	4,629			10,408
Fuel oil stock, at average cost	64,480			71,216
Materials and supplies, at average cost	57,356			54,429
Prepayments and other	35,645			36,640
Regulatory assets	74,681			72,231
Total current assets	489,353			486,660
Other long-term assets
Regulatory assets	805,094			824,500
Unamortized debt expense	267			497
Other	68,994			75,486
Total other long-term assets	874,355			900,483
Total assets	$	5,800,826		$	5,672,210
Capitalization and liabilities
Capitalization
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 15,805,327 shares)	$	105,388		$	105,388
Premium on capital stock	578,921			578,930
Retained earnings	1,081,081			1,043,082
Accumulated other comprehensive income, net of income taxes	1,337			925
Common stock equity	1,766,727			1,728,325
Cumulative preferred stock — not subject to mandatory redemption	34,293			34,293
Long-term debt, net	1,279,327			1,278,702
Total capitalization	3,080,347			3,041,320
Commitments and contingencies (Note 4)
Current liabilities
Short-term borrowings from affiliates	21,000			—
Accounts payable	107,497			114,846
Interest and preferred dividends payable	25,934			23,111
Taxes accrued	167,276			191,084
Regulatory liabilities	2,987			2,204
Other	56,753			54,079
Total current liabilities	381,447			385,324
Deferred credits and other liabilities
Deferred income taxes	714,559			654,806
Regulatory liabilities	397,492			369,339
Unamortized tax credits	87,794			84,214
Defined benefit pension and other postretirement benefit plans liability	535,912			552,974
Other	77,784			78,146
Total deferred credits and other liabilities	1,813,541			1,739,479
Contributions in aid of construction	525,491			506,087
Total capitalization and liabilities	$	5,800,826		$	5,672,210

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Changes in Common Stock Equity (unaudited)



	Common stock			Premium on capital			Retained			Accumulated other comprehensive
(in thousands)	Shares	Amount		stock			earnings			income (loss)		Total
Balance, December 31, 2015	15,805	$	105,388	$	578,930		$	1,043,082		$	925	$	1,728,325
Net income for common stock	—	—		—			108,198			—		108,198
Other comprehensive income, net of taxes	—	—		—			—			412		412
Common stock dividends	—	—		—			(70,199		)	—		(70,199		)
Common stock issuance expenses	—	—		(9		)	—			—		(9		)
Balance, September 30, 2016	15,805	$	105,388	$	578,921		$	1,081,081		$	1,337	$	1,766,727
Balance, December 31, 2014	15,805	$	105,388	$	578,938		$	997,773		$	45	$	1,682,144
Net income for common stock	—	—		—			102,721			—		102,721
Other comprehensive income, net of taxes	—	—		—			—			11		11
Common stock dividends	—	—		—			(67,804		)	—		(67,804		)
Common stock issuance expenses	—	—		(8		)	—			—		(8		)
Balance, September 30, 2015	15,805	$	105,388	$	578,930		$	1,032,690		$	56	$	1,717,064

The accompanying notes are an integral part of these consolidated financial statements.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



Nine months ended September 30	2016			2015
(in thousands)
Cash flows from operating activities
Net income	$	109,694		$	104,217
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	140,300			132,840
Other amortization	5,380			4,999
Deferred income taxes	55,648			58,211
Tax credits, net	5,256			4,247
Allowance for equity funds used during construction	(6,010		)	(5,366		)
Impairment of utility assets	—			4,828
Other	(2,022		)	(326		)
Changes in assets and liabilities
Increase in accounts receivable	(655		)	(4,464		)
Decrease (increase) in accrued unbilled revenues	(10,658		)	13,796
Decrease in fuel oil stock	6,736			35,942
Increase in materials and supplies	(2,927		)	(1,723		)
Increase in regulatory assets	(2,251		)	(23,458		)
Decrease in accounts payable	(676		)	(40,375		)
Change in prepaid and accrued income taxes and revenue taxes	(9,595		)	(61,635		)
Increase in defined benefit pension and other postretirement benefit plans liability	360			331
Change in other assets and liabilities	(13,309		)	(20,478		)
Net cash provided by operating activities	275,271			201,586
Cash flows from investing activities
Capital expenditures	(250,704		)	(265,521		)
Contributions in aid of construction	23,568			34,627
Other	1,100			778
Net cash used in investing activities	(226,036		)	(230,116		)
Cash flows from financing activities
Common stock dividends	(70,199		)	(67,804		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(1,496		)	(1,496		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	21,000			94,995
Other	(12		)	(223		)
Net cash provided by (used in) financing activities	(50,707		)	25,472
Net decrease in cash and cash equivalents	(1,472		)	(3,058		)
Cash and cash equivalents, beginning of period	24,449			13,762
Cash and cash equivalents, end of period	$	22,977		$	10,704

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1 · Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 2015.

In the opinion of HEI’s and Hawaiian Electric’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to fairly state consolidated HEI’s and Hawaiian Electric’s financial positions as of September 30, 2016 and December 31, 2015, the results of their operations for the three and nine months ended September 30, 2016 and 2015 and their cash flows for the nine months ended September 30, 2016 and 2015. All such adjustments are of a normal recurring nature, unless otherwise disclosed below or in other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.

2 · Termination of proposed merger and other matters

On December 3, 2014, HEI, NextEra Energy, Inc. (NEE) and two subsidiaries of NEE entered into an Agreement and Plan of Merger (the Merger Agreement), under which Hawaiian Electric was to become a subsidiary of NEE. The Merger Agreement contemplated that, prior to the Merger, HEI would distribute to its shareholders all of the common stock of ASB Hawaii, Inc. (ASB Hawaii), the parent company of ASB (such distribution referred to as the Spin-Off).

The closing of the Merger was subject to various conditions, including receipt of regulatory approval from the Hawaii Public Utilities Commission (PUC). In January 2015, NEE and Hawaiian Electric filed an application with the PUC requesting approval of the proposed Merger. On July 15, 2016, the PUC dismissed the application without prejudice.

On July 16, 2016, NEE terminated the Merger Agreement. Pursuant to the terms of the Merger Agreement, on July 19, 2016, NEE paid HEI a $90 million termination fee and $5 million for the reimbursement of expenses associated with the transaction. In the third quarter of 2016, the Company recognized $64 million of net income, comprised of the termination fee ($55 million), reimbursements of expenses from NEE and insurance ($3 million), and additional tax benefits on the previously non-tax-deductible merger- and spin-off-related expenses incurred through June 30, 2016 ($8 million), less merger- and spin-off-related expenses incurred in the third quarter of 2016 ($2 million) (all net of tax impacts). The Spin-Off of ASB Hawaii was cancelled as it was cross-conditioned on the merger consummation.

In May 2016, the Utilities filed an application for approval of an LNG supply and transport agreement and LNG-related capital equipment and two related applications, which applications were conditioned on the PUC’s approval of the proposed Merger. On July 21, 2016, the Utilities withdrew the three applications.

Litigation. HEI and its subsidiaries are subject to various legal proceedings that arise from time to time. Some of these proceedings may seek relief or damages in amounts that may be substantial. Because these proceedings are complex, many years may pass before they are resolved, and it is not feasible to predict their outcomes. Some of these proceedings involve claims HEI and Hawaiian Electric believe may be covered by insurance, and HEI and Hawaiian Electric have advised their insurance carriers accordingly.

Since the December 3, 2014 announcement of the Merger Agreement with NEE, several purported class action complaints were filed by alleged stockholders of HEI against HEI, the individual directors of HEI, NEE and others. To date, all of these lawsuits (seven of which were consolidated) have been dismissed, either with or without prejudice.

3 · Segment financial information



(in thousands)	Electric utility		Bank		Other			Total
Three months ended September 30, 2016
Revenues from external customers	$	572,208	$	73,708	$	139		$	646,055
Intersegment revenues (eliminations)	45		—		(45		)	—
Revenues	572,253		73,708		94			646,055
Income (loss) before income taxes	75,617		22,727		80,861			179,205
Income taxes (benefit)	28,145		7,623		15,824			51,592
Net income (loss)	47,472		15,104		65,037			127,613
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	46,974		15,104		65,064			127,142
Nine months ended September 30, 2016
Revenues from external customers	$	1,549,602	$	213,297	$	360		$	1,763,259
Intersegment revenues (eliminations)	98		—		(98		)	—
Revenues	1,549,700		213,297		262			1,763,259
Income (loss) before income taxes	174,376		62,545		64,321			301,242
Income taxes (benefit)	64,682		21,483		10,038			96,203
Net income (loss)	109,694		41,062		54,283			205,039
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	108,198		41,062		54,362			203,622
Total assets (at September 30, 2016)	5,800,826		6,336,670		61,489			12,198,985
Three months ended September 30, 2015
Revenues from external customers	$	648,121	$	69,091	$	(36	)	$	717,176
Intersegment revenues (eliminations)	6		—		(6		)	—
Revenues	648,127		69,091		(42		)	717,176
Income (loss) before income taxes	68,894		20,802		(9,036		)	80,660
Income taxes (benefit)	25,390		7,351		(3,225		)	29,516
Net income (loss)	43,504		13,451		(5,811		)	51,144
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	43,006		13,451		(5,784		)	50,673
Nine months ended September 30, 2015
Revenues from external customers	$	1,779,708	$	199,222	$	20		$	1,978,950
Intersegment revenues (eliminations)	24		—		(24		)	—
Revenues	1,779,732		199,222		(4		)	1,978,950
Income (loss) before income taxes	164,568		61,159		(36,347		)	189,380
Income taxes (benefit)	60,351		21,382		(11,327		)	70,406
Net income (loss)	104,217		39,777		(25,020		)	118,974
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	102,721		39,777		(24,941		)	117,557
Total assets (at December 31, 2015)*	5,672,210		6,014,755		95,053			11,782,018

* See Note 11 for the impact to prior period financial information of the adoption of Accounting Standards Update (ASU) No. 2015-03.

Intercompany electricity sales of the Utilities to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.

Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution and the profit on such fees is nominal.

4 · 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 third quarters of 2016 and 2015 and nine months ended September 30, 2016 and 2015 approximately $51 million, $58 million, $138 million and $159 million, respectively, of revenue taxes in “revenues” and in “taxes, other than income taxes” expense.

Recent tax developments. On December 18, 2015, Congress passed, and President Obama signed into law, the “Protecting Americans from Tax Hikes (PATH) Act of 2015” and the “Consolidating Appropriations Act, 2016,” providing government funding and a number of significant tax changes.

The provision with the greatest impact on the Company is the extension of bonus depreciation. The PATH Act continues 50% bonus depreciation through 2017 and phases down the percentage to 40% in 2018 and 30% in 2019 and then terminates bonus depreciation thereafter. The extension of bonus depreciation resulted in an increase in 2015 tax depreciation of $123 million. Tax depreciation is expected to increase by approximately $126 million in 2016 and result in increased accumulated deferred tax liabilities.

Additionally, the “Consolidating Appropriations Act, 2016” extended a variety of energy-related credits that were expired or were soon to expire. These credits include the production credit for wind facilities and the 30% investment credit for qualified solar energy property, with various phase-out dates through 2021.

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 2,000,000 6.50% 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 September 30, 2016 and December 31, 2015 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 nine months ended September 30, 2016 and 2015 each consisted of $2.5 million of interest income received from the 2004 Debentures; $2.4 million of distributions to holders of the Trust Preferred Securities; and $75,000 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 September 30, 2016, the Utilities had five 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 September 30				Nine months ended September 30
(in millions)	2016		2015		2016		2015
AES Hawaii	$	38	$	37	$	112	$	97
Kalaeloa	44		51		109		143
HEP	8		13		23		34
Hpower	19		18		52		50
Puna Geothermal Venture	7		8		19		22
Hawaiian Commercial & Sugar (HC&S)	1		2		1		7
Other IPPs	41		32		97		93
Total IPPs	$	158	$	161	$	413	$	446

In October 2015 the amended PPA between Maui Electric and HC&S became effective following PUC approval in September 2015. The amended PPA amends the pricing structure and rates for energy sold to Maui Electric, eliminates the capacity payment to HC&S, eliminates Maui Electric’s minimum purchase obligation, provides that Maui Electric may request up to 4 MW of scheduled energy during certain months, and be provided up to 16 MW of emergency power, and extends the term of the PPA from 2014 to 2017. In 2016 HC&S requested to terminate the PPA in January of 2017, approximately 1 year early due to HC&S ceasing sugar operations.

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 IPPs the information necessary to make the determinations required under accounting standards for VIEs. In each year from 2005 to 2015, 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 later agreed to provide the information pursuant to the amendments to its PPA (see below) and an entity owning a wind farm provided information as required under its PPA. 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.

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 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 PPA prior to October 31, 2017. This agreement complements continued negotiations between the parties and accounts for time needed for PUC approval of a negotiated resolution.

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 consolidated financial statements. The energy payments paid by Hawaiian Electric will fluctuate as fuel prices change, however, 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 September 30, 2016, Hawaiian Electric’s accounts payable to Kalaeloa amounted to $12 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 an Amendment No. 3, for which PUC approval has been requested. If approved by the PUC, Amendment No. 3 would increase the firm capacity from 180 MW to a maximum of 189 MW. 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. If Amendment No. 3 is approved by the PUC, payments for energy associated with firm capacity in excess of 180 MW will be at fixed rates not subject to adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to AES Hawaii are fixed in accordance with the PPA and, if approved by the PUC, Amendment No. 3.

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 of Hawaiian Electric’s PPA with AES Hawaii. 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 AES Hawaii’s economic performance, including operations and maintenance of AES Hawaii’s facility. Thus, Hawaiian Electric has not consolidated AES Hawaii in its consolidated financial statements. As of September 30, 2016, Hawaiian Electric’s accounts payable to AES Hawaii amounted to $13 million.

Commitments and contingencies.

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

Hawaiian Electric and Chevron Products Company (Chevron), a division of Chevron USA, Inc., are parties to the Low Sulfur Fuel Oil Supply Contract (LSFO Contract) for the purchase/sale of low sulfur fuel oil (LSFO), which terminates on December 31, 2016. The LSFO Contract will be replaced by a new contract with Chevron for LSFO and diesel fuel to meet MATS requirements for the island of Oahu that begins on January 1, 2017, terminates on December 31, 2019 and may automatically renew for annual terms thereafter unless earlier terminated by either party.

The Utilities are also parties to amended Inter-Island contracts for the supplies of industrial fuel oil and diesel fuels with Chevron and Par Hawaii Refining, LLC (PAR) (formerly known as Hawaii Independent Energy, LLC), respectively, which terminate on December 31, 2016. The Inter-Island contracts will be replaced by a new Inter-Island contract with Chevron for industrial fuel oil, diesel and ultra-low sulfur diesel for the islands of Oahu, Hawaii, Maui and Molokai, which begins on January 1, 2017, terminates on December 31, 2019 and may automatically renew for annual terms thereafter unless earlier terminated by either party.

Hawaii Electric Light and Chevron are also parties to a terminalling agreement for the island of Hawaii, which begins on January 1, 2017, terminates on December 31, 2019 and may automatically renew for annual terms thereafter unless earlier terminated by either party. Currently, terminalling services are provided to Hawaii Electric Light under the Inter-island Fuel Supply Contract with Chevron that expires on December 31, 2016.

The PUC has approved all of the foregoing contracts (LSFO, Inter-Island and Terminalling) and the costs incurred under these contracts are included in the Utilities’ respective ECACs, to the extent such costs are not recovered through the base rates.

The energy charge for energy purchased from Kalaeloa Partners, L.P. (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 under a Facility Fuel Supply Contract (fuel contract) between them. The term of the fuel contract between Kalaeloa and PAR ended on May 31, 2016 and is being extended until terminated by one of the parties.

AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended, 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 agreement on an 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 includes certain conditions precedent which, if satisfied, will release the parties from the claims under the arbitration proceeding. Among the conditions precedent is the successful negotiation of an amendment to the existing purchase power agreement and PUC approval of such amendment.

On November 13, 2015, Hawaiian Electric entered into Amendment No. 3 to the AES Hawaii PPA, subject to PUC approval. Amendment No. 3 provides more favorable pricing for the additional 9 MW than the existing pricing, the benefit of which will be passed on to customers, and among other things, provides (1) for an increase in firm capacity of up to 9 MW (the Additional Capacity) above the 180 MW capacity of the AES Hawaii facility, subject to a demonstration of such increased available capacity, (2) for the payment for the Additional Capacity to include a Priority Peak Capacity Charge, a Non-Peak Capacity Charge, a Priority Peak Energy Charge and a Non-Peak Energy Charge and (3) that AES will make certain operational commitments to improve reliability, and Hawaiian Electric will pay a reliability bonus according to a schedule for reduced Full Plant Trips. On January 22, 2016, Amendment No. 3 was filed with the PUC for approval. If such approval is obtained, the final condition to the Settlement Agreement’s release of the parties from the arbitration claims will be satisfied. The arbitration proceeding has been stayed to allow the PUC approval proceeding to proceed.

Liquefied natural gas. On May 18, 2016, Hawaiian Electric and Fortis Hawaii Energy Inc. (Fortis Hawaii), an affiliate of Fortis, Inc. (Fortis), entered into a Fuel Supply Agreement (FSA) whereby Fortis Hawaii intended to sell to Hawaiian Electric liquefied natural gas (LNG) to be produced from the LNG facilities on Tilbury Island in Delta, British Columbia, Canada. Pursuant to the FSA, Fortis Hawaii had arranged, or planned to arrange, for the transportation of gas for delivery to, and liquefaction at, the Tilbury LNG facilities, including with respect to the transport and delivery of LNG across a jetty at such facilities, for the purchase and storage of LNG at such LNG facilities and for the transportation of LNG to delivery points in Hawaii for the benefit of Hawaiian Electric and its subsidiaries. The FSA was subject to approval by the PUC and to the satisfaction of certain conditions precedent, including the consummation of the merger between HEI and NEE. On July 16, 2016, pursuant to the terms of the Merger Agreement, NEE terminated the Merger Agreement. Accordingly, on July 19, 2016, Hawaiian Electric provided notice of termination of the FSA to Fortis Hawaii, effective immediately, and withdrew the application for PUC approval of the FSA, which included a request for approval to commit approximately $341 million to convert existing generating units to use natural gas, and to commit approximately $117 million for containers to support LNG. In addition, on July 19, 2016, Hawaiian Electric withdrew its applications to the PUC for a waiver from the competitive bidding process to allow Hawaiian Electric to construct a modern, efficient, combined cycle generation system at the Kahe power plant that would utilize LNG and to commit $859 million for such project. Hawaiian Electric will continue to evaluate all options to modernize generation using a cleaner fuel to bring price stability and support adding renewable energy for its customers.

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 p