HE-6.30.2015-10Q


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 June 30, 2015
 OR
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 July 31, 2015
Hawaiian Electric Industries, Inc. (Without Par Value)
 
107,456,645 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 June 30, 2015
 
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income -
three and six months ended June 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income -
three and six months ended June 30, 2015 and 2014
 
 
Consolidated Balance Sheets - June 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Changes in Shareholders’ Equity -
six months ended June 30, 2015 and 2014
 
 
Consolidated Statements of Cash Flows -
six months ended June 30, 2015 and 2014
 
 
 
 
 
Consolidated Statements of Income -
three and six months ended June 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income -
three and six months ended June 30, 2015 and 2014
 
 
Consolidated Balance Sheets - June 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Changes in Common Stock Equity -
six months ended June 30, 2015 and 2014
 
 
Consolidated Statements of Cash Flows -
six months ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 

i



Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2015
 
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.; Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III (inactive financing entities); 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
DBEDT
 
State of Hawaii Department of Business, Economic Development and Tourism
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
Energy Agreement
 
Agreement, dated October 20, 2008, signed by the Governor of the State of Hawaii, the State of Hawaii Department of Business, Economic Development and Tourism, the Division of Consumer Advocacy of the Department of Commerce and Consumer Affairs, and Hawaiian Electric, for itself and on behalf of its electric utility subsidiaries, committing to actions to develop renewable energy and reduce dependence on fossil fuels in support of the HCEI. In September 2014, the parties to the Energy Agreement concluded that the agreements and policy directives in the Energy Agreement had been advanced or superseded by subsequent events, as well as by decisions and orders issued by the PUC, and accordingly ended the Energy Agreement as of September 14, 2014.
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
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

ii

GLOSSARY OF TERMS, continued

Terms
 
Definitions
GNMA
 
Government National Mortgage Association
HCEI
 
Hawaii Clean Energy Initiative
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., Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III 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
IRP
 
Integrated resource planning
Kalaeloa
 
Kalaeloa Partners, L.P.
kW
 
Kilowatt/s (as applicable)
KWH
 
Kilowatthour/s (as applicable)
LTIP
 
Long-term incentive plan
LGD
 
Loss given default
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
MOU
 
Memorandum of understanding
MW
 
Megawatt/s (as applicable)
NEE
 
NextEra Energy, Inc.
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
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



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 “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:
the successful and timely completion of the proposed Merger with NextEra Energy, Inc. (NEE), which could be materially and adversely affected by, among other things, resolving the litigation brought in connection with the proposed Merger, obtaining (and the timing and terms and conditions of) required governmental and regulatory approvals, and ability to maintain relationships with employees, customers or suppliers, as well as the ability to integrate the businesses;
the ability of ASB to operate successfully after the Spin-Off of its parent ASB Hawaii;
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 American Savings Bank, F.S.B. (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, unrest, ongoing conflicts in North Africa and the Middle East, terrorist acts, potential conflict or crisis with North Korea or Iran, developments in the Ukraine 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 PUC’s potential delay in considering (and potential disapproval of actual or proposed) Hawaii Clean Energy Initiative (HCEI)-related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; potential changes in political support for the HCEI; and uncertainties surrounding solar power, wind power, proposed undersea cables, biofuels, environmental assessments and the impacts of implementation of the HCEI 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 that are being developed in response to the four orders that the Public Utilities Commission of the State of Hawaii (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 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;


iv



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 HEI 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 renewable portfolio standards (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 as a result of new information, future events or otherwise.

v


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Revenues
 
 

 
 

 
 

 
 

Electric utility
 
$
558,163

 
$
738,429

 
$
1,131,605

 
$
1,458,491

Bank
 
65,783

 
60,616

 
130,131

 
124,235

Other
 
(34
)
 
(388
)
 
38

 
(320
)
Total revenues
 
623,912

 
798,657

 
1,261,774

 
1,582,406

Expenses
 
 

 
 

 
 

 
 

Electric utility
 
492,002

 
668,361

 
1,007,808

 
1,317,757

Bank
 
46,057

 
42,660

 
89,774

 
83,748

Other
 
13,123

 
4,453

 
21,956

 
8,504

Total expenses
 
551,182

 
715,474

 
1,119,538

 
1,410,009

Operating income (loss)
 
 

 
 

 
 

 
 

Electric utility
 
66,161

 
70,068

 
123,797

 
140,734

Bank
 
19,726

 
17,956

 
40,357

 
40,487

Other
 
(13,157
)
 
(4,841
)
 
(21,918
)
 
(8,824
)
Total operating income
 
72,730

 
83,183

 
142,236

 
172,397

Interest expense, net—other than on deposit liabilities and other bank borrowings
 
(18,906
)
 
(20,022
)
 
(38,006
)
 
(39,478
)
Allowance for borrowed funds used during construction
 
682

 
523

 
1,181

 
1,137

Allowance for equity funds used during construction
 
1,896

 
1,387

 
3,309

 
2,996

Income before income taxes
 
56,402

 
65,071

 
108,720

 
137,052

Income taxes
 
20,911

 
23,317

 
40,890

 
49,038

Net income
 
35,491

 
41,754

 
67,830

 
88,014

Preferred stock dividends of subsidiaries
 
473

 
473

 
946

 
946

Net income for common stock
 
$
35,018

 
$
41,281

 
$
66,884

 
$
87,068

Basic earnings per common share
 
$
0.33

 
$
0.41

 
$
0.63

 
$
0.86

Diluted earnings per common share
 
$
0.33

 
$
0.41

 
$
0.63

 
$
0.85

Dividends per common share
 
$
0.31

 
$
0.31

 
$
0.62

 
$
0.62

Weighted-average number of common shares outstanding
 
107,418

 
101,495

 
105,361

 
101,439

Net effect of potentially dilutive shares
 
276

 
330

 
298

 
606

Adjusted weighted-average shares
 
107,694

 
101,825

 
105,659

 
102,045

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


1



Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2015
 
2014
 
2015
 
2014
Net income for common stock
 
$
35,018

 
$
41,281

 
$
66,884

 
$
87,068

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 $2,439, $(1,679), $161 and $(3,343) for the respective periods
 
(3,694
)
 
2,543

 
(243
)
 
5,063

Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $1,132 for the respective periods
 

 

 

 
(1,715
)
Derivatives qualified as cash flow hedges:
 
 

 
 

 
 

 
 

Less: reclassification adjustment to net income, net of tax benefits of $38, $38, $75 and $75 for the respective periods
 
59

 
59

 
118

 
118

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 $3,691, $1,836, $7,177, and $3,632 for the respective periods
 
5,780

 
2,873

 
11,239

 
5,686

Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $3,359, $1,641, $6,486 and $3,239 for the respective periods
 
(5,272
)
 
(2,575
)
 
(10,183
)
 
(5,085
)
Other comprehensive income (loss), net of taxes
 
(3,127
)
 
2,900

 
931

 
4,067

Comprehensive income attributable to Hawaiian Electric Industries, Inc.
 
$
31,891

 
$
44,181

 
$
67,815

 
$
91,135

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

2



Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited) 
(dollars in thousands)
 
June 30, 2015
 
December 31, 2014
Assets
 
 

 
 

Cash and cash equivalents
 
$
300,687

 
$
175,542

Accounts receivable and unbilled revenues, net
 
269,207

 
313,696

Available-for-sale investment securities, at fair value
 
693,520

 
550,394

Stock in Federal Home Loan Bank, at cost
 
10,678

 
69,302

Loans receivable held for investment, net
 
4,410,817

 
4,389,033

Loans held for sale, at lower of cost or fair value
 
5,581

 
8,424

Property, plant and equipment, net of accumulated depreciation of $2,288,804 and $2,250,950 at the respective dates
 
4,269,241

 
4,148,774

Regulatory assets
 
904,559

 
905,264

Other
 
493,151

 
542,523

Goodwill
 
82,190

 
82,190

Total assets
 
$
11,439,631

 
$
11,185,142

Liabilities and shareholders’ equity
 
 

 
 

Liabilities
 
 

 
 

Accounts payable
 
$
183,094

 
$
186,425

Interest and dividends payable
 
25,360

 
25,336

Deposit liabilities
 
4,803,271

 
4,623,415

Short-term borrowings—other than bank
 
124,543

 
118,972

Other bank borrowings
 
314,157

 
290,656

Long-term debt, net—other than bank
 
1,506,546

 
1,506,546

Deferred income taxes
 
632,718

 
633,570

Regulatory liabilities
 
357,089

 
344,849

Contributions in aid of construction
 
482,760

 
466,432

Defined benefit pension and other postretirement benefit plans liability
 
615,945

 
632,845

Other
 
461,335

 
531,230

Total liabilities
 
9,506,818

 
9,360,276

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: 107,446,530 shares and 102,565,266 shares at the respective dates
 
1,626,569

 
1,521,297

Retained earnings
 
298,398

 
296,654

Accumulated other comprehensive loss, net of tax benefits
 
(26,447
)
 
(27,378
)
Total shareholders’ equity
 
1,898,520

 
1,790,573

Total liabilities and shareholders’ equity
 
$
11,439,631

 
$
11,185,142

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

3


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, 2014
 
102,565

 
$
1,521,297

 
$
296,654

 
$
(27,378
)
 
$
1,790,573

Net income for common stock
 

 

 
66,884

 

 
66,884

Other comprehensive income, net of taxes
 

 

 

 
931

 
931

Issuance of common stock, net
 
4,882

 
105,272

 

 

 
105,272

Common stock dividends ($0.62 per share)
 

 

 
(65,140
)
 

 
(65,140
)
Balance, June 30, 2015
 
107,447

 
$
1,626,569

 
$
298,398

 
$
(26,447
)
 
$
1,898,520

Balance, December 31, 2013
 
101,260

 
$
1,488,126

 
$
255,030

 
$
(16,750
)
 
$
1,726,406

Net income for common stock
 

 

 
87,068

 

 
87,068

Other comprehensive income, net of taxes
 

 

 

 
4,067

 
4,067

Issuance of common stock, net
 
300

 
5,310

 

 

 
5,310

Common stock dividends ($0.62 per share)
 

 

 
(62,916
)
 

 
(62,916
)
Balance, June 30, 2014
 
101,560

 
$
1,493,436

 
$
279,182

 
$
(12,683
)
 
$
1,759,935

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


4



Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30
 
2015
 
2014
(in thousands)
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
67,830

 
$
88,014

Adjustments to reconcile net income to net cash provided by operating activities
 
 

 
 

Depreciation of property, plant and equipment
 
91,731

 
86,397

Other amortization
 
4,320

 
4,014

Provision for loan losses
 
2,439

 
2,016

Loans receivable originated and purchased, held for sale
 
(168,921
)
 
(69,656
)
Proceeds from sale of loans receivable, held for sale
 
173,267

 
75,040

Increase in deferred income taxes
 
22,980

 
28,570

Excess tax benefits from share-based payment arrangements
 
(984
)
 
(267
)
Allowance for equity funds used during construction
 
(3,309
)
 
(2,996
)
Change in cash overdraft
 
193

 
(1,038
)
Changes in assets and liabilities
 
 

 
 

Decrease (increase) in accounts receivable and unbilled revenues, net
 
44,489

 
(2,986
)
Increase in fuel oil stock
 
(2,362
)
 
(27,206
)
Increase in regulatory assets
 
(19,976
)
 
(17,731
)
Decrease in accounts, interest and dividends payable
 
(56,076
)
 
(64,843
)
Change in prepaid and accrued income taxes and utility revenue taxes
 
(4,390
)
 
(32,510
)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
 
218

 
(1,714
)
Change in other assets and liabilities
 
(47,146
)
 
(16,909
)
Net cash provided by operating activities
 
104,303

 
46,195

Cash flows from investing activities
 
 

 
 

Available-for-sale investment securities purchased
 
(208,110
)
 
(125,531
)
Principal repayments on available-for-sale investment securities
 
63,568

 
33,202

Proceeds from sale of available-for-sale investment securities
 

 
79,564

Redemption of stock from Federal Home Loan Bank
 
58,623

 
11,683

Net increase in loans held for investment
 
(23,206
)
 
(137,122
)
Proceeds from sale of real estate acquired in settlement of loans
 
1,258

 
2,162

Capital expenditures
 
(142,236
)
 
(149,253
)
Contributions in aid of construction
 
19,089

 
13,209

Other
 
3,308

 
(16
)
Net cash used in investing activities
 
(227,706
)
 
(272,102
)
Cash flows from financing activities
 
 

 
 

Net increase in deposit liabilities
 
179,856

 
152,383

Net increase in short-term borrowings with original maturities of three months or less
 
5,571

 
79,693

Net increase (decrease) in retail repurchase agreements
 
13,508

 
(2,053
)
Proceeds from other bank borrowings
 
10,000

 

Proceeds from issuance of long-term debt
 

 
125,000

Repayment of long-term debt
 

 
(100,000
)
Excess tax benefits from share-based payment arrangements
 
984

 
267

Net proceeds from issuance of common stock
 
104,469

 
3,048

Common stock dividends
 
(65,140
)
 
(62,916
)
Preferred stock dividends of subsidiaries
 
(946
)
 
(946
)
Other
 
246

 
(228
)
Net cash provided by financing activities
 
248,548

 
194,248

Net increase (decrease) in cash and cash equivalents
 
125,145

 
(31,659
)
Cash and cash equivalents, beginning of period
 
175,542

 
220,036

Cash and cash equivalents, end of period
 
$
300,687

 
$
188,377

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

5



Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2015
 
2014
 
2015
 
2014
Revenues
 
$
558,163

 
$
738,429

 
$
1,131,605

 
$
1,458,491

Expenses
 
 

 
 

 
 

 
 

Fuel oil
 
146,231

 
270,257

 
323,037

 
556,557

Purchased power
 
149,284

 
188,323

 
285,291

 
353,239

Other operation and maintenance
 
98,864

 
98,564

 
202,866

 
187,170

Depreciation
 
44,241

 
41,593

 
88,484

 
83,196

Taxes, other than income taxes
 
53,382

 
69,624

 
108,130

 
137,595

Total expenses
 
492,002

 
668,361

 
1,007,808

 
1,317,757

Operating income
 
66,161

 
70,068

 
123,797

 
140,734

Allowance for equity funds used during construction
 
1,896

 
1,387

 
3,309

 
2,996

Interest expense and other charges, net
 
(16,288
)
 
(16,852
)
 
(32,613
)
 
(32,575
)
Allowance for borrowed funds used during construction
 
682

 
523

 
1,181

 
1,137

Income before income taxes
 
52,451

 
55,126

 
95,674

 
112,292

Income taxes
 
19,111

 
20,397

 
34,961

 
41,644

Net income
 
33,340

 
34,729

 
60,713

 
70,648

Preferred stock dividends of subsidiaries
 
229

 
229

 
458

 
458

Net income attributable to Hawaiian Electric
 
33,111

 
34,500

 
60,255

 
70,190

Preferred stock dividends of Hawaiian Electric
 
270

 
270

 
540

 
540

Net income for common stock
 
$
32,841

 
$
34,230

 
$
59,715

 
$
69,650


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

Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2015
 
2014
 
2015
 
2014
Net income for common stock
 
$
32,841

 
$
34,230

 
$
59,715

 
$
69,650

Other comprehensive income (loss), net of taxes:
 
 

 
 

 
 

 
 

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 $3,349, $1,647, $6,490 and $3,252 for the respective periods
 
5,257

 
2,588

 
10,190

 
5,107

Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $3,359, $1,641, $6,486 and $3,239 for the respective periods
 
(5,272
)
 
(2,575
)
 
(10,183
)
 
(5,085
)
Other comprehensive income (loss), net of taxes
 
(15
)
 
13

 
7

 
22

Comprehensive income attributable to Hawaiian Electric Company, Inc.
 
$
32,826

 
$
34,243

 
$
59,722

 
$
69,672

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


6



Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value)
 
June 30,
2015
 
December 31,
2014
Assets
 
 

 
 

Property, plant and equipment
 
 
 
 
Utility property, plant and equipment
 
 

 
 

Land
 
$
52,022

 
$
52,299

Plant and equipment
 
6,142,229

 
6,009,482

Less accumulated depreciation
 
(2,218,703
)
 
(2,175,510
)
Construction in progress
 
196,355

 
158,616

Utility property, plant and equipment, net
 
4,171,903

 
4,044,887

Nonutility property, plant and equipment, less accumulated depreciation of $1,228 and $1,227 at respective dates
 
6,562

 
6,563

Total property, plant and equipment, net
 
4,178,465

 
4,051,450

Current assets
 
 

 
 

Cash and cash equivalents
 
4,470

 
13,762

Customer accounts receivable, net
 
139,922

 
158,484

Accrued unbilled revenues, net
 
109,444

 
137,374

Other accounts receivable, net
 
5,890

 
4,283

Fuel oil stock, at average cost
 
108,408

 
106,046

Materials and supplies, at average cost
 
57,355

 
57,250

Prepayments and other
 
35,962

 
66,383

Regulatory assets
 
99,236

 
71,421

Total current assets
 
560,687

 
615,003

Other long-term assets
 
 

 
 

Regulatory assets
 
805,323

 
833,843

Unamortized debt expense
 
7,900

 
8,323

Other
 
81,932

 
81,838

Total other long-term assets
 
895,155

 
924,004

Total assets
 
$
5,634,307

 
$
5,590,457

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
 
578,933

 
578,938

Retained earnings
 
1,012,285

 
997,773

Accumulated other comprehensive income, net of income taxes-retirement benefit plans
 
52

 
45

Common stock equity
 
1,696,658

 
1,682,144

Cumulative preferred stock — not subject to mandatory redemption
 
34,293

 
34,293

Long-term debt, net
 
1,206,546

 
1,206,546

Total capitalization
 
2,937,497

 
2,922,983

Commitments and contingencies (Note 4)
 


 


Current liabilities
 
 

 
 

Short-term borrowings from non-affiliates
 
88,993

 

Accounts payable
 
147,750

 
163,934

Interest and preferred dividends payable
 
22,367

 
22,316

Taxes accrued
 
188,653

 
250,402

Regulatory liabilities
 
763

 
632

Other
 
66,385

 
65,146

Total current liabilities
 
514,911

 
502,430

Deferred credits and other liabilities
 
 

 
 

Deferred income taxes
 
605,702

 
602,872

Regulatory liabilities
 
356,326

 
344,217

Unamortized tax credits
 
83,893

 
79,492

Defined benefit pension and other postretirement benefit plans liability
 
578,637

 
595,395

Other
 
74,581

 
76,636

Total deferred credits and other liabilities
 
1,699,139

 
1,698,612

Contributions in aid of construction
 
482,760

 
466,432

Total capitalization and liabilities
 
$
5,634,307

 
$
5,590,457

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

7



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, 2014
 
15,805

 
$
105,388

 
$
578,938

 
$
997,773

 
$
45

 
$
1,682,144

Net income for common stock
 

 

 

 
59,715

 

 
59,715

Other comprehensive income, net of taxes
 

 

 

 

 
7

 
7

Common stock dividends
 

 

 

 
(45,203
)
 

 
(45,203
)
Common stock issuance expenses
 

 

 
(5
)
 

 

 
(5
)
Balance, June 30, 2015
 
15,805

 
$
105,388

 
$
578,933

 
$
1,012,285

 
$
52

 
$
1,696,658

Balance, December 31, 2013
 
15,429

 
$
102,880

 
$
541,452

 
$
948,624

 
$
608

 
$
1,593,564

Net income for common stock
 

 

 

 
69,650

 

 
69,650

Other comprehensive income, net of taxes
 

 

 

 

 
22

 
22

Common stock dividends
 

 

 

 
(44,246
)
 

 
(44,246
)
Common stock issuance expenses
 

 

 
(3
)
 

 

 
(3
)
Balance, June 30, 2014
 
15,429

 
$
102,880

 
$
541,449

 
$
974,028

 
$
630

 
$
1,618,987

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


8



Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) 
Six months ended June 30
 
2015
 
2014
(in thousands)
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
60,713

 
$
70,648

Adjustments to reconcile net income to net cash provided by operating activities
 
 

 
 

Depreciation of property, plant and equipment
 
88,484

 
83,196

Other amortization
 
2,748

 
3,597

Increase in deferred income taxes
 
33,320

 
45,386

Change in tax credits, net
 
4,461

 
4,227

Allowance for equity funds used during construction
 
(3,309
)
 
(2,996
)
Change in cash overdraft
 
193

 
(1,038
)
Changes in assets and liabilities
 
 

 
 

Decrease (increase) in accounts receivable
 
16,955

 
(5,039
)
Decrease in accrued unbilled revenues
 
27,930

 
2,255

Increase in fuel oil stock
 
(2,362
)
 
(27,206
)
Increase in materials and supplies
 
(105
)
 
(1,835
)
Increase in regulatory assets
 
(19,976
)
 
(17,731
)
Decrease in accounts payable
 
(68,951
)
 
(63,306
)
Change in prepaid and accrued income taxes and revenue taxes
 
(63,613
)
 
(38,270
)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
 
221

 
(498
)
Change in other assets and liabilities
 
(13,102
)
 
(26,258
)
Net cash provided by operating activities
 
63,607

 
25,132

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(134,563
)
 
(145,734
)
Contributions in aid of construction
 
19,089

 
13,209

Net cash used in investing activities
 
(115,474
)
 
(132,525
)
Cash flows from financing activities
 
 

 
 

Common stock dividends
 
(45,203
)
 
(44,246
)
Preferred stock dividends of Hawaiian Electric and subsidiaries
 
(998
)
 
(998
)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
 
88,993

 
102,989

Other
 
(217
)
 
(457
)
Net cash provided by financing activities
 
42,575

 
57,288

Net decrease in cash and cash equivalents
 
(9,292
)
 
(50,105
)
Cash and cash equivalents, beginning of period
 
13,762

 
62,825

Cash and cash equivalents, end of period
 
$
4,470

 
$
12,720

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


9



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, 2014.
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 the Company’s and Hawaiian Electric’s financial position as of June 30, 2015 and December 31, 2014, the results of its operations for the three and six months ended June 30, 2015 and 2014, and its cash flows for the six months ended June 30, 2015 and 2014. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
Prior period financial statements reflect the retrospective application of Accounting Standards Update (ASU) No. 2014-01, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” which was adopted as of January 1, 2015 and did not have a material impact on the Company’s financial condition or results of operations. See “Investments in qualified affordable housing projects” in Note 11.
2 · Proposed Merger
On December 3, 2014, HEI, NextEra Energy, Inc., a Florida corporation (NEE), NEE Acquisition Sub I, LLC, a Delaware limited liability company and a wholly owned subsidiary of NEE (Merger Sub II) and NEE Acquisition Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of NEE (Merger Sub I), entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger Agreement provides for Merger Sub I to merge with and into HEI (the Initial Merger), with HEI surviving, and then for HEI to merge with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary of NEE (the Merger). The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and be tax-free to HEI shareholders.
Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding share of HEI common stock will automatically be converted into the right to receive 0.2413 shares of common stock of NEE (the Exchange Ratio). No adjustment to the Exchange Ratio is made in the Merger Agreement for any changes in the market prices of either HEI or NEE common stock between December 3, 2014 and the closing of the Merger.
The Merger Agreement contemplates that, immediately prior to the closing of the Merger, HEI will distribute to its shareholders all of the issued and outstanding shares of common stock of ASB Hawaii, the direct parent company of ASB (such distribution referred to as the Spin-Off), with ASB Hawaii becoming a new public company. In addition, the Merger Agreement contemplates that, immediately prior to the closing of the Merger, HEI will pay its shareholders a special dividend of $0.50 per share.
The closing of the Merger is subject to various conditions, including, among others, (i) the approval of holders of 75% of the outstanding shares of HEI common stock, (ii) effectiveness of the registration statement for the NEE common stock to be issued in the Initial Merger and the listing of such shares on the New York Stock Exchange, (iii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, (iv) receipt of all required regulatory approvals from, among others, the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission and the Hawaii Public Utilities Commission, (v) the absence of any law or judgment in effect or pending in which a governmental entity has imposed or is seeking to impose a legal restraint that would prevent or make illegal the closing of the Merger, (vi) the absence of any material adverse effect with respect to either HEI or NEE, (vii) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Merger Agreement, (viii) receipt by each of HEI and NEE of a tax opinion of its counsel regarding the tax treatment of the transactions contemplated by the Merger Agreement, (ix) effectiveness of the ASB Hawaii registration statement necessary to consummate the Spin-Off, and (x) the determination by each of HEI and NEE that, upon completion of the Spin-Off, HEI will no longer be a savings and loan holding company or be deemed to control ASB for purposes of the Home Owners' Loan Act. The Spin-Off will be subject to various conditions, including, among others, the approval of the Federal Reserve Board (FRB).

10



The Merger Agreement contains customary representations, warranties and covenants of HEI and NEE.
HEI is also subject to a “no shop” restriction that limits its ability to solicit alternative acquisition proposals, provide information or engage in discussion with third parties, except under limited circumstances to permit HEI’s board of directors to comply with its fiduciary duties.
The Merger Agreement contains certain termination rights for both HEI and NEE, including the right of either party to terminate the Merger Agreement if the Merger has not been consummated by December 3, 2015 (subject to a 6-month extension if required to obtain necessary regulatory approvals), and further provides that upon termination of the Merger Agreement under specified circumstances, HEI or NEE, as the case may be, would be required to pay the other party a termination fee of $90 million and reimburse the other party for up to $5 million of its documented out-of-pocket expenses incurred in connection with the Merger Agreement.
On March 26, 2015, NEE’s Form S-4, which registers NEE common stock expected to be issued in the Initial Merger, was declared effective. Also on March 26, 2015, HEI filed its special meeting proxy statement for the vote on the merger proposal and related matters, which meeting was scheduled for May 12, 2015. On May 12, 2015, HEI shareholders approved a proposal to adjourn the special meeting of the shareholders to extend the deadline for shareholder voting on the proposed merger agreement with NEE. Thus, the special meeting was adjourned on May 12, 2015 and reconvened on June 10, 2015. Shareholders approved the proposed merger agreement with NextEra Energy on June 10, 2015.
On March 30, 2015, ASB Hawaii filed its Form 10, the registration statement for ASB Hawaii shares expected to be distributed in the Spin-Off.
On August 7, 2015, each of HEI and NEE filed their respective notifications pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with the U.S. Department of Justice and Federal Trade Commission. The filings initiated a 30-day waiting period, which is scheduled to expire on September 8, 2015.
PUC application In January 2015, NEE and Hawaiian Electric filed an application with the PUC requesting approval of the proposed Merger of Hawaiian Electric. The application also requests modification of certain conditions agreed to by HEI and the PUC in 1982 for the merger and corporate restructuring of Hawaiian Electric, and confirmation that with approval of the Merger Agreement, the recommendations in the 1995 Dennis Thomas Report (resulting from a proceeding to review the relationship between HEI and Hawaiian Electric and any impact of HEI’s then diversified activities on the Utilities) will no longer be applicable. The application includes a commitment that, for at least four years following the completion of the transaction, Hawaiian Electric will not submit any applications seeking a general base rate increase and will forego recovery of the incremental operations and maintenance rate adjustment under decoupling during that period, which amounts to approximately $60 million in cumulative savings for customers, subject to certain exceptions and conditions, including that the following remain in effect:  the RBA tariff provisions, the Rate Base RAM, the Renewable Energy Infrastructure Program, and Renewable Energy Infrastructure Surcharge, the IRP/DSM Recovery tariff provisions, the energy cost adjustment clause (ECAC) tariff provisions, the PPA tariff provision and the Pension and OPEB tracker mechanism. Various parties, including governmental, environmental and commercial interests, have been allowed to intervene in the proceeding.
Twenty-eight interveners filed testimonies in the docket in July 2015. Eleven interveners recommended the merger not be approved, eleven recommended approval only with conditions, and six did not specifically make a recommendation either way. The Consumer Advocate is scheduled to file its testimonies on August 10, 2015, and the applicants are scheduled to file their responsive testimonies on August 31, 2015. Evidentiary hearings are scheduled from November 30 to December 16, 2015.
Other requests.  On January 29, 2015, HEI submitted its application to the FERC requesting all necessary authorization to consummate the transactions contemplated by the Merger Agreement. The FERC issued its order authorizing the proposed merger on March 27, 2015.
On February 1, 2015, HEI submitted a letter to the FRB requesting deregistration as a Savings & Loan Holding Company (SLHC).
Pending litigation and other matters.
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, eight purported class action complaints were filed in the Circuit Court of the First Circuit for the State of Hawaii by alleged stockholders of HEI against HEI, Hawaiian Electric (in

11



one complaint), the individual directors of HEI, NEE and NEE's acquisition subsidiaries. The lawsuits are captioned as follows: Miller v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2531-12 KTN (December 15, 2014) (the Miller Action); Walsh v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2541-12 JHC (December 15, 2014) (the Walsh Action); Stein v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2555-12 KTN (December 17, 2014) (the Stein Action); Brown v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2643-12 RAN (December 30, 2014) (the Brown Action); Cohn v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2642-12 KTN (December 30, 2014) (the Cohn State Action); Guenther v. Watanabe, et al., Case No. 15-1-003-01 ECN (January 2, 2015) (the Guenther Action); Hudson v. Hawaiian Electric Industries, Inc., et al., Case No. 15-1-0013-01 JHC (January 5, 2015) (the Hudson Action); Grieco v. Hawaiian Electric Industries, Inc., et al., Case No. 15-1-0094-01 KKS (January 21, 2015) (the Grieco Action). On January 12, 2015, plaintiffs in the Miller Action, the Walsh Action, the Stein Action, the Brown Action, the Guenther Action, and the Hudson Action filed a motion to consolidate their actions and to appoint co-lead counsel. The Court held a hearing on this motion on February 13, 2015 and granted consolidation and appointment of co-lead counsel on March 6, 2015. On March 10, 2015, plaintiffs in the consolidated state action filed an amended complaint, and added J.P. Morgan Securities, LLC (JP Morgan), which was HEI’s financial advisor for the Merger, as a defendant. On March 17, 2015, plaintiffs in the consolidated state action moved for limited expedited discovery. After limited discovery, the parties in the consolidated state action stipulated and the Court ordered that the deadline for defendants to respond to the amended complaint is extended indefinitely.  On April 30, 2015, the Court consolidated the seven state actions under the caption, In re Consolidated HEI Shareholder Cases. On January 23, 2015, the Cohn State Action was voluntarily dismissed. Thereafter, the same alleged stockholder plaintiff filed a purported class action complaint in the United States District Court for the District of Hawaii against HEI, the individual directors of HEI, NEE and NEE's acquisition subsidiaries. The lawsuit is captioned as Cohn v. Hawaiian Electric Industries, Inc. et al., 15-cv-00029-JMS-KSC (January 27, 2015) (the Cohn Federal Action).
The actions allege, among other things, that members of HEI's Board breached their fiduciary duties in connection with the proposed transaction, and that the Merger Agreement involves an unfair price, was the product of an inadequate sales process, and contains unreasonable deal protection devices that purportedly preclude competing offers. The complaints further allege that HEI, NEE and/or its acquisition subsidiaries aided and abetted the purported breaches of fiduciary duty. The plaintiffs in these lawsuits seek, among other things, (i) a declaration that the Merger Agreement was entered into in breach of HEI's directors' fiduciary duties, (ii) an injunction enjoining the HEI Board from consummating the Merger, (iii) an order directing the HEI Board to exercise their duties to obtain a transaction which is in the best interests of HEI's stockholders, (iv) a rescission of the Merger to the extent that it is consummated, and/or (v) damages suffered as a result of the defendants' alleged actions. Plaintiffs in the consolidated state action also allege that JP Morgan had a conflict of interest in advising HEI because JP Morgan and its affiliates had business ties to and investments in NEE. The consolidated state action also alleges that the HEI board of directors violated its fiduciary duties by omitting material facts from the Registration Statement on Form S-4. In addition, the Cohn Federal Action alleges that the HEI board of directors violated its fiduciary duties and federal securities laws by omitting material facts from the Registration Statement on Form S-4.
HEI and Hawaiian Electric believe the allegations of the complaints are without merit and intend to defend these lawsuits vigorously.

12



3 · Segment financial information
 
(in thousands) 
 
Electric utility
 
Bank
 
Other
 
Total
Three months ended June 30, 2015
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
558,156

 
$
65,783

 
$
(27
)
 
$
623,912

Intersegment revenues (eliminations)
 
7

 

 
(7
)
 

Revenues
 
558,163

 
65,783

 
(34
)
 
623,912

Income (loss) before income taxes
 
52,451

 
19,726

 
(15,775
)
 
56,402

Income taxes (benefit)
 
19,111

 
6,875

 
(5,075
)
 
20,911

Net income (loss)
 
33,340

 
12,851

 
(10,700
)
 
35,491

Preferred stock dividends of subsidiaries
 
499

 

 
(26
)
 
473

Net income (loss) for common stock
 
32,841

 
12,851

 
(10,674
)
 
35,018

Six months ended June 30, 2015
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
1,131,587

 
$
130,131

 
$
56

 
$
1,261,774

Intersegment revenues (eliminations)
 
18

 

 
(18
)
 

Revenues
 
1,131,605

 
130,131

 
38

 
1,261,774

Income (loss) before income taxes
 
95,674

 
40,357

 
(27,311
)
 
108,720

Income taxes (benefit)
 
34,961

 
14,031

 
(8,102
)
 
40,890

Net income (loss)
 
60,713

 
26,326

 
(19,209
)
 
67,830

Preferred stock dividends of subsidiaries
 
998

 

 
(52
)
 
946

Net income (loss) for common stock
 
59,715

 
26,326

 
(19,157
)
 
66,884

Assets (at June 30, 2015)
 
5,634,307

 
5,777,098

 
28,226

 
11,439,631

Three months ended June 30, 2014
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
738,423

 
$
60,616

 
$
(382
)
 
$
798,657

Intersegment revenues (eliminations)
 
6

 

 
(6
)
 

Revenues
 
738,429

 
60,616

 
(388
)
 
798,657

Income (loss) before income taxes
 
55,126

 
17,956

 
(8,011
)
 
65,071

Income taxes (benefit)
 
20,397

 
6,420

 
(3,500
)
 
23,317

Net income (loss)
 
34,729

 
11,536

 
(4,511
)
 
41,754

Preferred stock dividends of subsidiaries
 
499

 

 
(26
)
 
473

Net income (loss) for common stock
 
34,230

 
11,536

 
(4,485
)
 
41,281

Six months ended June 30, 2014
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
1,458,479

 
$
124,235

 
$
(308
)
 
$
1,582,406

Intersegment revenues (eliminations)
 
12

 

 
(12
)
 

Revenues
 
1,458,491

 
124,235

 
(320
)
 
1,582,406

Income (loss) before income taxes
 
112,292

 
40,488

 
(15,728
)
 
137,052

Income taxes (benefit)
 
41,644

 
14,553

 
(7,159
)
 
49,038

Net income (loss)
 
70,648

 
25,935

 
(8,569
)
 
88,014

Preferred stock dividends of subsidiaries
 
998

 

 
(52
)
 
946

Net income (loss) for common stock
 
69,650

 
25,935

 
(8,517
)
 
87,068

Assets (at December 31, 2014)
 
5,590,457

 
5,566,222

 
28,463

 
11,185,142

 
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, the profit on such sales is nominal and the elimination of electric sales revenues and expenses could distort segment operating income and net income for common stock.
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, the profit on such fees is nominal and the elimination of bank fee income and expenses could distort segment operating income and net income for common stock.

13



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 second quarters of 2015 and 2014 and the six months ended June 30, 2015 and 2014 approximately $50 million, $64 million, $101 million and $129 million, respectively, of revenue taxes in “revenues” and in “taxes, other than income taxes” expense.
Recent tax developments. The Utilities adopted the safe harbor guidelines with respect to network assets in 2011 and, in June 2013, the IRS released a revenue procedure relating to deductions for repairs of generation property, which provides some guidance (that is elective) for taxpayers that own steam or electric generation property. This guidance defines the relevant components of generation property to be used in determining whether such component expenditures should be deducted as repairs or capitalized and depreciated by taxpayers. The revenue procedure also provides an extrapolation methodology that could be used by taxpayers in determining deductions for prior years’ repairs without going back to the specific documentation of those years. The guidance does not provide specific methods for determining the repairs amount. Management intends to adopt a method consistent with this guidance in its 2014 tax return.
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 June 30, 2015 and December 31, 2014 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 six months ended June 30, 2015 and 2014 each consisted of $1.7 million of interest income received from the 2004 Debentures; $1.6 million of distributions to holders of the Trust Preferred Securities; and $50,000 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 June 30, 2015, the Utilities had six purchase power agreements (PPAs) for firm capacity and other PPAs with smaller IPPs and Schedule Q providers (i.e., customers with cogeneration and/or small power production facilities with a capacity of 100 kilowatts (kWs) or less who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs. Approximately 90% of the firm capacity is purchased from AES Hawaii, Inc. (AES Hawaii), Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (HEP) and HPOWER. Purchases from all IPPs were as follows:

14



 
 
Three months ended June 30
 
Six months ended June 30
(in millions)
 
2015
 
2014
 
2015
 
2014
AES Hawaii
 
$
26

 
$
36

 
$
60

 
$
69

Kalaeloa
 
48

 
74

 
92

 
141

HEP
 
10

 
8

 
21

 
20

HPOWER
 
16

 
16

 
32

 
32

Other IPPs
 
49

 
54

 
80

 
91

Total IPPs
 
$
149

 
$
188

 
$
285

 
$
353

 
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 2014, 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 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.
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. A significant factor affecting the level of expected losses Hawaiian Electric could potentially absorb is the fact that Hawaiian Electric’s exposure to fuel price variability is limited to the remaining term of the PPA as compared to the facility’s remaining useful life. Although Hawaiian Electric absorbs fuel price variability for the remaining term of the PPA, 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 June 30, 2015, Hawaiian Electric’s accounts payable to Kalaeloa amounted to $14 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 October 2017. 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 price is tied to the market prices of animal fat feedstocks in the U.S. West Coast and U.S. Midwest.

15



Updates. On August 27, 2014, Chevron Products Company (Chevron) and Hawaiian Electric entered into a first amendment of their Low Sulfur Fuel Oil Supply Contract, which was approved by the PUC in March 2015. The Amendment reduces the price of fuel above certain volumes, allows for increases in the volume of fuel, and modifies the specification of certain petroleum products supplied under the contract. In addition, Chevron agreed to supply a blend of low sulfur fuel oil (LSFO) and diesel as soon as January 2016 (for supply through the end of the contract term, December 31, 2016) to help Hawaiian Electric meet more stringent EPA air emission requirements known as Mercury and Air Toxics Standards.
The Utilities are parties to amended contracts for the supply of industrial fuel oil and diesel fuels with Chevron and Hawaii Independent Energy, LLC (HIE), respectively, which were scheduled to end December 31, 2015. In August 2014, Chevron and the Utilities entered into a third amendment to the Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract, which amendment extended the term of the contract through December 31, 2016 and provided for automatic renewal for annual terms thereafter unless earlier terminated by either party. In February 2015, Hawaiian Electric executed a similar extension, through December 31, 2016, of the corresponding Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract with HIE.
In June 2015, the Utilities issued Requests for Proposals (RFP) for most of their fuel needs with supplies beginning in 2017 after the expiration of Chevron LSFO and Chevron/HIE Interisland contracts on December 31, 2016. Proposals were received in July 2015 and new contracts, which would be subject to PUC approval, are expected to be executed by December 31, 2015.
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, Inc. (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, extend the PPA term until 2032, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, and Hawaiian Electric has been in negotiations with AES Hawaii; however, Hawaiian Electric and AES Hawaii have not reached 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 believes the claim asserted in the arbitration demand is without merit. Hawaiian Electric has responded to the arbitration demand. Management cannot predict the outcome of the arbitration proceeding.
Liquefied natural gas. On May 31, 2015 the previous August 2014 agreement with Fortis BC Energy Inc. (Fortis) for liquefaction capacity for liquefied natural gas (LNG) was superseded with a liquefaction Heads of Agreement by and between FortisBC Holdings Inc. and Hawaiian Electric Company, Inc. The agreement, which is subject to Hawaii PUC approval, other regulatory approvals and permits, and other conditions precedent before it becomes effective, provides for LNG liquefaction capacity purchases of 700,000 tonnes per year for the first five years, 600,000 tonnes per year for the next five years, and 500,000 tonnes per year for the last ten years. Fortis must also obtain regulatory and other approvals for the agreement to become effective. The Fortis agreement is assignable and can be assigned to the selected bidder in the Utilities’ RFP for the supply of containerized LNG and will help ensure that liquefaction capacity is available at pricing that management believes will lower customer bills.
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 and management anticipates that such activity will continue.
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 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. In the case of Hawaiian Electric’s power plants, there are a number of studies that have yet to be completed before Hawaiian Electric and the State of Hawaii Department of Health (DOH) can determine what entrainment or impingement controls, if any, might be necessary at the affected facilities to comply with the new 316(b) rule.
On February 16, 2012, the Federal Register published the EPA’s final rule establishing the EPA’s National Emission Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs). The final rule, known as the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power plants. MATS establishes the Maximum Achievable Control Technology standards for the control of hazardous air pollutants emissions from new and existing EGUs. Based on a review of the final rule and the benefits and costs of alternative compliance strategies, Hawaiian

16



Electric has selected a MATS compliance strategy based on switching to lower emission fuels. The use of lower emission fuels will provide for MATS compliance at lower overall costs and avoid the reduction in operational flexibility imposed by emissions control equipment. Hawaiian Electric requested and received a one-year extension, resulting in a MATS compliance date of April 16, 2016. Hawaiian Electric submitted to the EPA a Petition for Reconsideration and Stay dated April 16, 2012, and a Request for Expedited Consideration dated August 14, 2013. The submittals asked the EPA to revise an emissions standard for non-continental oil-fired EGUs on the grounds that the promulgated standard was incorrectly derived. The Petition and Request submittals to the EPA included additional data to demonstrate that the existing standard is erroneous. On April 21, 2015, the EPA issued a notice denying Hawaiian Electric's MATS Petition for Reconsideration along with all other pending MATS petitions. Hawaiian Electric is now pursuing judicial relief through an appeal of EPA’s denial of the Petition. On June 29, 2015, the United State Supreme Court found that the EPA’s determination that it was appropriate and “necessary” to regulate hazardous air pollutants from power plants was flawed because the EPA did not take the costs of compliance into account. The Supreme Court sent the MATS rule case back to the D.C. Circuit Court of Appeals for further proceedings. The likely timeframe for action by the Circuit Court is October 2015. Pending action by the Circuit Court, Hawaiian Electric will continue with its plan to comply with the MATS requirements by April 16, 2016.
On February 6, 2013, the EPA issued a guidance document titled “Next Steps for Area Designations and Implementation of the Sulfur Dioxide National Ambient Air Quality Standard,” which outlines a process that will provide the states additional flexibility and time for their development of one-hour sulfur dioxide (SO2) National Ambient Air Quality Standard (NAAQS) implementation plans. In May 2014, the EPA published a proposed data requirements rule for states to characterize their air quality in relation to the one-hour SO2 NAAQS. Under the proposed rule, the EPA expects to designate areas as attaining, or not attaining, the one-hour SO2 NAAQS in December 2017 or December 2020, depending on whether the area was characterized through modeling or monitoring. Hawaiian Electric will work with the DOH in implementing the one-hour SO2 NAAQS and in developing cost-effective strategies for NAAQS compliance, if needed.
Depending upon the rules and guidance developed for compliance with the more stringent NAAQS, the Utilities may be required to incur material capital expenditures and other compliance costs, but such amounts and their timing are not determinable at this time. Additionally, the combined effects of the CWA 316(b) regulations, the MATS rule and the more stringent NAAQS may contribute to a decision to retire or deactivate certain generating units earlier than anticipated.
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.
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) asserting potential violations of the Prevention of Significant Deterioration (PSD) and Title V requirements of the Clean Air Act involving the Hill and Kahului Power Plants. The EPA referred the matter to the DOJ for enforcement based on Hawaii Electric Light’s and Maui Electric’s responses to information requests in 2010 and 2012. The letter expresses an interest in resolving the matter without the issuance of a notice of violation. The parties had preliminary discussions in February 2014, and are continuing to negotiate toward a resolution of the DOJ’s claims. As part of the ongoing negotiations, the DOJ proposed in November 2014 entering into a consent decree pursuant to which the Utilities would install certain pollution controls and pay a penalty. The Utilities are currently reviewing the proposal, but are unable to estimate the amount or effect 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 performed Brownfield assessments of the Site that identified environmental impacts in the subsurface. Although Maui Electric never operated at the Site and operations there had stopped four years before the merger, in 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 impacts of subsurface contaminants. 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. In March 2012, Maui Electric accrued an additional $3.1 million (reserve balance of $3.6 million as of June 30, 2015) for 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. Maui Electric received the DOH’s and EPA’s comments on a draft site investigation plan for site characterization in the fourth quarter of 2013. Management concluded that these comments did not require a change to the reserve balance. The site investigation plan was revised to address the EPA’s and DOH’s comments. The final site investigation plan was submitted to the DOH and

17



EPA in December 2014 for their review and approval. The DOH and EPA are currently reviewing the final site investigation plan. Maui Electric is awaiting formal agency approval of this plan before commencing the site investigation.
Pearl Harbor sediment study. The U.S. Navy has completed a remedial investigation and is currently conducting a feasibility study for the remediation of contaminated sediment at several locations in Pearl Harbor. In the course of its study, the Navy identified elevated levels of PCBs in the sediment in East Loch of Pearl Harbor, offshore from the Waiau Power Plant. The results of the Navy’s study to date, including sampling data and possible remediation approaches, are undergoing further federal review. Hawaiian Electric submitted comments on the Navy’s study, including the further investigation and analyses that are necessary to identify appropriate remedial options and actions. 
In July 2014, the Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is responsible for cleanup of the area offshore of the Waiau Power Plant. The Navy has also requested that Hawaiian Electric reimburse the costs incurred by the Navy to date to investigate the area, and is asking Hawaiian Electric to engage in negotiations regarding the financing and undertaking of future response actions to address the sediment contamination offshore from the Waiau Power Plant. The extent of the contamination, the appropriate remedial measures to address it, and Hawaiian Electric’s potential responsibility for any associated costs, including any past costs incurred by the Navy, have not yet been determined. In December 2014, Hawaiian Electric recorded a reserve of $0.8 million for additional investigation of the PCBs in the sediment offshore from the Waiau Power Plant; however, final costs of remediation will depend on the results of the additional investigation. On March 23, 2015, Hawaiian Electric received from the EPA a letter requesting that Hawaiian Electric submit within 45 days 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 work plan to the EPA and the State Department of Health; the work plan is currently being reviewed by the regulators. The extent of the onshore contamination, the appropriate remedial measures to address it, and any associated costs have not yet been determined.
Hawaiian Electric has also conducted a search for other potential sources of sediment contamination in the Waiau area that are unrelated to electric power generation at its Waiau Power Plant. A potential source was identified east of the plant. This potential source, located on the property currently occupied by the City and County (C&C) of Honolulu’s Neal S. Blaisdell Park, is a former Naval Reserve site where a used drum storage area, a waste oil burning pit, and an oil/water separator were operated by the Navy from the 1940s until approximately 1963. To further assess this former Naval Reserve site, Hawaiian Electric has requested environmental investigation reports, environmental data, and permits for this property and the adjacent Waimalu Stream (e.g., dredging permits and related environmental impact assessments and studies) from several federal and state agencies, as well as the C&C of Honolulu. The contribution of PCBs to sediment contamination in East Loch from this potential source has not yet been determined.
Global climate change and greenhouse gas emissions reduction.  National and international concern 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 action by the State and to federal legislative and regulatory proposals to reduce GHG emissions.
In July 2007, 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, became law in Hawaii. On June 20, 2014, the Governor signed the final regulations required to implement Act 234 and the regulations went into effect on June 30, 2014. In general, the regulations will require affected sources that have the potential to emit GHGs in excess of established thresholds to reduce GHG emissions by 16% below 2010 emission levels by 2020. The regulations will also assess affected sources an annual fee based on tons per year of GHG emissions commencing on the effective date of the regulations, estimated to be approximately $0.5 million annually for the Utilities. The DOH GHG regulations also track the federal “Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule” (GHG Tailoring Rule, see below) and would create new thresholds for GHG emissions from new and existing stationary source facilities. State of Hawaii Act 234 requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the statewide GHG emission levels in 1990. The state GHG regulations were effective on June 30, 2014. In general, the state GHG regulations require entities that have the potential to emit GHGs in excess of established thresholds to reduce GHG emissions by 16 percent below 2010 emission levels by 2020. The latest assessment of the proposed federal and final state GHG rules is that the continued growth in renewable power generation will significantly reduce the compliance costs and risk for the Utilities.
Several approaches (e.g., “cap and trade”) to GHG emission reduction have been either introduced or discussed in the U.S. Congress; however, no federal legislation has yet been enacted.
On September 22, 2009, the EPA issued its Fin