Item 8.01. Other Events.
The following is an update to the disclosure on the "Performance-based
regulation proceeding" in Note 3 of the Notes to Condensed Consolidated
Financial Statements, which is incorporated herein by reference to page 17 of
HEI's and Hawaiian Electric's Form 10-Q for the quarterly period ended September
30, 2020.
Performance-based regulation proceeding
On December 23, 2020, the Public Utilities Commission of the State of Hawaii
(PUC) issued a decision and order (D&O) in Phase 2 of the performance-based
regulation (PBR) proceeding, establishing a new PBR framework (PBR Framework)
for Hawaiian Electric and its subsidiaries (Utilities). The PBR Framework
includes (1) a five-year multi-year rate plan with an index-driven annual
revenue adjustment (ARA) based on (i) an inflation factor, (ii) a pre-determined
X-factor to encompass productivity, which is set at zero, (iii) a Z-factor to
account for exceptional circumstances not in the Utilities' control and (iv) a
customer dividend consisting of a negative adjustment of 0.22% compounded
annually and a flow through of the "pre-PBR" savings commitment from the
management audit recommendations developed in a prior docket, (2) a symmetric
earnings sharing mechanism for actual return on equity (ROE) outside of a 300
basis points dead band above and below a target ROE of 9.5%, which is the
current authorized ROE for each of the Utilities, (3) re-opener provisions if
Hawaiian Electric's credit rating outlook indicates a potential credit downgrade
below investment grade status, or if its earned ROE is below 5% or above 14%,
(4) modification of the Major Project Interim Recovery mechanism (renamed
Exceptional Project Recovery Mechanism (EPRM)) to include deferred and operation
and maintenance (O&M) expense projects and to permit the Utilities to include
the full amount of approved costs in the EPRM for recovery in the first year the
project goes into service, pro-rated for the portion of the year the project is
in service, (5) continuation of (i) the revenue balancing account, (ii) the
pension and other postretirement benefit tracking mechanisms, and (iii) energy
cost recovery clause, purchased power adjustment clause, and other recovery
mechanisms, and (6) a portfolio of new performance incentive mechanisms (PIMs)
for (i) customer engagement and distributed energy resources asset effectiveness
(rewards only), (ii) accelerated achievement of renewable portfolio standards
(rewards only as penalties are defined by statute), (iii) interconnection
experience (both rewards and penalties), (iv) energy efficiency measures for low
to moderate income (LMI) customers (rewards only), (v) advanced meter
implementation (AMI) (rewards only), (vi) the continuation of the existing
reliability and call center performance PIMs, and (vii) scorecards to track
progress against targeted performance levels, shared savings mechanisms to
apportion savings to the Utilities and customers, and reported metrics. The
initial revenues adjusted for the ARA will be the existing allowed revenues for
each of the Utilities.
The PUC indicated it may initiate a review of any of the mechanisms in the PBR
Framework at any time. The PUC will hold a formal review process to
comprehensively review the PBR Framework in the fourth year of the multi-year
rate plan.
The Utilities are required to file draft tariffs reflecting the order in
mid-February 2021 for PUC review, and the final tariffs are expected to be
effective June 1, 2021. In February 2021, the PUC will convene a post-D&O
working group to finalize PIMs for interconnection approval, LMI energy
efficiency, and AMI, as well as finalize initial scorecard and reporting
metrics.
The PBR Framework provides for revenue reductions as part of the customer
dividend, but also creates opportunities for the Utilities to improve their
financial condition by implementing cost containing measures and earning rewards
for meeting performance goals.
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The foregoing descriptions of the D&O and PBR Framework are qualified in their
entirety by reference to the full text of the D&O, which can be found on the PUC
website at dms.puc.hawaii.gov/dms (Docket No. 2018-0088 for the
Performance-Based Regulation proceeding).
Motion for clarification
On January 4, 2021, the Utilities filed a motion for clarification and/or
reconsideration of the D&O (Motion for Clarification) with respect to (i) the
treatment of the "pre-PBR" management audit savings commitment as part of the
customer dividend component of the ARA in the new PBR Framework and (ii)
clarification regarding implementation of certain matters regarding certain new
PIMs under the PBR framework. With respect to the "pre-PBR" management audit
savings commitment, the D&O accelerates the savings commitment and assumes all
of the savings will be generated from O&M expense reductions. In contrast, the
Utilities' commitment was rooted in a combination of reduced O&M expenses and
reduced future capital expenditures that are aligned with the management audit
recommendations and delivery of the savings to customers over time as they are
actually achieved. The savings to be flowed through to customers under the D&O
is $110.8 million for the multi-year rate period (MYP), compared to the
Utilities' commitment of $35.4 million in savings, which reflects the savings
that are expected to be realized by the Utilities over the MYP. In the Motion
for Clarification, the Utilities proposed an alternative levelized committed
savings over the MYP to address the PUC's desired "day 1" savings. Management
cannot predict if the PUC will reconsider its decision regarding the customer
dividend component of the ARA.
Item 7.01. Regulation FD Disclosure.
As described further in the Motion for Clarification, after preliminary
evaluation, the Utilities currently believe that with respect to its "core"
components (i.e., the components other than the treatment of the "pre-PBR"
management audit savings commitment), the PBR Framework established by the PUC
in the D&O appears to (i) represent a reasonable evolution of the existing
framework, (ii) provide balanced incentives that will provide cost savings to
customers while supporting and encouraging the Utilities to more aggressively
achieve clean energy objectives and other energy policy goals and (iii) be
generally consistent with the guiding principles established by the PUC in its
Phase 1 decision and order: (a) a customer-centric approach, including immediate
"day 1" savings when the new regulations take effect; (b) administrative
efficiency to reduce regulatory burdens to the Utilities and stakeholders; and
(c) Utilities financial integrity to maintain the Utilities' financial health,
including access to low-cost capital. The D&O in large part achieves these
principles with respect to the core components of the PBR Framework.
The foregoing descriptions of the Motion for Clarification contained under Items
8.01 and 7.01 of this current report on Form 8-K are qualified in their entirety
by reference to the full text of the Motion for Clarification, which can be
found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2018-0088 for the
Performance-Based Regulation proceeding).
The information furnished in connection with Item 7.01 of this current report on
Form 8-K shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated
by reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in
such a filing.
ADDITIONAL INFORMATION
HEI and Hawaiian Electric intend to continue to use HEI's website, www.hei.com,
as a means of disclosing additional information. Such disclosures will be
included on HEI's website in the Investor Relations section. Accordingly,
investors should routinely monitor such portions of HEI's website, in
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addition to following HEI's, Hawaiian Electric's and American Savings Bank,
F.S.B.'s (ASB) press releases, HEI's and Hawaiian Electric's Securities and
Exchange Commission (SEC) filings and HEI's public conference calls and
webcasts. The information on HEI's website is not incorporated by reference in
this document or in HEI's and Hawaiian Electric's SEC filings unless, and except
to the extent, specifically incorporated by reference. Investors may also wish
to refer to the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2018-0088 for
the Performance-Based Regulation proceeding) in order to review documents filed
with and issued by the PUC. No information on the PUC website is incorporated by
reference in this document or in HEI's and Hawaiian Electric's other SEC
filings.
FORWARD-LOOKING STATEMENTS
This report may contain "forward-looking statements," which include statements
that are predictive in nature, depend upon or refer to future events or
conditions, and usually include words such as "will," "expects," "anticipates,"
"intends," "plans," "believes," "predicts," "estimates" or similar expressions.
In addition, any statements concerning future financial performance, ongoing
business strategies or prospects or possible future actions are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties and the accuracy of assumptions concerning HEI and its
subsidiaries, 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.
Forward-looking statements in this report should be read in conjunction with the
"Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors"
discussions (which are incorporated by reference herein) set forth in HEI's and
Hawaiian Electric's Annual Report on Form 10-K for the year ended December 31,
2019 and HEI's and Hawaiian Electric's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2020 and HEI's other periodic reports that discuss
important factors that could cause HEI's results to differ materially from those
anticipated in such statements. These 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.
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