T1 - dms.puc.hawaii.gov

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

In the Matter of the Application of ))

HAWAIIAN ELECTRIC COMPANY, INC. ) HAWAI'I ELECTRIC LIGHT COMPANY, INC.) and MAUI ELECTRIC COMPANY, LIMITED )

DOCKET NO. 2016-0202

)For Approval of Issuance of )Unsecured Obligations and Guarantee.)

)

DECISION AND ORDER NO. 3 4 3 4 9

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BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

In the Matter of the Application of ))

HAWAIIAN ELECTRIC COMPANY, INC. )HAWAI'I ELECTRIC LIGHT COMPANY, INC.) and MAUI ELECTRIC COMPANY, LIMITED )

)For Approval of Issuance of )Unsecured Obligations and Guarantee.)

)

Docket No. 2016-0202

Order No. 3 4 3 4 9

DECISION AND ORDER

By this Decision and Order,^ the Public Utilities

Commission {"commission") grants Applicants' Application, 2

but limits the maximum interest rate that may be affixed to

the issued unsecured obligations ("Obligations") to 5.75%,

iThe Parties to this docket are HAWAIIAN ELECTRIC COMPANY, INC. ("HECO"), HAWAII ELECTRIC LIGHT COMPANY, INC. ("HELCO"), and MAUI ELECTRIC COMPANY, LIMITED ("MECO") {collectively, the "Applicants"), and the DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS, DIVISION OF CONSUMER ADVOCACY {"Consumer Advocate"), an ex officio party, pursuant to Hawaii Revised Statutes {"HRS") § 269-51 and Hawaii Administrative Rules {"HAR") § 6-61-62{a).

^"Application; Exhibits A, R, and Certificate of Service," filed August 11, 2016 {"Application").

1-5; Verification; by Applicants on

exclusive of the Default Rate of interest,^ as further

described herein.

I.

BACKGROUND

A.

The Parties

HECO is an operating public utility engaged in the

production, purchase, transmission, distribution, and sale of

electric energy for domestic, commercial, industrial,

agricultural, and governmental purposes on the island of Oahu,

State of Hawaii. HECO's principal place of business and executive

offices are located at 900 Richards Street, Honolulu, Hawaii.

HECO was originally organized on or about October 13, 1891,

and has been a wholly-owned subsidiary of Hawaiian Electric

Industries, Inc. ("HEI") since July 1, 1983.'^

^The Default Rate is an additional rate of interest that is applied to overdue interest on the Obligations, or overdue principals or premiums on the Obligations that occur during the continuance of an event of default. See "Reply to Statement of Position of Division of Consumer Advocacy; and Certificate of Service," filed by Applicants on January 12, 2017 {"Applicants Reply"), at 4; see also, HECO and MECO's Limited Request to Approve Addition to Paragraph 2 of Section IV of Decision and Order No. 33860, filed November 16, 2016, in Docket No. 2016-0057.

Âpplication at 3.

2016-0202

HELCO is an operating public utility engaged in the


electricity on the island of Hawaii. HELCO was originally

organized on or about December 5, 1894, and has been a wholly-owned

subsidiary of HECO since February 1, 1970.^

MECO is an operating public utility engaged in the


electricity on the island of Maui; the production, transmission,

distribution, and sale of electricity on the island of Molokai;

and the production, distribution, and sale of electricity

on the island of Lanai, State of Hawaii. MECO's principal

place of business and executive offices are located at

210 Kamehameha Avenue, Kahului, Maui. MECO was originally

organized on or about April 28, 1921, and has been a wholly-owned

subsidiary of HECO since November 1, 1968.®

B.

Procedural History

On August 11, 2016, Applicants filed their Application

requesting approval to issue the Obligations.

Âpplication at 3-4

Âpplication at 4.

2016-0202

On August 30, 2016, the Consumer Advocate filed its

Preliminary Statement of Position, in which it stated that it was

unable to state its position at that time, but would be issuing

information requests to Applicants.”^

On September 7, 2016, Applicants moved the commission

for a protective order,® which the commission issued on

September 27, 2016.^

On September 14, 2016, the commission issued

Order No. 33911, in which it instructed the Parties to propose a

stipulated procedural schedule. On September 26, 2016,

the Parties submitted their proposed stipulated procedural

schedule to the commission.On October 4, 2016, the commission

■^See "Division of Consumer Advocacy's Preliminary Statement of Position," filed August 30, 2016.

®See "Hawaiian Electric Company, Inc. [sic] Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited Motion for Protective Order; and Certificate of Service," filed September 7, 2016.

^See "Protective Order No. 33948," filed September 27, 2016.

^°Order No. 33911, "Instructing the Parties -to Submit a Proposed Stipulated Procedural Schedule," filed September 14, 2016.

^^See Joint letter from E. Kunisaki and the Consumer Advocate to the commission, filed September 26, 2016.

2016-0202

issued Order No. 33960, in which it approved the Parties'

stipulated procedural schedule.

On October 14, 2016, the Consumer Advocate issued its

first round of information requests to Applicants, to which

Applicants responded on November 4, 2016.^^

On November 30, 2016, the Consumer Advocate filed its

Statement of Position, in which it recommended approving the

Application, but limiting the fixed in^terest rate on the

Obligations to no more than 5.75%.^^

On December 8, 2016, Applicants filed a letter with

the commission in which they stated that, based on the

Consumer Advocate's Statement of Position, they would not be

submitting information requests to the Consumer Advocate,

and would be filing a Reply as soon as practicable.^® '

Applicants subsequently filed their Reply on January 12, 2017.

^Ôrder No. 33960, "Approving the Parties' Proposed Procedural Schedule," filed October 4, 2016 ("Order No. 33960").

i3«Division of Consumer Advocacy's Submission of Information Requests," filed October 14, 2016 ("CA-IRs").

^^Letter from D. Matsuura to the commission, filed November 4, 2016 ("Applicants' Response to CA-IRs").

^^''Division of Consumer Advocacy's Statement of Position" filed November 30, 2016 ("CA SOP"), at 8.

i®Letter from D. Matsuura to the commission, filed December 8, 2016.

•■i

2016-0202

II.

POSITIONS OF THE PARTIES

A.

The Application

Applicants request, pursuant to HRS § 269-17,

commission approval to sell and guarantee up to $140 million in

unsecured Obligations in 2017, consisting of $100 million for HECO,

$10 million for HELCO, and $30 million for MECO, respectively.^"^

As requested, the Obligations may be designated as bonds, notes,

debentures, or some similar term.^® HECO also states that it

intends to guarantee HELCO's and MECO's borrowing, and seeks

approval to issue these guarantees as part of HECO's respective

Obligation.^® Applicants also request approval to participate in

the proposed sale(s) of the Obligations, including the authority

to enter into agreements necessary to issue the Obligations,

as well as discretion to execute and deliver financing documents

necessary to conclude the sale(s) of the Obligations.

^■Âpplication at 1.

^®Application at 1.

^Âpplication at 2.

^Âpplication at 28

2016-0202

Applicants state that their requests are part of the

Hawaiian Electric Companies'll larger strategic focus of meeting

Hawaii's evolving energy needs by modernizing the electric grid in

a reliable, economical and environmentally sound way.^^

The Application's request is intended to cover the HECO Companies'

estimated net capital expenditures for 2017, plus some excess to

allow for flexibility in the event that unexpected events

affect the projected 2017 financing needs.23 Specifically,

Applicants state that the proceeds from the issuance of the

Obligations are needed to finance capital expenditures,

repay long-term debt and/or short-term debt used to finance or

refinance capital expenditures, and/or to reimburse funds used for

the payment of capital expenditures. 24

In issuing the Obligations, Applicants state that they

will balance two primary objectives: (1) obtaining funds at the

lowest possible interest cost and minimizing issuance costs;

and (2) preserving the financial strength of the HECO Companies.25

Applicants state that the Obligations, in combination with future

2iThe "Hawaiian Electric Companies" ("HECO Companies") refers to HECO, HELCO, and MECO.

22Application at 5.

22Application at 5.

24Application at 1.

25Application at 6.

2016-0202 7

issuances of taxable debt and common equity, will help the

HECO Companies maintain their current capitalization ratios,

which should help to avoid a downgrade by any of the

U.S. ratings agencies.

Applicants propose that the Obligations be issued as

unsecured taxable debt.^s Applicants submit that while tax-exempt

revenue bonds currently have slightly lower interest rates

compared to taxable debt, the difference is slight and is

outweighed by other considerations that come with issuing revenue

bonds.Specifically, Applicants state that as of August 2016,

2^HECO and MECO previously received commission approval to issue long-term unsecured obligations in 2016 in amounts up to $70 million for HECO and $20 million for MECO. See In re Hawaiian Electric Company, Inc., Docket No. 2016-0057, Decision and Order No. 33860, filed August 10, 2016, as modified by Order No. 34154, filed November 29, 2016.

The HECO Companies also previously received commission approval to issue $390 million in common stock in 2016 ($330,000,000 for HECO, $15,000,000 for HELCO, and $45,000,000 for

MECO, respectively) . See In re Hawaiian Elec. Co., Inc., Docket No. 2015-0172, Decision and filed June 6, 2016 ("Order No. 33744").

Order No. 33744,

^"^See Application at 7-8. Currently, Applicants' parent company, Hawaiian Electric Industries, is rated "BBB+" by Fitch Ratings, "Baa2" by Moody's Investors Service, and "BBB-" by Standard and Poors. at 7, n.6.

^^See Application at 2.

^Âpplication at 10-11.

2016-0202

the difference in fixed interest rates between 30-year taxable

debt and revenue bonds was as follows

Taxable Debt (public offering)

Taxable Debt (private placement)

Tax-Exempt Debt (revenue bonds)

4.49%3i 4.24%32 3.75%-4.00%33

Applicants state that the difference in rates (the "spread") is

narrow, and in recent years has actually "flip-flopped" (i.e.,

taxable debt offered a lower interest rate than revenue bonds

in 2012-2013)

Furthermore, Applicants state that taxable debt offers

additional incentives, such as favorable tax treatment and

flexibility in the use of funds. Assets purchased with taxable

debt may take advantage of accelerated depreciation treatment,

which impacts deferred taxes, and, ultimately, company cash flow

^°See Applicants' Responses to Consumer Advocate's Information Requests, filed November 4, 2016 ("Applicants' Response toCA-IR"), at Response to CA-IR-5.

3^Based on data obtained from Wells Fargo in August 2016. See Applicants' Response to CA-IR-5(a).

^^Based on data obtained from Wells Fargo in August 2016. See Applicants' Response to CA-IR-5(a).

33Based on data obtained from Bank of America/Merill Lynch in August 2016. See Applicants' Response to CA-IR-5(b).

^Âpplication at 14.


2016-0202

and rate base.ê Unlike the "straight-line" method of

depreciation, which applies to assets purchased with revenue

bonds, accelerated depreciation increases the amount of deferred

taxes in early years, which has the effect of decreasing rate base

(by increasing accumulated deferred income taxes) and outside

capital funding requirements (by increasing available cash).^”^

Additionally, taxable debt is eligible for "bonus"

depreciation under the Protecting Americans from Tax Hikes

("PATH") Act of 2015, which allows qualified property placed in

service between 2015-2017 a 50% "bonus" depreciation.PATH also

provides bonus depreciation at decreasing rates of 40% and 30% for

property placed in service in 2018 and 2019, respectively.^^

Applicants also state that taxable debt allows for more

flexibility in spending. According to Applicants, revenue bonds

require increased formalities and administrative requirements,

in addition to limits upon how the funds may be used.^°

For example. Applicants state that revenue bond financing

typically includes legislative authorization, "official action,"

^Âpplication at 11-12





2016-0202

commission approval, and public hearings before revenue bonds may

be sold.^^ Furthermore, the proceeds from the sale of revenue

bonds are placed in a trust administered by a construction fund

trustee, and funds may only be withdrawn for qualifying

expenditures on approved and certified projects.Conversely,

taxable debt is not subject to the same level of formality, which,

in turn, results in more flexibility {i.e., liquidity)

Applicants have proposed the following parameters for

the Obligations:^**

Principal amount Not in excess of $100,000,000 of HECO notes and/or $10,000,000 of HECO-guaranteed HELCO notes and/or $30,000,000 of HECO-guaranteed MECO notes.

Interest rate Fixed rate not in excess of 5.75% per annum. **^

Maturity Not later than the 30-year anniversary of the date of issuance.

Price Not less than 95% of the principal amount of the Notes.

•^Âpplication at 13.


^^See Application at 14.


^În their Application, Applicants initially requested a maximum fixed rate of 7.0% per annum; however, in their response to the Consumer Advocate's information requests. Applicants stated that they do not object to lowering the maximum interest rate parameter to 5.75%. See Application at 16 and Applicants' Response to CA-IR-7(c)(1).

2016-0202

Unde rwriting spread/Agent fee

Not in excess of 2% of the aggregate principal amount of the Notes.

Redemption/Prepayment Optional redemption on terms substantially consistent with the redemption terms of previously-issued securities of the HECO Companies or on terms permitting redemption at any time upon payment of the principal amount of the bonds, accrued interest and a "make-whole amount."

Security Unsecured.

Covenants Not materially more restrictive than covenants in connection with previous issuances and sales of the HECO Companies' securities, unless such materially more restrictive covenants are determined by at least two of the officers of the HECO Companies to be necessary or desirable under then-current market conditions to complete the contemplated financing on satisfactory terms.

Sinking Fund None.

Applicants seek commission approval for the discretion

to issue the Obligations either through private placement and/or

through negotiated public offering."^® According to Applicants,

a private placement offering is generally advantageous

when compared to a registered public offering, in that:

(1) private placement does not have the expenses and formalities

related to the registration of securities with the U.S. Securities

and Exchange Commission {"SEC") and the sale of those securities


2016-0202

on public exchanges; and (2) a private placement avoids timing

uncertainties associated with SEC review.Additionally,

public sales of less than $250 million are generally not

index-eligible, making them more difficult to value, which results

in an "interest premium" due to illiquidity.That being said.

Applicants acknowledge that private placement sales generally

result in slightly higher interest rates, owing to the

"illiquidity premium" that arises due to the fact that private

placements are generally marketed to a smaller pool of

potential buyers.

Applicants state that, under current market conditions,

it is likely that issuing the Obligations through public offerings

will be more favorable.However, Applicants request that they

be allowed to elect the specific form of issuance

(private placement or public offering) nearer to the time the

Obligations are actually sold, in order to take advantage of market

conditions that exist at that time.^^ Applicants also request

■^■Âpplication at 17.





2016-0202 13

commission approval to issue the necessary paperwork related to a

private placement or public offering.

Applicants also request an expedited approval procedure

to revise the Obligations' parameters if compelled by market

conditions.Under such circumstances, Applicants would file a

letter request for expedited approval of changes or additions to

the Obligations, and would not include many of the exhibits

included in this Application, such as balance sheet information,

income statement information, sources and uses of funds

information, capitalization ratios, year-end capital structure,

or interest coverage information.^*^ Applicants state that similar

procedures have been approved by the commission in the past.^^

Applicants state that they will provide the commission

with a report containing the results of the proposed financings as

soon as practicable after they are concluded.

In support of their Application, Applicants state that

a variety of financial statements are either incorporated by

reference or included as exhibits to the Application, including.




^Âpplication at 9 (referring to Docket Nos. and 2014-0090).


2011-0127

2016-0202

but not limited to: (1) audited financial statements for the year

ending December 31, 2015; (2) respective unsolicited balance

sheets as of June 30, 2016; (3) respective unconsolidated income

statements and statements of retained earnings for twelve months

ending on June 30, 2016 (unaudited); (4) the estimated consolidated

issuance costs of the proposed Obligations financings;

(5) respective schedules covering details of outstanding issues of

preferred stock, long-term debt, and hybrid securities,

and related docket numbers for incorporation by reference as of

June 30, 2016; (6) respective copies of the resolutions of HECO's,

HELCO's, and MECO's Boards of Directors relating to the issuance

of the Obligations; (7) each Companies" respective capital

expenditures program for 2015 and forecast for 2016-2020;

(8) respective statements of sources and applications of funds

for 2015 and forecast for 2016-2020; (9) respective statements of

capital structure at year-end 2015 and forecasts for 2016-2020;

and (10) respective statements of interest coverage for 2015 and

forecasts for 2016-2020.^'^

Applicants request commission approval no later than

February 28, 2017, in order to pursue alternative sources of

funding in the event this Application is denied.^®

^■Âpplication at 25-26

®®Application at 27.

2016-0202

B.

The Consumer Advocate's Statement of Position

The Consumer Advocate recommends that the

commission approve Applicants' request to issue the long-term,

unsecured Obligations in 2017, subject to certain conditions.^®

In doing so, the Consumer Advocate examines: the proposed uses for

the Obligations; the proposed terms and conditions for the

Obligations; Applicants' ability to service the proposed debt;

whether the Obligations comply with HRS § 269-17; and Applicants'

proposed expedited approval procedures.

First, the Consumer Advocate does not object to the

proposed use of the Obligations. The Consumer Advocate notes that

Applicants state that they will use the proceeds from the

Obligations to finance capital expenditures, repay long-term debt

and/or short-term debt used to finance or refinance capital

expenditures, and/or to reimburse funds used for the payment of

capital expenditures.®® In turn, these capital expenditures will

be used to "modernize the grid, use clean energy sources,

and sustain an effective asset management program, and promote

5®CA SOP at 1.

®°CA SOP at 4 (citing Application at 1)

2016-0202

smart use of energy by providing information and energy

alternatives to customers."®^

Second, the Consumer Advocate does not oppose the

Obligations' proposed terns and conditions, as modified by

Applicants' non-objection to reducing the maximum fixed interest

rate from 7.0% to 5.75%.®^

However, the Consumer Advocate clarifies that its

recommended approval is focused on the requested relief as set

forth in the Application.The Consumer Advocate notes that in

Docket No. 2016-0057 {approving HECO and MECO's request to approve

the issuance of unsecured obligations for 2016) , HECO and MECO

belatedly sought clarification that the maximum fixed interest

rate did not include the Default Rate which was not discussed in

the application in Docket No. 2016-0057.®^ Anticipating that this

issue may also arise in this docket, the Consumer Advocate

reiterates its position that while it supports taking advantage of

®^CA SOP at 4 (citing Application at 5).

®^See SOP at 8 (citing Applicants' Response toCA-IR-7(c)(1)).

“CA SOP at 9.

^^CA SOP at 9, In Docket No. 2016-0057, the Default Rate was defined as "the rate of interest that may be payable on overdue interest or, during the continuance of an event of default in respect of the Obligations, overdue principal or premium in respect of the Obligations." Id. at n.l3 (citing a letter filed by HECO and MECO on November 16, 2016, in Docket No. 2016-0057).

2016-0202 17

favorable interest rates to benefit customers, it does not believe

that the HECO Companies' customers should be held responsible for

any costs related to interest expenses that exceed the approved

maximum interest rate or events of default.The Consumer Advocate

maintains that this condition should not be objectionable, as any

incident involving the Default Rate should be avoided so long as

the HECO Companies pursue prudent business management decisions.®®

As to whether to issue the Obligations as taxable debt

or revenue bonds, the Consumer Advocate observes that while revenue

bonds generally have lower interest rates under current market

conditions, taxable debt offers other incentives, such as

favorable depreciation tax treatment and fewer administrative and

recordkeeping requirements.®'^ Additionally, the Consumer Advocate

notes that, at this time, issuing the Obligations as taxable debt

is estimated to result in greater revenue savings compared to

issuing the Obligations as revenue bonds.®® Accordingly,

®®CA SOP at 9; see also, letter from the Consumer Advocate to the Commission, filed on November 22, 2016, in Docket No. 2016-0057.

®®CA SOP at 9.

®'^CA SOP at 10-11.

®®CA SOP at 11. Specifically, estimated savings in terms of revenue requirement is approximately $16,008,000 for privately placed taxable debt (compared to revenue bonds) and $20,581,000 for publicly placed taxable debt (compared to revenue bonds). Applicants' Response to CA-IR-4, Attachment 1 at page 1 of 3.

2016-0202

it appears that the Consumer Advocate does not object to issuing

the Obligations as taxable debt.®®

Regarding issuance of the Obligations, the Consumer

Advocate observes that a private placement avoids many of

the expenses and formalities associated with the registration

of a public placement with the SEC.”^® Additionally,

the Consumer Advocate also notes that the estimated issuance cost

for the Obligations is approximately $815,600 more for a public

offering than a private placement. Accordingly, even though

current interest rates favor issuing a public offering over a

private placement, the Consumer Advocate does not oppose giving

Applicants authority to choose between issuing the Obligations

In its Statement of Positon, the Consumer Advocate appears to have inadvertently switched these numbers. Compare CA SOP at 11 ("The analyses provided show that the estimated revenue savings are greatest for public (at $16,008,000) or private (at $20,581,000) taxable debt compared to revenue bonds, and therefore, it is likely that such taxable debt has the largest positive impact for consumers.") with Applicants' Response to CA-IR-4, Attachment 1 at page 1 of 3.

®®See CA SOP at 11.

■ÔCA SOP at 11-12 .

■^^CA SOP at 12 (citing Application, Exhibit A and Applicants' Response to CA-IR-1, Attachment 1). The estimated issuance costs are approximately $1,702,600 for a public offering and $887,000 for a private placement. Id.

2016-0202 19

through a public or private placement at a time nearer to when the

Obligations are sold.'^^

Third, the Consumer Advocate states that it is satisfied

that Applicants will be able to meet their interest expense

requirements through 2020.'^^

Fourth, the Consumer Advocate concludes that the

proposed uses for the proceeds of the Obligations comply with the

requirements of HRS § 269-17.’^^ However, the Consumer Advocate

cautions that while it is not objecting to the Obligations,

it still reserves the right to review and make recommendations,

as appropriate, regarding the intended use of the

proceeds from the Obligations (such as capital projects)

The Consumer Advocate states that this is consistent with other

financing dockets, where the Consumer Advocate has contended that

the reasonableness of projects and the recovery of costs associated

with those projects should be determined in a separate application.

■^2CA SOP at 12-13.

■^^CA SOP at 13 (citing Application at Confidential Exhibit 5 - HECO; Confidential Exhibit 5 - HELCO; and Confidential Exhibit 5 - MECO).

"^^CA SOP at 14 .

■^5CA SOP at 15.

2016-0202

such as a commission General Order No. 7 application or a rate

case proceeding.

Fifth, the Consumer Advocate does not oppose Applicants'

request for approval of expedited approval procedures in the event

that the parameters of the Obligations need to be changed.

The Consumer Advocate observes that this request appears to be

efficient and would reduce the amount of regulatory work required

to approve the Obligations.”^® However, the Consumer Advocate

states that its position is premised on the understanding that the

expedited process will only be used for debt amounts and purposes

that have been set forth in this docket.

In sum, the Consumer Advocate does not object to

commission approval of the following: (1) Applicants' request to

issue unsecured taxable Obligations in amounts up to $100 million

for HECO, up to $10 million for HELCO, and up to $30 million for

MECO in one or more private placements and/or one or more

registered public offerings during 2017; (2) HECO's request to

guarantee any obligations of HELCO and MECO with

respect to the subject Obligations and related agreements;

■^^CA SOP at 15.

■^■^CA SOP at 15.

■^®CA SOP at 15.

■^^CA SOP at 15-16

2016-0202

(3) Applicants" request to execute and deliver the necessary-

financing documents to complete the issuance of the Obligations;

and (4) Applicants" request to use an expedited procedure to obtain

approval from the commission for any significant variations in the

terms and conditions of the Obligations.

C.

Applicants' Reply

On January 12, 2017, Applicants filed a Reply Statement,

in which they confirmed that they did not oppose the

Consumer Advocate's request to reduce the upper parameter for the

interest rate for the Obligations to 5.75%, provided that

this maximum interest rate parameter does not apply to

the Default Rate.However, Applicants noted that the

Consumer Advocate opposed any attempt to collect costs associated

with application of the Default Rate from customers. in response,

Applicants agreed in principle that "costs that arise from

imprudent actions may be disallowed; however, prudence must be

determined by the facts and circumstances at the time of

the default and not presupposed.Applicants proposed a

80CA SOP at 16-17.

®Âpplicants Reply at 4.

®2Applicants Reply at 5-6.

®3Applicants Reply at 6.

2016-0202

"prudence standard" to use in the event the Default Rate is applied

in order to determine whether the associated costs are recoverable

from customers.®^

II.

LEGAL AUTHORITY

The Application is governed by HRS

which states:

Issuance of securities. A public utility corporation, may, on securing the prior approval of the public utilities commission, and not otherwise, issue stocks and stock certificates, bonds, notes, and other evidence of indebtedness, payable at periods of more than twelve months after the date thereof, for the following purposes and no other, namely: for the acquisition of property or for the construction, completion, extension, or improvement of or addition to its facilities or service, or for the discharge or lawful refunding of its obligations or for the reimbursement of moneys actually expended from income or from any other moneys in its treasury not secured by or obtained from the issue of its stocks or stock certificates, or bonds, notes, or other evidences of indebtedness, for any of the aforesaid purposes except maintenance of service, replacements, and substitutions not constituting capital expenditures in cases where the corporation has kept its accounts for such expenditures in such manner as to enable the commission to ascertain the amount of moneys so expended and the purpose for which the expenditures were made, and the sources of the funds in its treasury applied to the expenditures. As used herein.

®Âpplicants Reply at 6.

269-17,

2016-0202

"property" and "facilities", mean property and facilities used in all operations of a public utility corporation, whether or not included in its public utility operations or rate base.A public utility may not issue securities to acquire property or to construct, complete, extend or improve or add to its facilities or service if the commission determines that the proposed purpose will have a material adverse effect on its public utility operations.

All stock and every stock certificate, and every bond, note, or other evidence of indebtedness of a public utility corporation not payable within twelve months, issued without an order of the commission authorizing the same, then in effect, shall be void.

The Application is also governed by Title 6, Chapter 61,

Subchapter 9 of the HAR, which governs "Applications to issue stock

or evidences of indebtedness, or to assume liabilities."

Specifically, HAR § 6-61-101 provides:

Contents. (a) An application forauthority to issue stock and stock certificates or bonds, notes, leverage leases, and other evidences of indebtedness payable at periods of more than twelve months after the date thereof shall comply with sections 6-61-15 to 6-61-24 and section 6-61-74 and shall contain the following data either in the body of the application or in exhibits attached to the application:

(1) A general description of the applicants' property and the types of public utility service it provides;

(2) The amount and kind of stock or other evidence of interest or ownership that the applicant proposes to issue and, if preferred, the nature and extent of the preferences; the amount of bonds, notes, or other evidences of indebtedness that the applicant proposes to issue.

2016-0202

together with terms and rate of interest, and a description of the manner in which the bonds, notes, or other evidences of indebtedness are to be secured, if at all; the amount and description of the indebtedness that the applicant proposes to assume, to the extent that information is known to the applicant at the time the application is filed;

(3) If the issuance of securities is to be by- negotiated bid rather than by competitive bid, the justification for that course of action;

(4) Purposes for which the securities are to be issued, and:(A) If for proprietary acquisition,

a detailed description thereof, the consideration to be paid, and the method of arriving at the amount;

(B) If for construction, completion, extension, or improvement of facilities, a description in reasonable detail, the cost or estimated cost, and any supporting study to indicate the reason or necessity for the expenditures;

(C) If for improvement or maintenance of service, a statement of the specific need and character of the improvements proposed and the reasons why service should be maintained from capital;

(D) If, for the discharge or refundingof obligations, a full description of the obligations to be discharged or refunded, including the character, principal amount,applicable discount or premium, date of issue, date of maturity, rate of interest, and other material facts concerning the obligations, together with a statement showing the purposes for which the obligations were issued or the proceeds expended and the commission's decisions, if any.

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(5)

authorizing the incurrence of the obligations;

(E) If for reorganization or readjustment of indebtedness or capitalization or for retirement or exchange of securities, a full description of the indebtedness or capitalization to be readjusted or exchanged; complete terms and conditions of the merger, consolidation, exchange, or other reorganization; a pro forma balance sheet, if possible, giving effect to the reorganization, readjustment, or exchange; and a statement of the reasons or necessity for the transaction; or

(F) If for reimbursement of moneys actually expended from income or from any other moneys in the treasury, a general description of the expenditures for which reimbursement is sought, the source of the expenditures, and the reason or necessity for the reimbursement; and

A description of any obligation or liability to be assumed by the applicant as guarantor, indorser, surety, or otherwise, the consideration to be received by the applicant, and the reason or necessity for that action.

(b) The following exhibits filed with the application:

shall be

(1) Financial statements in accordance with sections 6-61-75 and 6-61-76;

(2) Copy of the instrument defining the terms of the proposed securities, if available, unless previously filed with the commission, in which event reference may be made to the proceeding in which it was filed;

(3) Copy of each plan, offer, or agreement for the reorganization or readjustment of indebtedness or capitalization or for the

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retirement or exchange of securities, if available;

(4) Copy of the resolution by the applicant'sboard of directors originallyauthorizing the proposed financing;

(5) Copy of source and application of funds statement for the latest year and for each of the succeeding five years;

(6) Statement of capital structure for latest year and for each of the succeeding five years, including notes payable as debt;

(7) Statement showing interest coverage for the latest year and for each of the succeeding five years;

(8) Where applicable, bond margincalculation, including pro forma figures giving effect to the proposedfinancing; and

(9) Statement of all estimated expenses for issuance of securities.

Ill.

FINDINGS AND CONCLUSIONS

Based on the above, the commission finds and concludes

as follows:

1. Stated concisely, the permitted purposes for the

use of proceeds under HRS § 269-17 are:®^

The acquisition of property;a.

b.

c.

The construction, completion, extension, or improvement of or addition to facilities or service;

The discharge or lawful refunding of obligations; or

85in Citizens Commc'ns Co., dba The Gas Co. ,Docket No. 03-0051, Decision and Order No. filed July 25, 2003, at 42-43 ("Order No. 20354").

20354,

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d. The reimbursement of moneys actually expended for any of the above purposes.

2. The first two permitted purposes apply to

situations where funds for capital acquisition or construction are

to be expended after or nearly contemporaneously with the issuance

of securities, while the third and fourth purposes apply to past

expenditures of funds, including the discharge or refinancing of

debt incurred in the past for the acquisition or construction of

capital facilities.

3. With respect to this Application, Applicants state

that they intend to use the proceeds from the sale of the

Obligations to "finance capital expenditures, to repay long-term

debt and/or short-term debt used to finance or refinance capital

expenditures and/or to reimburse funds used for the payment of

capital expenditures."®"^ The commission concludes that these are

permitted uses under HRS § 269-17.

4. Likewise, the commission finds that Applicants have

satisfied the requirements of HAR § 6-61-101. Applicants have

provided, either through an attached exhibit or through

86order No. 33744 at 19-20 (citing Order No. 20354 at 43)

®’Âpplication at 1.

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appropriate reference, the information listed in

HAR § 6-61-101(a)88 and (b).®^

5. Regarding HAR § 6-61-101 (a) (4) , Applicants state

that the proceeds from the Obligations are needed to help meet

their respective estimated net capital expenditures for 2017.^°

While these estimated net capital expenditures are broken down

into several distinct categories, it appears that Applicants have

not yet designated them for the specific uses as contemplated in

HAR § 6-61-101{a) (4) .

6. In this regard, the commission notes that

Applicants' estimated net capital expenditures may be subject to

changes based on the results of the HECO Companies' updates to the

Power Supply Improvement Plan ("PSIP").®^

^^See Application at 2-5 and 15-17.

^^See Application at 15-16 and 19-25, and Exhibits A, HECO-R, HECO-1, HECO-3, HECO-4, HECO-5, HELCO-R, HELCO-1, HELCO-2, HELCO-3, HELCO-4, HELCO-5, MECO-R, MECO-1, MECO-3, MECO-4, and MECO-5; and Applicants' Response to CA-IR-1, CA-IR-5, and CA-IR-7.

^Âpplication at 5.

^^See Application at Exhibit HECO-2 (confidential), Exhibit HELCO-2 (confidential), and Exhibit MECO-2 (confidential) for a break-down of Applicants' respective capital expenditures programs for 2015 and forecasts for 2016-2020.

^^The PSIP is the subject of Docket No. 2014-0183, which is currently pending before the commission. The HECO Companies most recently updated the PSIP on December 23, 2016. See "Hawaiian Electric Companies' PSIP Update Report Filed

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7. Accordingly, while the commission is approving

Applicants' request to issue the Obligations, Applicants will

still be required to seek and receive appropriate prior commission

approval for specific capital projects, as required by law. In any

such proceeding, Applicants will be required to satisfactorily

describe and justify the capital project and its costs.

8. The commission observes that while the

Consumer Advocate has not objected to the Application, it has

similarly reserved its ability to review and make recommendations

regarding any future capital projects.^^ Likewise, the commission

observes that approval of the Application does not constitute

approval of any capital projects.

9. Based on the commission's review of the record in

this proceeding, it does not appear that the issuance and sale of

the Obligations, as requested, will have a material adverse effect

on Applicants' public utility operations.

10. The commission notes that while Applicants

originally requested an upper limit of 7% interest rate on their

Obligations, they do not object to the Consumer Advocate's

December 23, 2016," Books 1-4, filed on December 23, 2016,in Docket No. 2014-0183.

93See CA SOP at 15.

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recommendation that the maximum interest rate be capped at 5.75%.®^

Accordingly, the commission adopts the Consumer Advocate's

recommendation and concludes that the interest rate on the

Obligations shall not exceed 5.75%.®^

11. Additionally, although not raised in the

Application, the commission addresses the issue of the

Default Rate, as noted by the Consumer Advocate.®®

12. This issue was previously addressed in

Docket No. 2016-0057, in which HECO and MECO sought, and received,

commission approval to issue unsecured obligations in 2016.®'^

At the time their application was filed in that docket, HECO and

MECO had not specifically raised the issue of the Default Rate and

its relationship to the maximum interest rate, resulting in

uncertainty as to whether the Default Rate was contemplated within

the maximum fixed interest rate.®® The issue was later resolved

pursuant to Order No. 34154, filed in that docket on

November 29, 2016.

®^See Applicants' Response to CA-IR-7(c) and Applicants Replyat 4.



^~^See Decision and Order No. 33860.

®®See Letter from HECO to the commission, filed on November 16, 2016, in Docket No. 2016-0057.

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13. The Consumer Advocate has stated its position on

this issue, and although not raised in the Application,

Applicants have stated their position on this issue in

their Reply.

14. Given that the Parties have had an opportunity to

brief this issue, and in order to avoid the post-decision briefing

that occurred in Docket No. 2016-0057, the commission will also

address the issue of the Default Rate in this Decision and Order.

15. As noted by the commission in Docket No. 2016-0057,

it does not appear that the Default Rate issue has been addressed

in prior proceedings (aside from Docket No. 2016-0057), nor does

it appear that an event of default has ever occurred.

16. Although not explained by Applicants in this

docket, it appears, based on HECO and MECO's statements in

Docket No. 2016-0057, that the financial markets in which

Applicants operate require clarification from the commission that

the approved maximum fixed interest rate parameter for the

Obligations excludes the Default Rate.^°^

99CA SOP at 9.

^°°Applicants Reply at 5-6.

^Q^See Order No. 34154 at 8-9.

^Q^See Order No. 34154 at 4-5; see also. Letter from Tayne Sekimura to the commission.Re: "Docket No. 2016-0057 - Hawaiian Electric Company, Inc. and Maui Electric Company, Limited Request to Approve an Addition to

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17. Given the favorable market conditions that

currently exist, the commission agrees that obtaining a lower

interest rate on the Obligations is in the public interest,

and finds that delaying the issuance of the Obligations to conduct

an investigation into the Default Rate is not in the public

interest at this time. However, the commission retains concerns

regarding the Default Rate, including its specific terms and

operation, as well as concerns regarding Applicants' failure to

timely raise the Default Rate issue in their Application.

Additionally, the commission notes the Consumer Advocate's

concerns regarding recovery of Default Rate-associated costs

from ratepayers.

18. Accordingly, the commission clarifies that the

maximum fixed interest rate parameter of 5.75% for the Obligations

does not include the Default Rate.

19. However, the commission will not allow any costs

associated with the Default Rate, if its application occurs, to be

automatically collected from ratepayers. Rather, in the event the

Default Rate is applied, the burden will be on Applicants to:

(1) explain what event of default triggered the Default Rate, and,

if they choose, (2) to attempt to justify why they should not be

Paragraph 2 of Section IV of Decision and Order No filed on November 16, 2016, in Docket No. 2016-0057.

33860,"

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held solely responsible for the associated costs of

the Default Rate for each particular instance in which

the Default Rate is applied.

20. In this regard, the commission declines to adopt

Applicants' proposed "prudence standard.Rather, if and when

such a situation arises, the commission will issue guidance as to

the applicable standard, which may include Applicants' proposed

"prudence standard," or some modification thereof.

21. In all other respects, the Application is approved

as requested.

IV.

ORDERS

THE COMMISSION ORDERS:

1. The Application is approved as follows;

a. Applicants are authorized to issue up to $100 million in Obligations for HECO, up to $10 million for HELCO, and up to $30 million for MECO, in one or more private placements and/or registered public offerings on or before December 31, 2017;

b. Applicants may participate in the sale(s) of the Obligations and enter into agreements necessary to complete the issuance of the Obligations, provided that the terms of the Obligations fall within the parameters described in the Application;

^Q^See Applicants Reply at 6.

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c. Applicants may execute and deliver any and all financing documents necessary or desirable to complete the sale(s) of the Obligations;

d. HECO is authorized to guarantee the Obligations of HELCO and MECO as described in this proceeding;

e. Applicants may use the proceeds from the Obligations for the purposes set forth in the Application, subject to applicable laws and regulations;

f. Applicants are required to seek and receive appropriate prior commission approval for specific capital projects utilizing proceeds from the Obligations, as required by law, and, in any such proceeding. Applicants will be required to satisfactorily describe and justify the capital project and its costs; and

g. The proposed procedures to expedite approval of changes in or additions to the parameters under which the Obligations may be issued, as requested by Applicants, are approved.

2. The maximum interest rate for the Obligations is

set at 5.75%. This interest rate does not include any rate of

interest that may be payable on overdue interest, or, during the

continuance of an event of default in respect of the Obligations,

on overdue principle or premium in respect of the Obligations

("Default Rate").

a. In the event that the Default Rate is applied to any of the Obligations, there shall be a presumption that the associated costs are not recoverable from ratepayers. The burden shall be on Applicants to explain the circumstances surrounding the event of default and, if they choose, to attempt to provide justification for why they should be able to recover the associated costs of that event of default from

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ratepayers. The commission will make any final determination regarding whether associated costs from an event of default are recoverable from ratepayers.

3. Applicants shall file a report with the commission

and the Consumer Advocate concerning the results of each of the

proposed financings within sixty (60) days of the completion of

the sale, including information on the actual expenses

incurred in the financings and a copy of the final principal

financing documents.

4. Upon the filing of all applicable reports pursuant

to Ordering Paragraph No. 3 above, this docket shall be deemed

closed, unless otherwise ordered by the commission.

DONE at Honolulu, Hawaii JAN 2 6 2017^

PUBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII

Randall Y.

APPROVED AS TO FORM:

Mark Kaetsu Commission Counsel2016-0202.ljk

By

By.

Lorraine H. Akiba, Commissioner

Thomas C. Gorak, Commissioner

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CERTIFICATE OF SERVICE

The foregoing order was served on the date of filing by mail,

postage prepaid, and properly addressed to the following parties:

DEAN NISHINA EXECUTIVE DIRECTORDEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS DIVISION OF CONSUMER ADVOCACY P.O. Box 541 Honolulu, HI 96809

DEAN K. MATSUURAMANAGER, REGULATORY RATE PROCEEDINGS HAWAIIAN ELECTRIC COMPANY, INC.P.O. Box. 2750 Honolulu, HI 96840-0001

Documents

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