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 SeptemberJune 30, 20172018
 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 large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
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
  
Emerging growth company o
   
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Hawaiian Electric Industries, Inc. o
 
Hawaiian Electric Company, Inc. 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
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 OctoberJuly 27, 20172018
Hawaiian Electric Industries, Inc. (Without Par Value) 108,785,978108,879,245 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value) 16,019,78516,142,216 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 SeptemberJune 30, 20172018
 
TABLE OF CONTENTS
 
Page No.  
ii
 
Glossary of Terms
iv
 
Cautionary Note Regarding Forward-Looking Statements
   
  
PART I. FINANCIAL INFORMATION
1
 
Item 1.
Financial Statements
   
Hawaiian Electric Industries, Inc. and Subsidiaries
1
  
Condensed Consolidated Statements of Income (unaudited) -
three and ninesix months ended SeptemberJune 30, 20172018 and 20162017
2
  
Condensed Consolidated Statements of Comprehensive Income (unaudited) -
three and ninesix months ended SeptemberJune 30, 20172018 and 20162017
3
  
Condensed Consolidated Balance Sheets (unaudited) - SeptemberJune 30, 20172018 and December 31, 20162017
4
  
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) -
ninesix months ended SeptemberJune 30, 20172018 and 20162017
5
  
Condensed Consolidated Statements of Cash Flows (unaudited) -
ninesix months ended SeptemberJune 30, 20172018 and 20162017
   
Hawaiian Electric Company, Inc. and Subsidiaries
6
  
Condensed Consolidated Statements of Income (unaudited) -
three and ninesix months ended SeptemberJune 30, 20172018 and 20162017
6
  
Condensed Consolidated Statements of Comprehensive Income (unaudited) -
three and ninesix months ended SeptemberJune 30, 20172018 and 20162017
7
  
Condensed Consolidated Balance Sheets (unaudited) - SeptemberJune 30, 20172018 and December 31, 20162017
8
  
Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited) -
ninesix months ended SeptemberJune 30, 20172018 and 20162017
9
  
Condensed Consolidated Statements of Cash Flows (unaudited) -
ninesix months ended SeptemberJune 30, 20172018 and 20162017
10
  
Notes to Condensed Consolidated Financial Statements (unaudited)
6062
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
6062
  
HEI consolidated
6466
  
Electric Utilities
7478
  
Bank
8386
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
8487
 
Item 4.
Controls and Procedures
   
  
PART II.
OTHER INFORMATION
8487
 
Item 1.
Legal Proceedings
8487
 
Item 1A.
Risk Factors
8588
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
8588
 
Item 5.
Other Information
8689
 
Item 6.
Exhibits
8790
 
Signatures
 

i


Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended SeptemberJune 30, 20172018
GLOSSARY OF TERMS
Terms Definitions
ADITAccumulated deferred income tax balances
AES Hawaii AES Hawaii, Inc.
AFUDC Allowance for funds used during construction
AOCI Accumulated other comprehensive income/(loss)
ASCAccounting Standards Codification
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.
ASU Accounting Standards Update
CIACContributions in aid of construction
CIP CT-1 Campbell Industrial Park 110 MW combustion turbine No. 1
Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; HEI Properties, Inc. (dissolved in 2015Pacific Current, LLC and wound up in 2017)its subsidiaries, Hamakua Holdings, LLC (and its subsidiary, Hamakua Energy, LLC) and Mauo Holdings, LLC (and its subsidiary, Mauo, LLC); The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.); and Pacific Current, LLCHEI Properties, Inc. (dissolved in 2015 and its subsidiary, Hamakua Holdings, LLC and its subsidiary, Hamakua Energy, LLCwound up in 2017)
Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
CBRE Community-based renewable energy
DER Distributed energy resources
D&O Decision and order from the PUC
DGDistributed 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
DSMDemand-side management
ECAC Energy cost adjustment clause
ECRCEnergy cost recovery clause
EIP 2010 Equity and Incentive Plan, as amended and restated
EPA Environmental Protection Agency — federal
EPS Earnings per share
ERP/EAM Enterprise Resource Planning/Enterprise Asset Management
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

ii
GLOSSARY OF TERMS, continued

Terms Definitions
GNMA Government National Mortgage Association
Hawaii Electric Light Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
Hawaiian Electric Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.
HEPHamakua Energy Hamakua Energy, LLC, an indirect subsidiary of HEI and successor in interest to Hamakua Energy Partners, L.P., an affiliate of Arclight Capital Partners (a Boston based private equity firm focused on energy infrastructure investments) and successor in interest to Encogen Hawaii, L.P.
HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., HEI Properties, Inc. (dissolved in 2015 and wound up in 2017), The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Pacific Current, LLC
HEIRSP Hawaiian Electric Industries Retirement Savings Plan
HELOC Home equity line of credit
HPOWER City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
IPP Independent power producer
Kalaeloa Kalaeloa Partners, L.P.
KWH Kilowatthour/s (as applicable)
LNGLiquefied natural gas
LTIP Long-term incentive plan
Maui Electric Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MergerAs provided in the Merger Agreement (see below), merger of NEE Acquisition Sub II, Inc. with and into HEI, with HEI surviving, and then merger of HEI with and into NEE Acquisition Sub I, LLC, with NEE Acquisition Sub I, LLC surviving as a wholly owned subsidiary of NextEra Energy, Inc.
Merger AgreementAgreement and Plan of Merger by and among HEI, NextEra Energy, Inc., NEE Acquisition Sub II, Inc. and NEE Acquisition Sub I, LLC, dated December 3, 2014 and terminated July 16, 2016
MPIR Major Project Interim Recovery
MSRMortgage servicing right
MauoMauo, LLC, an indirect subsidiary of HEI
MW Megawatt/s (as applicable)
NEENextEra Energy, Inc.
NEM Net energy metering
NII Net interest income
NPBC Net periodic benefit costs
NPPC Net periodic pension costs
O&M Other operation and maintenance
OCC Office of the Comptroller of the Currency
OPEB Postretirement benefits other than pensions
Pacific CurrentPacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC and Mauo Holdings, LLC
PIMsPerformance incentive mechanisms
PPA Power purchase agreement
PPAC Purchased power adjustment clause
PSIPs Power Supply Improvement Plans
PUC Public Utilities Commission of the State of Hawaii
PV Photovoltaic
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
SEC Securities and Exchange Commission
See Means the referenced material is incorporated by reference
Spin-OffTax Act The previously planned distribution2017 Tax Cuts and Jobs Act (H.R. 1, An Act to HEI shareholders of allprovide for reconciliation pursuant to titles II and V of the common stock of ASB Hawaii immediately prior toconcurrent resolution on the Merger, which was terminatedbudget for fiscal year 2018)
TDR Troubled debt restructuring
Trust III HECO Capital Trust III
Utilities Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
VIE Variable interest entity
 

iii


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic, political and market factors, among other things. These forward-looking statements are not guarantees of future performance.
Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:
international, national and local economic and political conditions—includingconditions--including the state of the Hawaii tourism, defense and construction industries; the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by ASB, which could result in higher loan loss provisions and write-offs); decisions concerning the extent of the presence of the federal government and military in Hawaii; the implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international responses to those conditions; and the potential impacts of global developments (including global economic conditions and uncertainties; the effects of the United Kingdom’s referendum to withdraw from the European Union; unrest; the conflict in Syria; the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade; terrorist acts by ISIS or others;acts; potential conflict or crisis with North Korea; and potential pandemics);
the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling, monetary policy, trade policy and tariffs, and other policy and regulation changes advanced or proposed by President Trump and his administration;
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 (including tax regulations), market conditions and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated;
increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);
the impacts of the termination of the Merger with NextEra Energy, Inc. (NEE) and the resulting loss of NEE’s resources, expertise and support (e.g., financial and technological), including potentially higher costs and longer lead times to increase levels of renewable energy and to complete projects like Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) and smart grids, and a higher cost of capital;
the potential delay by the Public Utilities Commission of the State of Hawaii (PUC) in considering (and potential disapproval of actual or proposed) renewable energy proposals and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; and uncertainties surrounding technologies, solar power, wind power, biofuels, environmental assessments required to meet renewable portfolio standards (RPS) goals and the impacts of implementation of the renewable energy proposals on future costs of electricity;
the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans included in their updated Power Supply Improvement Plans (PSIPs), Demand Response Portfolio Plan, Distributed Generation Interconnection Plan, Grid Modernization Plans, and business model changes, which have been and are continuing to be developed and updated in response to the orders issued by the PUC, inthe PUC’s April 2014 statement of its April 2014 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 subsequent orders of the PUC;
capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management, (DSM), distributed generation, (DG), combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;
fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs);
the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;
the ability of the Utilities to achieve performance incentive mechanisms currently in place;
the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Senate Bill No. 2939 SD2, including the potential addition of new performance incentive mechanisms, third party proposals to the PUC’s implementation of PBR, and the implications of not achieving performance incentive goals;
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;

iv


the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities' electric systems and as customers reduce their energy usage;
the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);
the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;
the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements;
new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors;
new technological developments,competitors such as the commercial development of energy storage and microgrids that could affect the operations of the Utilities;and banking through alternative channels;
cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASBits third-party vendors, and the Utilitiesits subsidiaries (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;
any failure in the implementation of the ERP/EAM system could adversely affect the Utilities’ ability to timely and accurately report financial information and make payments to vendors and employees;
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 emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);
developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies;
discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight;
decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);
decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS);
potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);
the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;
the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);
changes in accounting principles applicable to HEI the Utilities and ASB,its subsidiaries, 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 capitalcapital/finance lease or on-balance-sheet operating 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;its subsidiaries;
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);
the ability of the Company’s non-regulated subsidiary, Pacific Current, LLC, to achieve its performance and growth objectives, which in turn could affect its ability to service its non-recourse debt;
the Company’s reliance on third parties and the risk of their non-performance; 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, Pacific Current and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise.

v

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands, except per share amounts) 2017 2016 2017 2016 2018 2017 2018 2017
Revenues  
  
  
  
  
  
  
  
Electric utility $598,769
 $572,253
 $1,674,255
 $1,549,700
 $608,126
 $556,875
 $1,178,553
 $1,075,486
Bank 74,289
 73,708
 222,474
 213,297
 77,104
 75,329
 152,523
 148,185
Other 127
 94
 299
 262
 47
 77
 75
 172
Total revenues 673,185
 646,055
 1,897,028
 1,763,259
 685,277
 632,281
 1,331,151
 1,223,843
Expenses  
  
  
  
  
  
  
  
Electric utility 511,693
 482,441
 1,483,194
 1,333,876
 552,982
 500,393
 1,072,040
 968,643
Bank 47,525
 50,981
 146,754
 150,752
 50,187
 50,332
 100,719
 98,833
Other 4,422
 7,191
 13,777
 18,883
 3,309
 3,754
 7,704
 8,827
Total expenses 563,640
 540,613
 1,643,725
 1,503,511
 606,478
 554,479
 1,180,463
 1,076,303
Operating income (loss)  
  
  
  
  
  
  
  
Electric utility 87,076
 89,812
 191,061
 215,824
 55,144
 56,482
 106,513
 106,843
Bank 26,764
 22,727
 75,720
 62,545
 26,917
 24,997
 51,804
 49,352
Other (4,295) (7,097) (13,478) (18,621) (3,262) (3,677) (7,629) (8,655)
Total operating income 109,545
 105,442
 253,303
 259,748
 78,799
 77,802
 150,688
 147,540
Merger termination fee —
 90,000
 —
 90,000
Retirement defined benefits expense—other than service costs (1,564) (1,906) (3,397) (3,782)
Interest expense, net—other than on deposit liabilities and other bank borrowings (19,227) (19,365) (59,235) (56,792) (22,001) (20,440) (43,519) (40,008)
Allowance for borrowed funds used during construction 1,339
 854
 3,371
 2,276
 1,365
 1,143
 2,809
 2,032
Allowance for equity funds used during construction 3,482
 2,274
 8,908
 6,010
 2,983
 3,027
 6,277
 5,426
Income before income taxes 95,139
 179,205
 206,347
 301,242
 59,582
 59,626
 112,858
 111,208
Income taxes 34,595
 51,592
 72,003
 96,203
 13,055
 20,492
 25,611
 37,408
Net income 60,544
 127,613
 134,344
 205,039
 46,527
 39,134
 87,247
 73,800
Preferred stock dividends of subsidiaries 471
 471
 1,417
 1,417
 473
 473
 946
 946
Net income for common stock $60,073
 $127,142
 $132,927
 $203,622
 $46,054
 $38,661
 $86,301
 $72,854
Basic earnings per common share $0.55
 $1.17
 $1.22
 $1.89
 $0.42
 $0.36
 $0.79
 $0.67
Diluted earnings per common share $0.55
 $1.17
 $1.22
 $1.88
 $0.42
 $0.36
 $0.79
 $0.67
Dividends declared per common share $0.31
 $0.31
 $0.93
 $0.93
 $0.31
 $0.31
 $0.62
 $0.62
Weighted-average number of common shares outstanding 108,786
 108,268
 108,737
 107,951
 108,842
 108,750
 108,830
 108,712
Net effect of potentially dilutive shares 79
 204
 172
 220
 121
 47
 223
 157
Weighted-average shares assuming dilution 108,865
 108,472
 108,909
 108,171
 108,963
 108,797
 109,053
 108,869
 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Net income for common stock $60,073
 $127,142
 $132,927
 $203,622
 $46,054
 $38,661
 $86,301
 $72,854
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 $(137), $1,417, $(1,619) and $(5,413), respectively 208
 (2,147) 2,452
 8,197
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $238, respectively —
 —
 —
 (360)
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of tax benefits (taxes) of $1,592, $(1,334), $6,459 and $(1,482), respectively (4,348) 2,021
 (17,645) 2,244
Derivatives qualifying as cash flow hedges:  
  
  
  
  
  
  
  
Effective portion of foreign currency hedge net unrealized gains arising during the period, net of taxes of nil, $205, nil and $368, respectively —
 321
 —
 578
Reclassification adjustment to net income, net of (taxes) benefits of nil, $(110), $289 and $(75), respectively —
 (173) 454
 (119)
Reclassification adjustment to net income, net of tax benefits of nil, nil, nil and $289, respectively —
 —
 —
 454
Retirement benefit plans:  
  
  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $2,516, $2,324, $7,526 and $6,943, respectively 3,942
 3,641
 11,793
 10,877
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,290, $2,109, $6,872 and $6,327, respectively (3,596) (3,311) (10,790) (9,934)
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,862, $2,508, $3,654 and $5,010, respectively 5,350
 3,930
 10,496
 7,851
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,674, $2,281, $3,277 and $4,582, respectively (4,827) (3,581) (9,449) (7,194)
Other comprehensive income (loss), net of taxes 554
 (1,669) 3,909
 9,239
 (3,825) 2,370
 (16,598) 3,355
Comprehensive income attributable to Hawaiian Electric Industries, Inc. $60,627
 $125,473
 $136,836
 $212,861
 $42,229
 $41,031
 $69,703
 $76,209
 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) 
(dollars in thousands) September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Assets  
  
  
  
Cash and cash equivalents $202,173
 $278,452
 $254,665
 $261,881
Accounts receivable and unbilled revenues, net 264,426
 237,950
 299,771
 263,209
Available-for-sale investment securities, at fair value 1,320,110
 1,105,182
 1,409,528
 1,401,198
Held-to-maturity investment securities, at amortized cost 62,630
 44,515
Stock in Federal Home Loan Bank, at cost 9,706
 11,218
 10,158
 9,706
Loans receivable held for investment, net 4,623,234
 4,683,160
Loans held for investment, net 4,721,941
 4,617,131
Loans held for sale, at lower of cost or fair value 15,728
 18,817
 5,248
 11,250
Property, plant and equipment, net of accumulated depreciation of $2,537,320 and $2,444,348 at September 30, 2017 and December 31, 2016, respectively 4,813,875
 4,603,465
Property, plant and equipment, net of accumulated depreciation of $2,615,259 and $2,553,295 at June 30, 2018 and December 31, 2017, respectively 4,611,949
 4,460,248
Regulatory assets 936,964
 957,451
 860,410
 869,297
Other 474,444
 447,621
 565,614
 513,535
Goodwill 82,190
 82,190
 82,190
 82,190
Total assets $12,742,850
 $12,425,506
 $12,884,104
 $12,534,160
Liabilities and shareholders’ equity  
  
  
  
Liabilities  
  
  
  
Accounts payable $160,897
 $143,279
 $213,832
 $193,714
Interest and dividends payable 26,484
 25,225
 27,594
 25,837
Deposit liabilities 5,752,326
 5,548,929
 6,116,109
 5,890,597
Short-term borrowings—other than bank 24,498
 —
 202,857
 117,945
Other bank borrowings 153,552
 192,618
 126,930
 190,859
Long-term debt, net—other than bank 1,618,446
 1,619,019
 1,783,009
 1,683,797
Deferred income taxes 756,814
 728,806
 375,832
 388,430
Regulatory liabilities 466,216
 410,693
 905,216
 880,770
Contributions in aid of construction 565,118
 543,525
Defined benefit pension and other postretirement benefit plans liability 620,788
 638,854
 494,541
 509,514
Other 460,396
 473,512
 500,873
 521,018
Total liabilities 10,605,535
 10,324,460
 10,746,793
 10,402,481
Preferred stock of subsidiaries - not subject to mandatory redemption 34,293
 34,293
 34,293
 34,293
Commitments and contingencies (Notes 3 and 4) 

 

 

 

Shareholders’ equity  
  
  
  
Preferred stock, no par value, authorized 10,000,000 shares; issued: none —
 —
 —
 —
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,785,978 shares and 108,583,413 shares at September 30, 2017 and December 31, 2016, respectively 1,661,492
 1,660,910
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,879,245 shares and 108,787,807 shares at June 30, 2018 and December 31, 2017, respectively 1,665,901
 1,662,491
Retained earnings 470,750
 438,972
 495,656
 476,836
Accumulated other comprehensive loss, net of tax benefits (29,220) (33,129) (58,539) (41,941)
Total shareholders’ equity 2,103,022
 2,066,753
 2,103,018
 2,097,386
Total liabilities and shareholders’ equity $12,742,850
 $12,425,506
 $12,884,104
 $12,534,160
 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.


Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 
 Common stock Retained 
Accumulated
other
comprehensive
   Common stock Retained 
Accumulated
other
comprehensive
  
(in thousands) Shares Amount Earnings income (loss) Total Shares Amount Earnings income (loss) Total
Balance, December 31, 2017 108,788
 $1,662,491
 $476,836
 $(41,941) $2,097,386
Net income for common stock —
 —
 86,301
 —
 86,301
Other comprehensive loss, net of tax benefits —
 —
 —
 (16,598) (16,598)
Issuance of common stock, net of expenses 91
 3,410
 —
 —
 3,410
Common stock dividends —
 —
 (67,481) —
 (67,481)
Balance, June 30, 2018 108,879
 $1,665,901
 $495,656
 $(58,539) $2,103,018
Balance, December 31, 2016 108,583
 $1,660,910
 $438,972
 $(33,129) $2,066,753
 108,583
 $1,660,910
 $438,972
 $(33,129) $2,066,753
Net income for common stock —
 —
 132,927
 —
 132,927
 —
 —
 72,854
 —
 72,854
Other comprehensive income, net of taxes —
 —
 —
 3,909
 3,909
 —
 —
 —
 3,355
 3,355
Issuance of common stock, net of expenses 203
 582
 —
 —
 582
 202
 (507) —
 —
 (507)
Common stock dividends —
 —
 (101,149) —
 (101,149) —
 —
 (67,426) —
 (67,426)
Balance, September 30, 2017 108,786
 $1,661,492
 $470,750
 $(29,220) $2,103,022
Balance, December 31, 2015 107,460
 $1,629,136
 $324,766
 $(26,262) $1,927,640
Net income for common stock —
 —
 203,622
 —
 203,622
Other comprehensive income, net of taxes —
 —
 —
 9,239
 9,239
Issuance of common stock, net of expenses 1,043
 28,285
 —
 —
 28,285
Common stock dividends —
 —
 (100,398) —
 (100,398)
Balance, September 30, 2016 108,503
 $1,657,421
 $427,990
 $(17,023) $2,068,388
Balance, June 30, 2017 108,785
 $1,660,403
 $444,400
 $(29,774) $2,075,029
 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 Nine months ended September 30 Six months ended June 30
(in thousands) 2017 2016 2018 2017
Cash flows from operating activities  
  
  
  
Net income $134,344
 $205,039
 $87,247
 $73,800
Adjustments to reconcile net income to net cash provided by operating activities  
  
  
  
Depreciation of property, plant and equipment 150,123
 145,684
 106,063
 100,062
Other amortization 15,362
 7,368
 20,603
 6,101
Provision for loan losses 7,231
 15,266
 6,304
 6,741
Loans receivable originated and purchased, held for sale (105,816) (172,657)
Proceeds from sale of loans receivable, held for sale 119,731
 168,490
Loans originated and purchased, held for sale (78,313) (69,595)
Proceeds from sale of loans, held for sale 77,382
 79,944
Deferred income taxes 21,397
 30,667
 (9,672) 17,047
Share-based compensation expense 4,383
 3,581
 4,414
 3,285
Allowance for equity funds used during construction (8,908) (6,010) (6,277) (5,426)
Other (1,350) 3,234
 (147) 246
Changes in assets and liabilities  
  
  
  
Increase in accounts receivable and unbilled revenues, net (26,250) (12,104) (41,526) (12,394)
Decrease in fuel oil stock 6,177
 6,736
Increase in fuel oil stock (19,867) (5,962)
Decrease (increase) in regulatory assets 3,922
 (2,251) (19,600) 8,179
Increase (decrease) in accounts, interest and dividends payable (10,390) 3,399
Increase in accounts, interest and dividends payable 31,784
 43,530
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes 2,828
 52,558
 (26,558) (37,954)
Increase in defined benefit pension and other postretirement benefit plans liability 670
 150
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability (871) 420
Change in other assets and liabilities (22,311) (39,850) (22,695) (33,922)
Net cash provided by operating activities 291,143
 409,300
 108,271
 174,102
Cash flows from investing activities  
  
  
  
Available-for-sale investment securities purchased (369,467) (354,165) (133,698) (295,510)
Principal repayments on available-for-sale investment securities 155,026
 172,829
 108,379
 99,663
Proceeds from sale of available-for-sale investment securities —
 16,423
Purchases of held-to-maturity investment securities (20,450) —
Principal repayments of held-to-maturity investment securities 2,270
 —
Purchase of stock from Federal Home Loan Bank (2,868) (2,773) (7,533) (2,868)
Redemption of stock from Federal Home Loan Bank 4,380
 2,233
 7,080
 2,380
Net decrease (increase) in loans held for investment 13,188
 (175,303)
Net increase in loans held for investment (111,521) (20,326)
Proceeds from sale of commercial loans 31,427
 37,946
 7,149
 13,493
Proceeds from sale of real estate acquired in settlement of loans 411
 829
 589
 185
Proceeds from sale of real estate held-for-sale —
 1,764
Capital expenditures (314,404) (259,207) (259,898) (210,325)
Contributions in aid of construction 40,603
 23,568
 13,573
 17,571
Contributions to low income housing investments (3,279) —
Other 1,345
 112
 5,919
 8,216
Net cash used in investing activities (440,359) (535,744) (391,420) (387,521)
Cash flows from financing activities  
  
  
  
Net increase in deposit liabilities 203,397
 355,467
 123,137
 175,457
Net increase (decrease) in short-term borrowings with original maturities of three months or less 24,498
 (103,063)
Net increase (decrease) in retail repurchase agreements 24,469
 (21,121)
Net increase in short-term borrowings with original maturities of three months or less 84,881
 49,789
Net increase in retail repurchase agreements 38,446
 9,048
Proceeds from other bank borrowings 59,500
 55,835
 177,000
 59,500
Repayments of other bank borrowings (123,034) (97,902) (177,000) (73,034)
Proceeds from issuance of long-term debt 265,000
 75,000
 100,000
 265,000
Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds (265,000) (75,000) (878) (265,000)
Withheld shares for employee taxes on vested share-based compensation (3,796) (2,398) (996) (3,787)
Net proceeds from issuance of common stock —
 10,901
Common stock dividends (101,149) (83,620) (67,481) (67,426)
Preferred stock dividends of subsidiaries (1,417) (1,417) (946) (946)
Other (9,531) (2,361) (230) (3,253)
Net cash provided by financing activities 72,937
 110,321
 275,933
 145,348
Net decrease in cash and cash equivalents (76,279) (16,123) (7,216) (68,071)
Cash and cash equivalents, beginning of period 278,452
 300,478
 261,881
 278,452
Cash and cash equivalents, end of period $202,173
 $284,355
 $254,665
 $210,381

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Revenues $598,769
 $572,253
 $1,674,255
 $1,549,700
 $608,126
 $556,875
 $1,178,553
 $1,075,486
Expenses  
  
  
  
  
  
  
  
Fuel oil 146,258
 128,624
 431,787
 334,263
 171,717
 141,259
 338,685
 285,529
Purchased power 160,347
 157,750
 440,538
 412,667
 160,738
 153,067
 300,648
 280,191
Other operation and maintenance 100,102
 94,789
 306,716
 298,260
 112,642
 104,939
 220,252
 203,756
Depreciation 48,206
 46,759
 144,578
 140,300
 50,361
 48,156
 100,827
 96,372
Taxes, other than income taxes 56,780
 54,519
 159,575
 148,386
 57,524
 52,972
 111,628
 102,795
Total expenses 511,693
 482,441
 1,483,194
 1,333,876
 552,982
 500,393
 1,072,040
 968,643
Operating income 87,076
 89,812
 191,061
 215,824
 55,144
 56,482
 106,513
 106,843
Allowance for equity funds used during construction 3,482
 2,274
 8,908
 6,010
 2,983
 3,027
 6,277
 5,426
Retirement defined benefits expense—other than service costs (988) (1,435) (2,252) (2,858)
Interest expense and other charges, net (16,907) (17,323) (52,625) (49,734) (18,160) (18,214) (35,854) (35,718)
Allowance for borrowed funds used during construction 1,339
 854
 3,371
 2,276
 1,365
 1,143
 2,809
 2,032
Income before income taxes 74,990
 75,617
 150,715
 174,376
 40,344
 41,003
 77,493
 75,725
Income taxes 27,005
 28,145
 54,623
 64,682
 8,676
 14,860
 17,851
 27,618
Net income 47,985
 47,472
 96,092
 109,694
 31,668
 26,143
 59,642
 48,107
Preferred stock dividends of subsidiaries 228
 228
 686
 686
 229
 229
 458
 458
Net income attributable to Hawaiian Electric 47,757
 47,244
 95,406
 109,008
 31,439
 25,914
 59,184
 47,649
Preferred stock dividends of Hawaiian Electric 270
 270
 810
 810
 270
 270
 540
 540
Net income for common stock $47,487
 $46,974
 $94,596
 $108,198
 $31,169
 $25,644
 $58,644
 $47,109
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.
HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Net income for common stock $47,487
 $46,974
 $94,596
 $108,198
 $31,169
 $25,644
 $58,644
 $47,109
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
  
  
Derivatives qualifying as cash flow hedges:                
Effective portion of foreign currency hedge net unrealized gains arising during the period, net of taxes of nil, $205, nil and $368, respectively —
 321
 —
 578
Reclassification adjustment to net income, net of (taxes) benefits of nil, $(110), $289 and $(110), respectively —
 (173) 454
 (173)
Reclassification adjustment to net income, net of tax benefits of nil, nil, nil and $289, respectively —
 —
 —
 454
Retirement benefit plans:  
  
  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $2,306, $2,110, $6,916 and $6,331, respectively 3,618
 3,314
 10,857
 9,941
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,290, $2,109, $6,872 and $6,327, respectively (3,596) (3,311) (10,790) (9,934)
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,683, $2,306, $3,297 and $4,610, respectively 4,853
 3,621
 9,506
 7,239
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,674, $2,281, $3,277 and $4,582, respectively (4,827) (3,581) (9,449) (7,194)
Other comprehensive income, net of taxes 22
 151
 521
 412
 26
 40
 57
 499
Comprehensive income attributable to Hawaiian Electric Company, Inc. $47,509
 $47,125
 $95,117
 $108,610
 $31,195
 $25,684
 $58,701
 $47,608
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value) September 30, 2017
 December 31, 2016
 June 30, 2018
 December 31, 2017
Assets  
  
  
  
Property, plant and equipment        
Utility property, plant and equipment  
  
  
  
Land $53,913
 $53,153
 $52,914
 $53,177
Plant and equipment 6,778,254
 6,605,732
 6,652,982
 6,401,040
Less accumulated depreciation (2,460,429) (2,369,282) (2,534,428) (2,476,352)
Construction in progress 307,492
 211,742
 165,608
 263,094
Utility property, plant and equipment, net 4,679,230
 4,501,345
 4,337,076
 4,240,959
Nonutility property, plant and equipment, less accumulated depreciation of $1,233 as of September 30, 2017 and $1,232 as of December 31, 2016 7,409
 7,407
Nonutility property, plant and equipment, less accumulated depreciation of $1,253 as of June 30, 2018 and $1,251 as of December 31, 2017 7,581
 7,580
Total property, plant and equipment, net 4,686,639
 4,508,752
 4,344,657
 4,248,539
Current assets  
  
  
  
Cash and cash equivalents 9,987
 74,286
 20,860
 12,517
Customer accounts receivable, net 133,135
 123,688
 157,260
 127,889
Accrued unbilled revenues, net 109,707
 91,693
 110,839
 107,054
Other accounts receivable, net 4,097
 5,233
 6,896
 7,163
Fuel oil stock, at average cost 60,253
 66,430
 107,016
 86,873
Materials and supplies, at average cost 55,959
 53,679
 57,941
 54,397
Prepayments and other 29,871
 23,100
 29,240
 25,355
Regulatory assets 72,773
 66,032
 103,566
 88,390
Total current assets 475,782
 504,141
 593,618
 509,638
Other long-term assets  
  
  
  
Regulatory assets 864,191
 891,419
 756,844
 780,907
Unamortized debt expense 661
 208
Other 80,228
 70,908
 108,595
 91,529
Total other long-term assets 945,080
 962,535
 865,439
 872,436
Total assets $6,107,501
 $5,975,428
 $5,803,714
 $5,630,613
Capitalization and liabilities  
  
  
  
Capitalization  
  
  
  
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 16,019,785 shares at September 30, 2017 and December 31, 2016) $106,818
 $106,818
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 16,142,216 shares at June 30, 2018 and December 31, 2017) $107,634
 $107,634
Premium on capital stock 601,487
 601,491
 614,667
 614,675
Retained earnings 1,120,571
 1,091,800
 1,131,185
 1,124,193
Accumulated other comprehensive income (loss), net of taxes 199
 (322)
Accumulated other comprehensive loss, net of tax benefits (1,162) (1,219)
Common stock equity 1,829,075
 1,799,787
 1,852,324
 1,845,283
Cumulative preferred stock — not subject to mandatory redemption 34,293
 34,293
 34,293
 34,293
Long-term debt, net 1,318,623
 1,319,260
 1,418,474
 1,318,516
Total capitalization 3,181,991
 3,153,340
 3,305,091
 3,198,092
Commitments and contingencies (Note 3) 

 

 

 

Current liabilities  
  
  
  
Current portion of long-term debt 49,983
 49,963
Short-term borrowings from non-affiliates 6,000
 —
 91,880
 4,999
Accounts payable 124,240
 117,814
 153,759
 159,610
Interest and preferred dividends payable 25,261
 22,838
 22,684
 22,575
Taxes accrued 183,365
 172,730
Taxes accrued, including revenue taxes 172,063
 199,101
Regulatory liabilities 3,399
 3,762
 9,787
 3,401
Other 59,611
 55,221
 59,203
 59,456
Total current liabilities 401,876
 372,365
 559,359
 499,105
Deferred credits and other liabilities  
  
  
  
Deferred income taxes 767,611
 733,659
 388,875
 394,041
Regulatory liabilities 462,817
 406,931
 895,429
 877,369
Unamortized tax credits 88,827
 88,961
 92,798
 90,369
Defined benefit pension and other postretirement benefit plans liability 581,713
 599,726
 457,953
 472,948
Other 57,548
 76,921
 104,209
 98,689
Total deferred credits and other liabilities 1,958,516
 1,906,198
 1,939,264
 1,933,416
Contributions in aid of construction 565,118
 543,525
Total capitalization and liabilities $6,107,501
 $5,975,428
 $5,803,714
 $5,630,613
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited)
 
 Common stock 
Premium
on
capital
 Retained 
Accumulated
other
comprehensive
   Common stock 
Premium
on
capital
 Retained 
Accumulated
other
comprehensive
  
(in thousands) Shares Amount stock earnings income (loss) Total Shares Amount stock earnings income (loss) Total
Balance, December 31, 2017 16,142
 $107,634
 $614,675
 $1,124,193
 $(1,219) $1,845,283
Net income for common stock —
 —
 —
 58,644
 —
 58,644
Other comprehensive income, net of taxes —
 —
 —
 —
 57
 57
Common stock dividends —
 —
 —
 (51,652) —
 (51,652)
Common stock issuance expenses —
 —
 (8) —
 —
 (8)
Balance, June 30, 2018 16,142
 $107,634
 $614,667
 $1,131,185
 $(1,162) $1,852,324
Balance, December 31, 2016 16,020
 $106,818
 $601,491
 $1,091,800
 $(322) $1,799,787
 16,020
 $106,818
 $601,491
 $1,091,800
 $(322) $1,799,787
Net income for common stock —
 —
 —
 94,596
 —
 94,596
 —
 —
 —
 47,109
 —
 47,109
Other comprehensive income, net of taxes —
 —
 —
 —
 521
 521
 —
 —
 —
 —
 499
 499
Common stock dividends —
 —
 —
 (65,825) —
 (65,825) —
 —
 —
 (43,884) —
 (43,884)
Common stock issuance expenses —
 —
 (4) —
 —
 (4) —
 —
 (5) —
 —
 (5)
Balance, September 30, 2017 16,020
 $106,818
 $601,487
 $1,120,571
 $199
 $1,829,075
Balance, December 31, 2015 15,805
 $105,388
 $578,930
 $1,043,082
 $925
 $1,728,325
Net income for common stock —
 —
 —
 108,198
 —
 108,198
Other comprehensive income, net of taxes —
 —
 —
 —
 412
 412
Common stock dividends —
 —
 —
 (70,199) —
 (70,199)
Common stock issuance expenses —
 —
 (9) —
 —
 (9)
Balance, September 30, 2016 15,805
 $105,388
 $578,921
 $1,081,081
 $1,337
 $1,766,727
Balance, June 30, 2017 16,020
 $106,818
 $601,486
 $1,095,025
 $177
 $1,803,506
 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.




Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) 
 Nine months ended September 30 Six months ended June 30
(in thousands) 2017 2016 2018 2017
Cash flows from operating activities  
  
  
  
Net income $96,092

$109,694
 $59,642

$48,107
Adjustments to reconcile net income to net cash provided by operating activities  

 
  

 
Depreciation of property, plant and equipment 144,578

140,300
 100,827

96,372
Other amortization 6,118

5,380
 13,021

4,262
Deferred income taxes 29,537

55,648
 (8,343)
23,599
Allowance for equity funds used during construction (8,908)
(6,010) (6,277)
(5,426)
Other 526
 3,234
 978
 1,615
Changes in assets and liabilities  

 
  

 
Increase in accounts receivable (8,087)
(655) (34,068)
(1,729)
Increase in accrued unbilled revenues (18,014)
(10,658) (3,785)
(11,903)
Decrease in fuel oil stock 6,177

6,736
Increase in fuel oil stock (20,143)
(5,962)
Increase in materials and supplies (2,280)
(2,927) (3,544)
(3,420)
Decrease (increase) in regulatory assets 3,922

(2,251) (19,600)
8,179
Decrease in accounts payable (22,841)
(676)
Increase in accounts payable 18,284

39,716
Change in prepaid and accrued income taxes, tax credits and revenue taxes 5,291

(9,595) (31,061)
(40,910)
Increase in defined benefit pension and other postretirement benefit plans liability 453

360
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability (1,961)
302
Change in other assets and liabilities (2,662)
(13,309) 5,866

(14,047)
Net cash provided by operating activities 229,902

275,271
 69,836

138,755
Cash flows from investing activities  
  
  
  
Capital expenditures (278,004) (250,704) (213,220) (190,159)
Contributions in aid of construction 40,603
 23,568
 13,573
 17,571
Other 8,114
 1,100
 4,301
 6,250
Net cash used in investing activities (229,287) (226,036) (195,346) (166,338)
Cash flows from financing activities  
  
  
  
Common stock dividends (65,825) (70,199) (51,652) (43,884)
Preferred stock dividends of Hawaiian Electric and subsidiaries (1,496) (1,496) (998) (998)
Proceeds from issuance of special purpose revenue bonds 265,000
 —
Proceeds from issuance of long-term debt 100,000
 265,000
Funds transferred for redemption of special purpose revenue bonds (265,000) —
 —
 (265,000)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less 6,000
 21,000
 86,881
 43,990
Other (3,593) (12) (378) (3,229)
Net cash used in financing activities (64,914) (50,707)
Net decrease in cash and cash equivalents (64,299) (1,472)
Net cash provided by (used in) financing activities 133,853
 (4,121)
Net increase (decrease) in cash and cash equivalents 8,343
 (31,704)
Cash and cash equivalents, beginning of period 74,286
 24,449
 12,517
 74,286
Cash and cash equivalents, end of period $9,987
 $22,977
 $20,860
 $42,582

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162017 Form 10-K.



9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1 · Basis of presentation
The accompanying unaudited condensed 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 unaudited condensed consolidated 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 condensed 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, 20162017.
In the opinion of HEI’s and Hawaiian Electric’s management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments required by GAAP to fairly state consolidated HEI’s and Hawaiian Electric’s financial positions as of SeptemberJune 30, 20172018 and December 31, 20162017, and the results of their operations for the three and ninesix months ended SeptemberJune 30, 2018 and 2017 and 2016 and their cash flows for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. All such adjustments are of a normal recurring nature, unless otherwise disclosed below or in other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
Recent accounting pronouncements.
Stock compensation.  In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions.
The Company adopted ASU No. 2016-09 in the first quarter of 2017. From January 1, 2017, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. From January 1, 2017, no excess tax benefits or deficiencies are included in determining the assumed proceeds under the treasury stock method of calculating diluted EPS. As of January 1, 2017, HEI adopted an accounting policy to account for forfeitures when they occur.
From January 1, 2017, HEI retrospectively applied the cashflow guidance for taxes paid (equivalent to the value of withheld shares for tax withholding purposes) and excess tax benefits. Excess tax benefits are classified along with other income tax cash flows as an operating activity and the cash payments made to taxing authorities on the employees’ behalf for withheld shares are classified as financing activities on the HEI unaudited condensed consolidated statements of cash flows for all periods that are presented.
Goodwill impairment. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to the adoption of ASU No. 2017-04, an entity was required to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compared the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeded its fair value, the entity performed Step 2 and compared the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeded the implied fair value of that goodwill would then be recorded. ASU No. 2017-04 removes the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. ASU No. 2017-04 does not amend the optional qualitative assessment of goodwill impairment.
The Company plans to adopt ASU No. 2017-04 prospectively in the fourth quarter of 2017 and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Revenues from contracts with customers. In May 2014, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should:  (1) identify the contract/s with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
As of September 30, 2017, the Company has identified its revenue streams from, and performance obligations related to, contracts with customers and has performed an analysis of these revenue streams for the impacts of Topic 606. The revenue

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


subject to Topic 606 is largely the Utilities’ electric sales revenue and the Utilities’ and ASB’s fee income. The Company and Hawaiian Electric do not expect a materialadopted ASU No. 2014-09 (and subsequently issued revenue-related ASUs, as applicable) in the first quarter of 2018. There was no cumulative effect adjustment and no impact on the timing or pattern of revenue recognition, upon adoption ofbut ASU No. 2014-09 but do expectrequired changes with respect to provide expanded disclosures around the amount, timing, natureCompany’s and uncertainty of our revenues from contracts with customers. The Company plans to adopt ASU No. 2014-09 (and subsequently issued revenue-related ASUs) in the first quarter of 2018 using the modified retrospective approach.Hawaiian Electric’s revenue disclosures. See Note 7.
Financial instruments. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things:
Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).
Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.
The Company plans to adoptadopted ASU No. 2016-01 in the first quarter of 2018 and expects changes to disclosures, but otherwise believes the impact of adoption willwas not be material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Cash Flowsflows. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on eight specific cash flow issues - debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.
The Company plans to adoptadopted ASU No. 2016-15 in the first quarter of 2018 using a retrospective transition method and believesthere was no impact from the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Restricted cash.  In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
The Company plans to adoptadopted ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and believes the impact of adoption willwas not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations—Clarifying the Definition of a Business.” This update clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted ASU No. 2017-01 in the first quarter of 2018 and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Net periodic pension cost and net periodic postretirement benefit cost. In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost (NPPC) and net periodic postretirement benefit cost (NPBC) as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization under GAAP, when applicable.
The Company plans to adoptadopted ASU No. 2017-07 in the first quarter of 20182018: (1) retrospectively for the presentation in the income statement of the service cost component and has not yet determined the impactother components of adoption.NPPC and NPBC, and (2) prospectively for the capitalization in assets of the service cost component of NPPC and NPBC for Hawaiian Electric and its subsidiaries. HEI and ASB do not capitalize pension and OPEB costs. 
In settlement agreements in the 2018 Maui Electric, 2017 Hawaiian Electric and 2016 Hawaii Electric Light rate cases, Maui Electric, Hawaiian Electric and Hawaii Electric Light, respectively, and the Consumer Advocate agreed to the deferral of the non-service cost components of NPPC and NPBC, which would have been capitalized prior to ASU No. 2017-07, as part of the pension tracking mechanism. The Utilities are seekingPUC approved this treatment in the final decision and order (D&O) in the Hawaiian Electric and Hawaii Electric Light rate cases. The treatment under the settlement agreements was followed beginning in 2018 until each utility’s next rate case. In each utility’s next rate case, rates established would include recovery of their defined benefit costs as reflected underthe deferred non-service cost components and seek to adopt the capitalization policy which reflects the requirements of ASU No. 2017-07 (i.e., only the service cost components of NPPC and NPBC will be eligible for capitalization) in their rate cases.capitalized).

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


 Thus, the adoption of ASU 2017-07 in the first quarter of 2018 does not have a net income impact. The Hawaii Electric Light 2016 test yearfollowing table summarizes the impact to the prior period financial statements of the adoption of ASU No. 2017-07:
 Three months ended June 30, 2017 Six months ended June 30, 2017
(in thousands)As previously filedAdjustment from adoption of ASU No. 2017-07As currently reported As previously filedAdjustment from adoption of ASU No. 2017-07As currently reported
HEI Condensed Consolidated Income Statement     
Expenses       
Electric utility$501,828
$(1,435)$500,393
 $971,501
$(2,858)$968,643
Bank50,533
(201)50,332
 99,229
(396)98,833
Other4,024
(270)3,754
 9,355
(528)8,827
Total expenses556,385
(1,906)554,479
 1,080,085
(3,782)1,076,303
Operating income       
Electric utility55,047
1,435
56,482
 103,985
2,858
106,843
Bank24,796
201
24,997
 48,956
396
49,352
Other(3,947)270
(3,677) (9,183)528
(8,655)
Total operating income75,896
1,906
77,802
 143,758
3,782
147,540
Retirement defined benefits expense--other than service costs—
(1,906)(1,906) —
(3,782)(3,782)
Hawaiian Electric Condensed Consolidated Income Statement    
Other operation and maintenance106,374
(1,435)104,939
 206,614
(2,858)203,756
Total expense501,828
(1,435)500,393
 971,501
(2,858)968,643
Operating income55,047
1,435
56,482
 103,985
2,858
106,843
Retirement defined benefits expense--other than service costs—
(1,435)(1,435) —
(2,858)(2,858)
Hawaiian Electric Condensed Consolidating Income Statement (in Note 3)       
Hawaiian Electric (parent only)       
Other operation and maintenance70,961
(1,302)69,659
 138,239
(2,587)135,652
Total expense357,575
(1,302)356,273
 690,763
(2,587)688,176
Operating income36,839
1,302
38,141
 66,494
2,587
69,081
Retirement defined benefits expense--other than service costs—
(1,302)(1,302) —
(2,587)(2,587)
Hawaii Electric Light       
Other operation and maintenance17,558
85
17,643
 33,074
168
33,242
Total expense72,903
85
72,988
 141,400
168
141,568
Operating income8,807
(85)8,722
 19,292
(168)19,124
Retirement defined benefits expense--other than service costs—
85
85
 —
168
168
Maui Electric       
Other operation and maintenance17,855
(218)17,637
 35,301
(439)34,862
Total expense71,350
(218)71,132
 139,338
(439)138,899
Operating income9,415
218
9,633
 18,220
439
18,659
Retirement defined benefits expense--other than service costs—
(218)(218) —
(439)(439)
ASB Statements of Income Data (in Note 4)      
Compensation and employee benefits24,742
(201)24,541
 47,979
(396)47,583
Other expense4,705
201
4,906
 9,016
396
9,412

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which is intended to improve and simplify accounting rules around hedge accounting. The amendments in ASU No. 2017-12 improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the Hawaiian Electric consolidated 2014presentation of hedge results in the financial statements. The amendments also expand and 2017 test year revenue requirements were based on their currentrefine hedge accounting for retirement benefits,both nonfinancial and reflectfinancial risk components and align the capitalization of a portionrecognition and presentation of the total pension and OPEB costseffects of the hedging instrument and the amortizationhedged item in the financial statements. For public business entities, the new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, but early adoption is permitted. The Company early adopted ASU No. 2017-12 in the second quarter of 2018, with an effective date of April 1, 2018, and the pension and OPEB regulatory assets or liabilities (basedadoption did not have a material impact on the difference between total pension and OPEB costs and the pension and OPEB costs included in rates). In Hawaii Electric Light’s (2016 test year) and Hawaiian Electric’s (consolidated 2014 and 2017 test years) on-going rate cases, each utility proposed that for 2018 and until its next rate case, the non-service cost portion of the test year pension and OPEB costs that are estimated to be capitalized, be deferred and included in the pension and OPEB tracking mechanisms, and amortized beginning with the next rate case. Maui Electric proposed in itsCompany’s consolidated 2015 and 2018 test year rate case filing to adopt the accounting prescribed by ASU No. 2017-07.
The impact of adoption will largely be dependent on the PUC's decisions.financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize a liability to make lease payments (the lease liability) and a right-of-use asset, representing its right to use the underlying asset for the lease term, for all leases (except short-term leases) at the commencement date. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election and recognize lease expense for such leases generally on a straight-line basis over the lease term. For finance leases, a lessee is required to recognize interest on the lease liability separately from amortization of the right-of-use asset in the condensed consolidated statement of income. For operating leases, a lessee is required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
The Company plans to adopt ASU No. 2016-02 in the first quarter of 2019 and has not yet determinedis currently analyzing the method orpotential impact of adoption.adoption, including the impact of electing certain practical expedients available under the standard. The Company has reviewed its agreements and has compiled a preliminary inventory of its operating leases and other arrangements that meet the definition of a lease under the new standard. The Company is in the process of analyzing the measurement provisions of the new standard and their impact to its existing lease arrangements that fall within the scope of ASU No. 2016-02.
Credit Losseslosses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU No. 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date (based on historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities will be replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The AFS debt security model will also require the use of an allowance to record the estimated losses (and subsequent recoveries). The accounting for the initial recognition of the estimated expected credit losses for purchased financial assets with credit deterioration would be recognized through an allowance for credit losses with an offset to the cost basis of the related financial asset at acquisition (i.e., there is no impact to net income at initial recognition).
The Company plans to adopt ASU No. 2016-13 in the first quarter of 20202020. The guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. The Company has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The team has not yet determinedassigned roles and responsibilities and developed key tasks to complete and a general timeline to be followed. The Company is evaluating the impacteffect that this ASU will have on the consolidated financial statements and disclosures. Economic conditions and the composition of adoption.the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment.

12
Condensed Consolidated Statements of Cash Flows error. Subsequent to the issuance of interim Condensed Consolidated Financial Statements (unaudited) for the quarter ended June 30, 2017, the Company and the Utilities identified an error within their previously reported interim Condensed Consolidated Statements of Cash Flows (unaudited). The timing of certain capital expenditure payments, including those that had retainage balances or were related to certain capitalized amounts were not reflected timely. The Company and the Utilities have evaluated the effect of the error, both qualitatively and quantitatively, and concluded that it is immaterial to their respective previously issued condensed consolidated financial statements. For the six months ended June 30, 2017, the correction of this error resulted in decreases in Net Cash Provided by Operating Activities

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


(impacting the change in Accounts, Interest and Dividends Payable for the Company and Accounts Payable for the Utilities) and Net Cash Used in Investing Activities (impacting the Capital Expenditures for the Company and the Utilities) of $12 million.
Reclassifications. Reclassifications made to prior year-end financial statements to conform to 2018 presentation include a reclassification of contributions in aid of construction (CIAC) balances to “Property, plant and equipment, net” and “Total property, plant and equipment, net” for the Company and Hawaiian Electric, respectively, which reduced the amounts of the respective balances.
Note 2 · Segment financial information
(in thousands)  Electric utility Bank Other Total Electric utility Bank Other Total
Three months ended September 30, 2017  
  
  
  
Three months ended June 30, 2018  
  
  
  
Revenues from external customers $598,756
 $74,289
 $140
 $673,185
 $608,112
 $77,104
 $61
 $685,277
Intersegment revenues (eliminations) 13
 —
 (13) —
 14
 —
 (14) —
Revenues $598,769
 $74,289
 $127
 $673,185
 $608,126
 $77,104
 $47
 $685,277
Income (loss) before income taxes $74,990
 $26,764
 $(6,615) $95,139
 $40,344
 $26,514
 $(7,276) $59,582
Income taxes (benefit) 27,005
 9,172
 (1,582) 34,595
 8,676
 5,953
 (1,574) 13,055
Net income (loss) 47,985
 17,592
 (5,033) 60,544
 31,668
 20,561
 (5,702) 46,527
Preferred stock dividends of subsidiaries 498
 —
 (27) 471
 499
 —
 (26) 473
Net income (loss) for common stock $47,487
 $17,592
 $(5,006) $60,073
 $31,169
 $20,561
 $(5,676) $46,054
Nine months ended September 30, 2017  
  
  
  
Six months ended June 30, 2018  
  
  
  
Revenues from external customers $1,674,158
 $222,474
 $396
 $1,897,028
 $1,178,526
 $152,523
 $102
 $1,331,151
Intersegment revenues (eliminations) 97
 —
 (97) —
 27
 —
 (27) —
Revenues $1,674,255
 $222,474
 $299
 $1,897,028
 $1,178,553
 $152,523
 $75
 $1,331,151
Income (loss) before income taxes $150,715
 $75,720
 $(20,088) $206,347
 $77,493
 $51,014
 $(15,649) $112,858
Income taxes (benefit) 54,623
 25,582
 (8,202) 72,003
 17,851
 11,493
 (3,733) 25,611
Net income (loss) 96,092
 50,138
 (11,886) 134,344
 59,642
 39,521
 (11,916) 87,247
Preferred stock dividends of subsidiaries 1,496
 —
 (79) 1,417
 998
 —
 (52) 946
Net income (loss) for common stock $94,596
 $50,138
 $(11,807) $132,927
 $58,644
 $39,521
 $(11,864) $86,301
Total assets (at September 30, 2017) $6,107,501
 $6,618,907
 $16,442
 $12,742,850
Three months ended September 30, 2016  
  
  
  
Total assets (at June 30, 2018) $5,803,714
 $6,983,583
 $96,807
 $12,884,104
Three months ended June 30, 2017  
  
  
  
Revenues from external customers $572,208
 $73,708
 $139
 $646,055
 $556,836
 $75,329
 $116
 $632,281
Intersegment revenues (eliminations) 45
 —
 (45) —
 39
 —
 (39) —
Revenues $572,253
 $73,708
 $94
 $646,055
 $556,875
 $75,329
 $77
 $632,281
Income before income taxes $75,617
 $22,727
 $80,861
 $179,205
Income taxes 28,145
 7,623
 15,824
 51,592
Net income 47,472
 15,104
 65,037
 127,613
Income (loss) before income taxes $41,003
 $24,796
 $(6,173) $59,626
Income taxes (benefit) 14,860
 8,063
 (2,431) 20,492
Net income (loss) 26,143
 16,733
 (3,742) 39,134
Preferred stock dividends of subsidiaries 498
 —
 (27) 471
 499
 —
 (26) 473
Net income for common stock $46,974
 $15,104
 $65,064
 $127,142
Nine months ended September 30, 2016  
  
  
  
Net income (loss) for common stock $25,644
 $16,733
 $(3,716) $38,661
Six months ended June 30, 2017  
  
  
  
Revenues from external customers $1,549,602
 $213,297
 $360
 $1,763,259
 $1,075,402
 $148,185
 $256
 $1,223,843
Intersegment revenues (eliminations) 98
 —
 (98) —
 84
 —
 (84) —
Revenues $1,549,700
 $213,297
 $262
 $1,763,259
 $1,075,486
 $148,185
 $172
 $1,223,843
Income before income taxes $174,376
 $62,545
 $64,321
 $301,242
Income taxes 64,682
 21,483
 10,038
 96,203
Net income 109,694
 41,062
 54,283
 205,039
Income (loss) before income taxes $75,725
 $48,956
 $(13,473) $111,208
Income taxes (benefit) 27,618
 16,410
 (6,620) 37,408
Net income (loss) 48,107
 32,546
 (6,853) 73,800
Preferred stock dividends of subsidiaries 1,496
 —
 (79) 1,417
 998
 —
 (52) 946
Net income for common stock $108,198
 $41,062
 $54,362
 $203,622
Total assets (at December 31, 2016) $5,975,428
 $6,421,357
 $28,721
 $12,425,506
Net income (loss) for common stock $47,109
 $32,546
 $(6,801) $72,854
Total assets (at December 31, 2017) $5,630,613
 $6,798,659
 $104,888
 $12,534,160
 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Intercompany electricity sales of the Utilities to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.
Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution and the profit on such fees is nominal.
Pending acquisitionHamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation. Hamakua Energy's profit on electricity sales to Hawaii Electric Light is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the ratemaking process, future revenue from Hawaii Electric Light’s sale of Hamakua power plant. In September 2017, HEI formed new 100% owned subsidiaries--Pacific Current, LLC andthe electricity will approximate its subsidiary Hamakua Holdings, LLC and its subsidiary,purchase price from Hamakua Energy LLC.  Hamakua Energy, LLC has agreed to acquire Hamakua Energy Partners, L.P.’s (HEP’s) 60-megawatt power plant from an affiliate of ArcLight Capital Partners, a Boston-based private equity firm focused on energy infrastructure investments. The plant sells power to Hawaii

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Electric Light under an existing power purchase agreement (PPA) that expires in 2030, the terms of which will remain the same upon completion of the acquisition. Closing of the transaction is expected later in 2017.PPA.
Note 3 · 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. For the second quarters of 2018 and 2017 and the six months ended June 30, 2018 and 2017, the Utilities’ revenues include recovery of revenue taxes of approximately $54 million, $50 million, $105 million and $96 million, respectively, which amounts are included in “Taxes, other than income taxes” expense, in the unaudited condensed consolidated statements of income. However, the Utilities’Utilities pay revenue tax paymentstaxes to the taxing authorities in the period are based on (1) the prior year’s billed revenues (in the case of public service company taxes and PUC fees) in the current year or on(2) the current year’s cash collections from electric sales (in the case of franchise taxes). The Utilities included in the third quarters of 2017 and 2016 and nine months ended September 30, 2017 and 2016 approximately $54 million, $51 million, $150 million and $138 million, respectively, of revenue taxes in “revenues” and in “taxes, other than income taxes” expense, in the unaudited condensed consolidated statements of income. after year-end.
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 have the power to direct the activities that most significantly impact the economic performance of Trust III nor the obligation to absorb the majority of the variability ofits expected losses, if any, that could potentially be significant to 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 SeptemberJune 30, 20172018 and December 31, 20162017 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 ninesix months ended SeptemberJune 30, 2018 and 2017 consisted of $2.5$1.7 million of interest income received from the 2004 Debentures; $2.4$1.6 million of distributions to holders of the Trust Preferred Securities; and $75,000$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 SeptemberJune 30, 20172018, the Utilities had five PPAs for firm capacity and other PPAs with independent power producers (IPPs) and Schedule Q providers (e.g.(i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which is currently required to be consolidated as VIEs.
Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and HEPthe predecessor of Hamakua Energy by reason of the provisions of the PPAsPPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii or HEPand the predecessor of Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii or HEPand the predecessor of Hamakua Energy in its unaudited condensed consolidated financial statements. In November 2017, HEI acquired the Hamakua project through Hamakua Energy, an indirect subsidiary of Pacific Current, and has consolidated it in HEI’s unaudited condensed consolidated financial statements since the acquisition.
For the other PPAs with IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the Utilities do not have variable interests in the IPPs due to the absence of an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPPs were eitherconsidered a “business” or “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Two IPPs of as-available energy declined to provide the information necessary for Utilities to determine the applicability of accounting standards for VIEs. If information is ultimately received from the IPPs, a possible

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


outcome of future analyses of such information is the consolidation of one or both of such IPPs in the unaudited condensed consolidated financial statements. The consolidation of any significant IPP could have a material effect on the unaudited condensed 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.VIEs to the IPP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Commitments and contingencies.
Contingencies. The Utilities are subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, the Utilities cannot rule out the possibility that such outcomes could have a material effect on the results of operations or liquidity for a particular reporting period in the future.
Power purchase agreements.  Purchases from all IPPs were as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in millions) 2017 2016 2017 2016 2018 2017 2018 2017
Kalaeloa $48
 $44
 $136
 $109
 $52
 $48
 $92
 $88
AES Hawaii 39
 38
 103
 112
 32
 35
 69
 64
HPOWER 18
 19
 51
 52
 17
 16
 32
 33
Puna Geothermal Venture 10
 7
 28
 19
 4
 10
 15
 18
HEP 8
 8
 25
 23
Hamakua Energy 15
 10
 22
 17
Other IPPs 1
 38
 42
 98
 98
 41
 34
 71
 60
Total IPPs $161
 $158
 $441
 $413
 $161
 $153
 $301
 $280
 
1 
Includes wind power, solar power, feed-in tariff projects and other PPAs.
Kalaeloa Partners, L.P.  In OctoberUnder a 1988 PPA, as amended, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved by the PUC, which provided that Hawaiian Electric wouldis committed to purchase 180 megawatts (MW)208 MW of firm capacity for a period of 25 years beginning in May 1991. In October 2004,from Kalaeloa. Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that Hawaiian Electric makes to Kalaeloa include: (1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil, (2) a fuel additives cost component and (3) a non-fuel component, with an adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to Kalaeloa are fixed in accordance with the PPA. Kalaeloa also has a steam delivery cogeneration contract with another customer, the term of which coincides with the PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.
Hawaiian Electric and Kalaeloa arecurrently in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith, but would end 60 days after either party notifies the other in writing that negotiations have terminated. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA prior to October 31, 2018. This agreement contemplates continued negotiations between the parties and accounts for time needed for PUC approval of a negotiated resolution.
AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years beginning September 1992, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, but Hawaiian Electric and AES Hawaii were not able to reach an agreement on the amendment. In June 2015, AES Hawaii filed an arbitration demand regarding a dispute about whether Hawaiian Electric was obligated to buy up to 9 MW of additional capacity based on a 1992 letter. Hawaiian Electric responded to the arbitration demand and in October 2015, AES Hawaii and Hawaiian Electric entered into a Settlement Agreementsettlement agreement to stay the arbitration proceeding. The Settlement Agreementsettlement agreement included certain conditions precedent which, if satisfied, would have released the parties from the claims under the arbitration proceeding. Among the conditions precedent was the successful negotiation and PUC approval of an amendment to the existing PPA.
In November 2015, Hawaiian Electric entered into Amendment No. 3 for which PUC approval was requested and subsequently denied in January 2017. Approval of Amendment No. 3 would have satisfied the final condition for effectiveness

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


of the Settlement Agreementsettlement agreement and resolved AES Hawaii's claims. Following the PUC's decision, the parties agreed to extend the stay of the arbitration proceeding, while settlement discussions continue.continued. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on Amendment No. 4, which was submitted to the PUC for approval in April 2018. Amendment No. 4, among other things, provides (1) that AES Hawaii will make certain operational commitments to improve reliability, (2) for inclusion of AES Hawaii in the Utilities’ greenhouse gas partnership, (3) provisions to allow AES Hawaii to reduce coal combustion by modifying its fuel consumption to include biomass upon approval by Hawaiian Electric, and (4) for release of an option agreement by Hawaiian Electric for land owned by AES Hawaii. Amendment No. 4 includes a stay of the arbitration proceeding pending review by the PUC. If approved by the PUC, Amendment No. 4 will resolve AES Hawaii’s claims. In June 2018, the PUC issued an order suspending the Amendment No. 4 docket pending a DOH decision on AES’ request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric.
Hu Honua Bioenergy, LLC. In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. PerUnder the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction delays, failed to meet its obligations under the PPA and failed to provide adequate assurances that it could perform or had the financial means to perform. Hawaii Electric Light terminated the PPA on March 1, 2016. On November 30, 2016, Hu Honua filed a civil complaint in the United States District Court for the District of Hawaii that included claims purportedly arising out of the termination of Hu Honua’s PPA. On May 26, 2017,

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Hawaii Electric Light and Hu Honua entered into a settlement agreement that will settle all claims related to the termination of the original PPA. The settlement agreement was contingent on the PUC’s approval of an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 5, 2017. In July 2017, the PUC approved the amended and restated PPA. On August 25, 2017, the PUC’s approval was appealed by a third party. The appeal is still pending. Hu Honua is expected to be on-line by the end of 2018.
Utility projects.  Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC imposedPUC-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.
Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) Implementation Project.implementation project. On August 11, 2016, the PUC approved the Utilities’ request to commence the ERP/EAM Implementation Project,implementation project, subject to certain conditions, including a $77.6 million cap on cost recovery as well as a requirement that the Utilities pass onto customers a minimum of $244 million in savingsbenefits associated with the system over its 12-year service life. The decision and order (D&O)D&O approved the deferral of certain project costs and allowed the accrual of allowance for funds used during construction (AFUDC), but limited the AFUDC rate to 1.75%. Pursuant to the D&O and subsequent orders, in September 2017, the Utilities filed a bottom-up, low-level analysis of the project’s benefits and performance metrics and tracking mechanism for passing the project’s benefits on to customers.
On November 30, 2017, the PUC issued an order, which, among other things, directed the Utilities to file a position statement regarding the reasonableness of the project, a reworked low-level benefits analysis and initial details of the metrics that will be used to demonstrate the achievement of benefits. On December 18, 2017, the Utilities filed their response to the order, re-affirming the need for the project and guaranteed minimum level of $244 million in benefits to customers. The response further noted that in Hawaiian Electric’s 2017 test year rate case, Hawaiian Electric and the Consumer Advocate have agreed in principle to a “rate case-centric” approach for a benefits delivery mechanism pending PUC approval. On January 4, 2018, the Consumer Advocate filed a statement of position (SOP) on the Utilities’ response, stating that it does not recommend revocation of the PUC’s prior conditional approval of the project or reductions to the previously ordered cost caps, and continues to recommend the use of a rate case-centric approach to facilitate pass through of the system’s benefits to customers. The Utilities filed a response to the Consumer Advocate’s SOP on January 11, 2018, noting among other things that the Consumer Advocate’s SOP is in general alignment with the Utilities’ position on the project. Monthly reports on the status and costs of the project continue to be filed. The parties have reached substantive agreement regarding the approach for delivering system benefits to customers, but are still in the process of developing an annual enterprise systems benefits report.
The ERP/EAM Implementation Project is on schedule. The project is expected to go live byin October 1, 2018. As of SeptemberJune 30, 2017,2018, the Project incurred costs of $23.6$61.2 million of which $4.6$10.6 million were charged to other operation and maintenance (O&M) expense, $1.4$2.6 million relate to capital costs and $17.6$48.0 million are deferred costs.
Schofield Generating Station Project. In August 2012, the PUC approved a waiver from the competitive bidding framework to allow Hawaiian Electric to negotiate with the U.S. Army for the construction of a 50 MW utility owned and operated firm, renewable and dispatchable generation facility at Schofield Barracks. In September 2015, the PUC approved Hawaiian Electric’s application to expend $167 million for the project. In approving the project, the PUC placed a cost cap of $167 million for the project, stated 90% of the cap is allowed for cost recovery through cost recovery mechanisms other than base rates, and stated the $167 million cap will be adjusted downward due to any reduction in the cost of the engine contract due to a reduction in the foreign exchange rate. Hawaiian Electric was required to take all necessary steps to lock in the lowest possible exchange rate. On January 5, 2016, Hawaiian Electric executed window forward contracts, which lowered the cost of the engine contract by $9.7 million, resulting in a revised project cost cap of $157.3 million. Hawaiian Electric has received all of the major permits for the project, including a 35 year35-year site lease from the U.S. Army. Construction of the facility began in October 2016, and the facility is expected to bewas placed in service in the second quarter ofon June 7, 2018. A request to recover the capital costs of the project and related operations and maintenance expense through the newly-established Major Project Interim Recovery (MPIR) adjustment mechanism is pendingwas approved by the PUC approval.on June 27, 2018. (See “Decoupling” section below for MPIR guidelines and capital cost recovery discussion.) A decision on recovery of related operation and maintenance expense (approximately $1.8 million annualized) during the interim period (i.e., between the in-service date and the next rate case) is pending. Project costs incurred as of SeptemberJune 30, 20172018 amounted to $105.7$141.5 million.
West Loch PV Project. In July 2016, Hawaiian Electric announced plans to build, own and operate a utility-owned, grid-tied 20-MW (ac) solar facility in conjunction withon property owned by the Department of the Navy at a Navy/Air Force joint base.Navy. In June 2017, the PUC approved the expenditure of funds for the project, including Hawaiian Electric’s proposed project cost cap of $67 million and a performance guarantee to provide energy at 9.56 cents/KWH or less. Project costs incurred as of September 30, 2017 amountedless to $0.7 million.the system.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


In approving the project, the PUC agreed that the project is eligible for recovery of costs offset by related net benefits under the newly-established MPIR adjustment mechanism. (See “Decoupling” section below for MPIR guidelines and capital

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


cost recovery discussion.) Hawaiian Electric provided supplemental materials in August 2017, as requested by the PUC, to support meeting the MPIR guidelines, accompanied by system performance guarantee and cost savings sharing mechanisms. A decision on these matters is pending.
Hawaiian Electric executed a fixed-price Engineering, Procurement, and Construction (EPC) contract for the project on December 6, 2017. The EPC contract includes the cost of the solar panels for the project, which is not subject to modification due to any tariffs that may be imposed under the current photovoltaic (PV) cell and module import tariffs. Construction of the facility began in the second quarter of 2018, and the facility is expected to be placed in service in the second quarter of 2019. Project costs incurred as of June 30, 2018 amounted to $9.1 million.
Hawaiian Telcom. The Utilities each have separate agreements for the joint ownership and maintenance of utility poles with Hawaiian Telcom, Inc. (Hawaiian Telcom), the respective county or counties in which each utility operates and other third parties, such as the State of Hawaii. The agreements set forth various circumstances requiring pole removal/installation/replacement and the sharing of costs among the joint pole owners. The agreements allow for the cost of work done by one joint pole owner to be shared by the other joint pole owners based on the apportionment of costs in the agreements. The Utilities have maintained, replaced and installed the majority of the jointly-owned poles in each of the respective service territories, and have billed the other joint pole owners for their respective share of the costs. The counties and the State have been reimbursing the Utilities for their share of the costs. However, Hawaiian Telcom has been delinquent in reimbursing the Utilities for its share of the costs.
Hawaiian Electric has initiated a dispute resolution process to collect the unpaid amounts from Hawaiian Telcom as specified
by the joint pole agreement. This dispute resolution process is stayed pending PUC approval of a settlement negotiations.agreement further
described below. For Hawaii Electric Light, the agreement does not specify an alternative dispute resolution process, and thus a
complaint for payment was filed with the Circuit Court in June 2016. This complaint is stayed pending PUC approval of a
settlement negotiations.agreement further described below. Maui Electric has not yet commenced any legal action to recover the delinquent
amounts. TheOn April 4, 2018, the Utilities and Hawaiian Telcom have entered into a non-binding memorandum of understanding to endeavor to negotiateseveral agreements, subject to PUC approval, for the purchase by the Utilities of Hawaiian Telcom’s interest in all the joint poles, with paymentand licensing and operating agreement between the Utilities and Hawaiian Telcom subsequent to the transfer of the purchase pricejoint pole interest to the Utilities. Consideration of suchapproximately $48 million to be paid for Hawaiian Telcom’s interest in the poles towill be offset in part by the receivables owed by Hawaiian Telcom to the Utilities. As of SeptemberJune 30, 2017, total2018, receivables under the joint pole agreement, includingnet of a reserve for a portion of the interest, from Hawaiian Telcom are $22.2$17.4 million ($14.911.6 million at Hawaiian Electric, $6.0$4.7 million at Hawaii Electric Light, and $1.3$1.1 million at Maui Electric). ManagementAlthough PUC approval has not yet been received, management expects the net receivable amounts will be realized. The remaining consideration for acquiring Hawaiian Telcom’s interest in the joint poles is to prevail on these claims but has reservedbe settled through the set-off of current and future license fees due from Hawaiian Telcom, after which Hawaiian Telcom would make cash payments for license fees under the accrued interest of $4.9 million on the receivables.agreement.
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.
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 effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.
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 Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. Although Maui Electric never operated at the Site or owned the Site property, after discussions with the EPA and the Hawaii Department of Health (DOH), Maui Electric agreed to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel to determine the extent of impacts of PCBs, residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $3.1$2.7 million as of SeptemberJune 30, 2017,2018, representing the probable and reasonably estimated cost to complete the additional investigation and estimated cleanup costs at the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued investigation.

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

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On March 23, 2015, Hawaiian Electric received a letter from the EPA requesting that Hawaiian Electric submit a work plan to assess potential sources and extent of PCB contamination onshore at the Waiau Power Plant. Hawaiian Electric submitted a sampling and analysis (SAP) work plan to the EPA and the DOH. Onshore sampling at the Waiau Power Plant was completed in two phases in December 2015 and June 2016. TheAppropriate remedial measures are being developed to address the extent of the onshore contamination, the appropriate remedial measures to address it and any associated costs have not yet been determined.
As of SeptemberJune 30, 2017,2018, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.9$4.7 million. The reserve represents the probable and reasonably estimable cost to complete the onshore and offshore investigations and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the results of the onshore investigation and assessment of potential source control requirements, as well as the further investigation of contaminated sediment offshore from the Waiau Power Plant.
Asset retirement obligations.  The Utilities recorded Asset Retirement Obligations (AROs) related to removing retired generating units at Hawaiian Electric’s Honolulu and Waiau power plants and removing certain types of transformers. The transformer removal projects are on-going. The retired generating unit removal projects are expected to be completedPlant by the end of 2017, and the related AROs have been reassessed. Hawaiian Electric has determined that the AROs for the retired generating units should be minimal, and thus $24.4 million of the remaining AROs related to those projects were reversed in the third quarter of 2017 to reflect the revision in estimated cash flows (with no impact on the Utilities’ net income). The ARO balances as of September 30, 2017 and 2016, amounted to $0.7 million and $26.2 million, respectively. Navy.
Regulatory proceedings
Decoupling. Decoupling is a regulatory model that is intended to facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The decoupling model, implemented in Hawaii in 2011, delinks revenues from sales and includes annual rate adjustments. The decoupling mechanism has threethe following major components: (1) a sales decoupling component via a revenue balancing account (RBA), (2) a revenue escalation component via a rate adjustment mechanism (RAM), (3) major project interim recovery component (MPIR), (4) performance incentive mechanisms (PIMs), and (3)(5) an earnings sharing mechanism, which would provide for a reduction of revenues between rate cases in the event the utility exceeds the return on average common equity (ROACE) allowed in its most recent rate case. Decoupling provides for more timely cost recovery and earning on investments.Under the decoupling mechanism, triennial general rate cases are required.
For the RAM years 2014 - 2016, Hawaiian Electric was allowed to record RAM revenue beginning on January 1 and to bill such amounts from June 1 of the applicable year through May 31 of the following year. Subsequent to 2016, Hawaiian Electric reverted to the RAM provisions initially approved in March 2011—i.e., RAM is both accrued and billed from June 1 of each year through May 31 of the following year.
2015 decoupling orderRate adjustment mechanism. On March 31, 2015, the PUC issued an Order (the 2015 Decoupling Order) that modified the RAM portion of the decoupling mechanism to be capped at the lesser of the RAM revenue adjustment as then determined (based on an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes) and a RAM revenue adjustment calculated based on the cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). The 2015 Decoupling Order provided a specific basis for calculating the target revenues until the next rate case, at which time the target revenues will reset upon the issuance of an interim or final D&O in a rate case. The triennial rate case cycle required under the decoupling mechanism continues to serve as the maximum period between the filing of general rate cases.
The RAM Cap impacted the Utilities' recovery of capital investments as follows:
Hawaiian Electric's RAM revenues were limited to the RAM Cap in 2015, 20162017 and 2017.2018.
Maui Electric's RAM revenues were limited to the RAM Cap in 20152017 and 2016; however, the 2017 RAM revenues2018 were below the RAM Cap.
Hawaii Electric Light’s RAM revenues in 2017 and 2018 were below the RAM CapCap.
For the RAM years 2014 - 2016, Hawaiian Electric was allowed to record RAM revenue beginning on January 1 and to bill such amounts from June 1 of the applicable year through May 31 of the following year. Subsequent to 2016, Hawaiian Electric reverted to the RAM provisions initially approved in 2015, 2016March 2011—i.e., RAM is both accrued and 2017.billed from June 1 of each year through May 31 of the following year.
2017 decoupling orderMajor project interim recovery. On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order) that requires the establishment of specific performance incentive mechanisms and providesprovided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
In May 2017,Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including, but not restricted to, renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for approved costs of eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects that

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


are not recovered through the MPIR would be included in the RAM and be subject to the RAM Cap, until the next rate case when the Utilities would request recovery in base rates.
The PUC has approved recovery of a capped portion of the Schofield generating station through the MPIR mechanism. Hawaiian Electric has filed their proposed initial tariffs to implement conventional stand-alonean MPIR for Schofield of $6.6 million in annual revenues, which would adjust revenues in July through December 2018 and be collected in customer bills beginning in June 2019.
Performance incentive mechanisms. The PUC has ordered the following performance incentive mechanisms namely for:(PIM), which will be reflected in the annual decoupling filing beginning in 2019. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to be re-determined upon issuance of an interim or final order in a general rate case for each utility.
Service Quality performance incentives are measured on a calendar-year basis beginning in 2018.
Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one

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standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s rate base (or maximum penalties of approximately $6$6.2 million penalty- pending adjustment to $6.7 million as a result of the final orders for the Hawaiian Electric and Hawaii Electric Light rate cases - for both indices in total for the three utilities).
Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or incentive is 8 basis points applied to the common equity share of each respective utility’s rate base (or maximum penalties or incentives of approximately $1.2 million penalty or incentive- pending adjustment to $1.3 million as a result of the final orders for the Hawaiian Electric and Hawaii Electric Light rate cases - in total for the three utilities).
Demand Response measured by the demand response resources acquired in 2018. The 2017 Decoupling Order also established guidelinesaward is equal to 5% of the total of the annual maintenance cost for MPIR. Projects eligiblecost-effective demand response capability contracted with aggregators by December 31, 2018. The maximum award is $0.5 million for recoverythe three utilities in total and there are no penalties. This incentive applies to one-time performance in 2018 only.
Procurement of low-cost variable renewable resources through the MPIR adjustment mechanism are major projects (i.e.,request for proposal process in 2018 measured by comparison of the procurement price to target prices. The incentive is 20% of savings determined by comparing procured price to a target of 11.5 cents per kilowatt-hour for renewable projects with capital expenditures netstorage capability and 9.5 cents per kilowatt-hour for energy-only renewable projects. This incentive has a cap of customer contributions$3.5 million for the three utilities in excess of $2.5 million), including but not restricted to renewable energy, energy efficiency, utility scale generation, grid modernizationtotal and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for net costs of approved eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism shall be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects which are not recovered through the MPIR would be included in the RAM and be subject to the RAM cap, until the next rate case when the utilities would request recovery in base rates.
In the 2017 Decoupling Order, the PUC indicated that in pending and subsequent rate cases, the PUC intends to require all fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment mechanism rather than through base rates, and will consider adopting processes to periodically reset fuel efficiency measures embedded in the energy cost adjustment mechanism to account for changes in the generating system.has no penalty.
Annual decoupling filings. On March 31, 2017, the Utilities submitted to the PUC, their annual decoupling filings. Maui Electric amended its annual decoupling filing on May 22, 2017, to update and revise certain cost information. On May 31, 2017, the PUC approved the annual decoupling filings for tariffed rates that will be effective from June 1, 2017 through May 31, 2018. The net annual incremental amounts to be collected (refunded) from June 1, 2018 through May 31, 2019 are as follows:
($ in millions) Hawaiian Electric Hawaii Electric Light Maui Electric
2017 Annual incremental RAM adjusted revenues $12.7
 $3.2
 $1.6
Annual change in accrued earnings sharing credits $—
 $—
 $—
Annual change in accrued RBA balance as of December 31, 2016 (and associated revenue taxes) (refunded) $(2.4) $(2.5) $(0.2)
Net annual incremental amount to be collected under the tariffs $10.3
 $0.7
 $1.4
(in millions) Hawaiian Electric Hawaii Electric Light Maui Electric
2018 Annual incremental RAM adjusted revenues $13.8
 $3.4
 $2.0
Annual change in accrued RBA balance as of December 31, 2017 (and associated revenue taxes) $6.6
 $0.7
 $3.2
2017 Tax Act Adjustment $—
 $—
 $(2.8)
Net annual incremental amount to be collected under the tariffs $20.4
 $4.1
 $2.4
Most recent*      Maui Electric incorporated a $2.8 million adjustment into its 2018 annual decoupling filing to incorporate the impact of the lower corporate income tax rate proceedings.
and the exclusion of the domestic production activities deduction, as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act). Tax adjustments for Hawaiian Electric consolidated 2014 test year abbreviated and 2017 test year rate cases. On December 16, 2016, HawaiianHawaii Electric filed an application with the PUC for a general rate increase of $106.4 million over revenues at current effective rates (for a 6.9% increase in revenues), based on a 2017 test year and an 8.28% rate of return (which incorporates a ROACE of 10.6% and a capital structure that includes a 57.4% common equity capitalization) on a $2.0 billion rate base. The requested increase is primarily to pay for operating costs and for system upgrades to increase reliability, improve customer service and integrate more renewable energy. In its application, Hawaiian Electric is also proposing implementation of performance based regulation (PBR) mechanisms related to its performanceLight are described in the areasdiscussion below of customer service, reliability and communication relating to the private rooftop solar interconnection process. Hawaiian Electric proposed an expansion of the range of fuel usage efficiencies under which fuel costs would be fully passed through to customers, and an additional trigger that would allow a re-establishment of fuel usage efficiency targets under certain conditions.their respective on-going rate cases.
Performance-based regulation proceeding. On December 23, 2016,April 18, 2018, the PUC issued an order, consolidating the Hawaiian Electric filings for the 2014 test year abbreviated rate caseinstituting a proceeding to investigate performance-based regulation (PBR). The PUC intends to provide a forum to collaboratively develop modifications or new components to better align utility and the 2017 test year rate case.customer interests. The order also found and concludedPUC stated that Hawaiian Electric's abbreviated 2014 rate case filing did not comply with: (1) the Mandatory Triennial Rate Case Cycle requirement in the decoupling order that Hawaiian Electric file an application for a general rate case every three years and (2) the requirement that Hawaiian Electric file its 2014 calendar test year rate case application by June 27, 2014. The order then stated that: “[T]he determination and disposition of any rates, accounts,PBR seeks to utilize both revenue adjustment mechanisms and practices that would have been subjectperformance mechanisms to review in the context of a 2014 test year rate case proceeding are subject to appropriate adjustment based on evidence and findings in the consolidated rate case proceeding.”more strongly align utilities’ incentives with customer interests.

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On January 4, 2017, Hawaiian Electric filed a motion for clarificationThe order stated that, in general, the PUC is interested in ratemaking elements and/or partial reconsiderationmechanisms that result in:
Greater cost control and reduced rate volatility;
Efficient investment and allocation of resources regardless of classification as capital or operating expense;
Fair distribution of risks between utilities and customers; and
Fulfillment of State policy goals.
The PUC envisions that the PBR components through this investigation are those that: (a) target areas of current utility performance that may benefit from improvement; and (b) reward the utility for achieving specific outcomes that are in the public interest and/or penalize the utility for not achieving said outcomes. To that end, through this investigation, the PUC intends to: (1) identify specific areas of utility performance that should be improved; (2) determine appropriate metrics for measuring successful outcomes in those areas; and (3) establish reasonable financial rewards and/or penalties that are sufficient to incent the utility to achieve those outcomes.
The order indicated that the proceeding would have two phases. Phase 1 would examine the current regulatory framework and identify those areas of utility performance that are deserving of further focus for PBR framework development and/or PIMs in Phase 2. A subsequent order established a procedural process and schedule for Phase I, which the PUC anticipated would take approximately nine months.
On July 10, 2018, the PUC submitted a Staff Report to provide the Parties with an initial set of proposed regulatory goals and outcomes to respond to, or expand upon, and to offer alternatives. Specifically, the Staff Report: (a) provides an overview of Phase 1 of the PUC’s order. proceeding; (b) discusses the terms and concepts that form the PBR process framework; and (c) proposes three overarching goals (enhance customer experience, improve utility performance, advance societal outcomes) along with a preliminary set of associated outcomes to help guide PBR evaluation and development.
On March 14, 2017,July 23 and 24, 2018, the PUC issued an order to address Hawaiian Electric’s motion, statingheld a technical workshop on goals and outcomes, attended by the parties in the proceeding.
Performance-based ratemaking legislation. On April 24, 2018, Senate Bill No. 2939 SD2 was signed into law, which establishes performance metrics that the PUC is not initiating an investigation/enforcementshall consider while establishing performance incentives and penalty mechanisms under a performance-based ratemaking model. The law requires that the PUC establish these performance-based ratemaking mechanisms on or before January 1, 2020. The PUC opened a proceeding against on April 18, 2018. See “Performance-based regulation proceeding” above.
Most recent rate proceedings.
Hawaiian Electric regardingconsolidated 2014 and 2017 test year rate cases. In June 2014, Hawaiian Electric submitted its compliance with the decoupling order, and the transfer and consolidation of Hawaiian Electric’s 2014 abbreviatedtest year rate case with the 2017 rate case isfiling, stating that it intended to ensure that ratepayers receiveforgo the attendant benefits of Hawaiian Electric’s decisionopportunity to voluntarily forgoseek a general rate increase in base rates for its mandated 2014 test year. As directed, on April 12, 2017,rates. In December 2016, Hawaiian Electric filed a supplement to its 2017 rate case filing, addressingan application with the items raised in the order and explaining why Hawaiian Electric’s forgoing ofPUC for a general rate increase, in the 2014 test year should not result in any further adjustments to Hawaiian Electric’s revenue requirement in the 2017 test year.
On April 26, 2017, the PUC issued an Order regarding the supplement to Hawaiian Electric’s 2017 rate case filing, requesting updated pension and OPEB regulatory asset and liability schedules, by May 12, 2017, to reflect the use of the 2014 net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) for the pension and OPEB tracking mechanisms and with amortization of such regulatory assets and liabilities beginning May 1, 2015. On May 12, 2017, Hawaiian Electric filed these schedules and on May 31, 2017, supplemented its May 12, 2017 filing to show the cumulative impact of the 2015-2017 change in employee benefits transferred to capital as a result of the change in the amortization of the pension and OPEB regulatory assets and liabilities.
On June 28, 2017, the PUC issued an order designatingconsolidating the filing dateHawaiian Electric filings for the 2014 and 2017 test year rate cases. On February 16, 2018, Hawaiian Electric implemented an interim increase of $36.0 million. On April 13, 2018, Hawaiian Electric’s completedElectric implemented an additional interim rate case applicationadjustment to be May 31, 2017 (the date that supplemental pension-related information described above was filed) rather than December 16, 2016, (the dateadjust rates for the impact of the filing of the rate case application). Tax Act.
On July 28, 2017,June 22, 2018, the PUC issued its Final D&O, approving final rate relief of a procedural schedule$37.7 million increase before the Tax Act impact reduction of $38.3 million, based on an ROACE of 9.5% and an overall rate of return of 7.57%. The PUC indicated that includesthe ECRC mechanism shall reflect a 98/2% risk-sharing split between ratepayers and Hawaiian Electric, and the Consumer Advocate submitting statementswith an annual maximum exposure cap of probable entitlement on November 17, 2017, an interim D&O tentatively scheduled for December 15, 2017, and an evidentiary hearing in early March 2018.$2.5 million.
Maui Electric consolidated 2015 test year abbreviated and 2018 test year rate cases. On June 9, 2017,In December 2014, Maui Electric filed a notice of intent with the PUC to file a generalsubmitted its 2015 test year rate case application by December 30, 2017 for a 2018 test year. Onfiling, proposing no change to its base rates. In August 4, 2017, the PUC issued an order consolidating the Maui Electric filings for the 2015 test year abbreviated rate case and the 2018 test year rate case. Similar to the PUC’s conclusion regarding Hawaiian Electric’s 2014 abbreviated rate case filing, the order also found and concluded that Maui Electric’s 2015 test year abbreviated rate case filing did not comply with the Mandatory Triennial Rate Case Cycle requirement in the decoupling order that Maui Electric file an application for a general rate case every three years. The order further stated that the PUC is not initiating an investigation/enforcement proceeding against Maui Electric regarding its compliance with the decoupling order, and the transfer and consolidation of Maui Electric’s 2015 abbreviated rate case with the 2018 rate case is intended to ensure that ratepayers receive the attendant benefits of Maui Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2015 test year. The order stated that: “[T]he determination and disposition of any rates, accounts, adjustment mechanisms, and practices that would have been subject to review in the context of a 2015 test year rate case proceeding are subject to appropriate adjustment based on evidence and findings in the consolidated rate case proceeding.”
Oncases. In October 12, 2017, Maui Electric filed its 2018 test year rate case application with the PUC for a general rate increase of $30.1 million over revenues at current effective rates (for a 9.3% increase in revenues) based on a 2018 test year and an 8.05% rate of return (which incorporates a ROACE of 10.6% and a capital structure that includes a 56.9% common equity capitalization) on a $473 million rate base. The requested rate increase is primarily to pay for operating costs, including system upgrades to increase reliability, integrate more renewable energy, and improve customer service. Further,Subsequently, in accordance with a PUC order, on February 26, 2018, Maui Electric requested that if a decisionfiled revised schedules to reflect the following adjustments resulting from the Tax Act in a docket (filed in December 2016) seeking approval of new depreciation rates is rendered prior to new rates being established in the Maui Electric 2018 test year rate case, the new electric rates be based on the depreciation rates as a result of that docket. If the proposed depreciation rates are used to calculate Maui Electric’sits 2018 test year revenue requirement,requirement: (1) $8.1 million income tax expense reduction; (2) $0.5 million annual amortization credit for excess accumulated deferred income tax balances (ADIT); and (3) $7.1 million increase in rate base resulting from the requested revenue increase would be $46.6 million (14.3%) over revenues at current effective rates. decrease in ADIT for bonus depreciation loss and CIAC taxability.
Maui Electric and the Consumer Advocate filed an exhibit with information responding toa stipulated settlement letter and the PUC’s consolidation order. Similar to Hawaiian Electric’s response, Maui Electric explained why its forgoingParties’ joint statement of a general rate increase inprobable entitlement on June 15, 2018 and July 6, 2018, respectively. The stipulated settlement resolved all issues between the 2015 test year should not result in any further adjustments to Maui Electric’s revenue requirement in the 2018 test year.parties,
Hawaii Electric Light 2016 test year rate case. On September 19, 2016, Hawaii Electric Light filed an application with the PUC for a general rate increase of $19.3 million over revenues at current effective rates (for a 6.5% increase in revenues), based on an 8.44% rate of return (which incorporates a ROACE of 10.60%). The last rate increase in base rates for Hawaii Electric Light was in January 2011. The requested increase is to cover higher operating costs (including expanded vegetation management focusing on albizia tree removal and increased pension costs) and system upgrades to increase reliability, improve customer service and integrate more renewable energy. In its application, Hawaii Electric Light is also proposing implementation of PBR mechanisms similar to those proposed by Hawaiian Electric. In addition, Hawaii Electric Light proposed an equal sharing of fuel expenses outside the fuel usage efficiency target range.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


On July 11, 2017, Hawaii Electric Light and the Consumer Advocate filed a Stipulated Settlement Letter, which documented agreements reached with the Consumer Advocate on all of the issues in the proceeding, except for the narrow issue of whether the stipulated ROACE should be reduced from 9.75% (byby up to 25 basis points)points based solely on the impact of decoupling, considering current circumstances and relevant precedents. OnThe parties agreed that the ROACE issue shall be addressed based on the information contained in the record without the need for an evidentiary hearing, and further agreed to the use of a 9.50% ROACE for the limited purpose of determining the revenue requirement for the interim order. The joint statement of probable entitlement reflects a general rate increase of $6.4 million over revenues at current effective rates (for a 1.95% increase in revenues) based on 7.43% rate of return (which incorporates a ROACE of 9.5% and a capital structure that includes a 57% common equity capitalization) on a $465 million rate base. The general rate increase would be $12.5 million over revenues at current effective rates with the depreciation rates approved in the depreciation proceeding. In the decision and order issued on July 30, 2018 in the depreciation proceeding, the PUC ordered that the effective date of the approved depreciation rates shall coincide with the effective date of interim or final rates in each of the Utilities’ subsequent general rate case proceedings, beginning with Maui Electric’s 2018 test year rate case. The PUC may consider the Parties’ joint statement of probable entitlement in issuing its interim order. The interim D&O is scheduled for August 21,13, 2018.
Hawaii Electric Light 2016 test year rate case. In September 2016, Hawaii Electric Light filed an application with the PUC for a general rate increase.
In August 2017, the PUC issued an order granting an interim rate increase of $9.9 million based on the Stipulated Settlement Letter of Hawaii Electric Light and the Consumer Advocate filed on July 11, 2017 and an ROACE of 9.5% and subject to refund with interest, if it exceeds amounts allowed in a final order. The interim rate increase was implemented on August 31, 2017. On May 1, 2018, Hawaii Electric Light implemented an interim rate reduction of $9.9 million which was primarily to incorporate the effects of the Tax Act.
On June 29, 2018, the PUC issued its Final D&O, approving the rates implemented in the interim rate reduction.
Tax Cuts and Jobs Act impact on utility rates. The Utilities began tracking the impact of the Tax Cuts and Jobs Act of 2017 (Tax Act) as of January 1, 2018. Each Utility accrued regulatory liabilities for estimated tax savings from January 1 to the date incorporated in rates. Hawaiian Electric’s rates for the 2017 test year reflected the Tax Act reductions effective April 13, 2018. Hawaii Electric Light’s rates for the 2016 test year reflect the Tax Act reductions effective May 1, 2018. Adjustments to Maui Electric’s current rates for the Tax Act are incorporated in the annual Revenue Balancing Account adjustment which became effective on June 1, 2018. See discussion in “Decoupling” section above.
Condensed consolidating financial information. Hawaiian Electric is not required to provide separate financial statements or other disclosures concerning Hawaii Electric Light and Maui Electric to holders of the 2004 Debentures issued by Hawaii Electric Light and Maui Electric to Trust III since all of their voting capital stock is owned, and their obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by Hawaiian Electric. Consolidating information is provided below for Hawaiian Electric and each of its subsidiaries for the periods ended and as of the dates indicated.
Hawaiian Electric also unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder and (c) relating to the trust preferred securities of Trust III. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
21

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $431,699
 89,548
 86,938
 —
 (59) $608,126
Expenses            
Fuel oil 120,007
 19,432
 32,278
 —
 —
 171,717
Purchased power 121,812
 24,664
 14,262
 —
 —
 160,738
Other operation and maintenance 76,845
 19,015
 16,782
 —
 —
 112,642
Depreciation 34,391
 10,038
 5,932
 —
 —
 50,361
Taxes, other than income taxes 40,951
 8,408
 8,165
 —
 —
 57,524
   Total expenses 394,006
 81,557
 77,419
 —
 —
 552,982
Operating income 37,693
 7,991
 9,519
 —
 (59) 55,144
Allowance for equity funds used during construction 2,588
 124
 271
 —
 —
 2,983
Equity in earnings of subsidiaries 9,080
 —
 —
 —
 (9,080) —
Retirement defined benefits expense—other than service costs (554) (105) (329) —
 —
 (988)
Interest expense and other charges, net (12,930) (2,922) (2,367) —
 59
 (18,160)
Allowance for borrowed funds used during construction 1,150
 77
 138
 —
 —
 1,365
Income before income taxes 37,027
 5,165
 7,232
 —
 (9,080) 40,344
Income taxes 5,588
 1,269
 1,819
 —
 —
 8,676
Net income 31,439
 3,896
 5,413
 —
 (9,080) 31,668
Preferred stock dividends of subsidiaries —
 133
 96
 —
 —
 229
Net income attributable to Hawaiian Electric 31,439
 3,763
 5,317
 —
 (9,080) 31,439
Preferred stock dividends of Hawaiian Electric 270
 —
 —
 —
 —
 270
Net income for common stock $31,169
 3,763
 5,317
 —
 (9,080) $31,169

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock $31,169
 3,763
 5,317
 —
 (9,080) $31,169
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 4,853
 734
 649
 —
 (1,383) 4,853
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (4,827) (733) (649) —
 1,382
 (4,827)
Other comprehensive income, net of taxes 26
 1
 —
 —
 (1) 26
Comprehensive income attributable to common shareholder $31,195
 3,764
 5,317
 —
 (9,081) $31,195

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended SeptemberJune 30, 2017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $429,267
 84,334
 85,198
 —
 (30) $598,769
 $394,414
 81,710
 80,765
 —
 (14) $556,875
Expenses                        
Fuel oil 103,959
 15,754
 26,545
 —
 —
 146,258
 99,814
 14,475
 26,970
 —
 —
 141,259
Purchased power 123,893
 21,332
 15,122
 —
 —
 160,347
 116,458
 23,482
 13,127
 —
 —
 153,067
Other operation and maintenance 66,221
 16,593
 17,288
 —
 —
 100,102
 69,659
 17,643
 17,637
 —
 —
 104,939
Depreciation 32,722
 9,685
 5,799
 —
 —
 48,206
 32,723
 9,686
 5,747
 —
 —
 48,156
Taxes, other than income taxes 40,824
 7,928
 8,028
 —
 —
 56,780
 37,619
 7,702
 7,651
 —
 —
 52,972
Total expenses 367,619
 71,292
 72,782
 —
 —
 511,693
 356,273
 72,988
 71,132
 —
 —
 500,393
Operating income 61,648
 13,042
 12,416
 —
 (30) 87,076
 38,141
 8,722
 9,633
 —
 (14) 56,482
Allowance for equity funds used during construction 3,108
 167
 207
 —
 —
 3,482
 2,659
 134
 234
 —
 —
 3,027
Equity in earnings of subsidiaries 12,767
 —
 —
 —
 (12,767) —
 7,936
 —
 —
 —
 (7,936) —
Retirement defined benefits expense—other than service costs (1,302) 85
 (218) —
 —
 (1,435)
Interest expense and other charges, net (11,786) (2,899) (2,252) —
 30
 (16,907) (12,562) (2,996) (2,670) —
 14
 (18,214)
Allowance for borrowed funds used during construction 1,173
 72
 94
 —
 —
 1,339
 988
 55
 100
 —
 —
 1,143
Income before income taxes 66,910
 10,382
 10,465
 —
 (12,767) 74,990
 35,860
 6,000
 7,079
 —
 (7,936) 41,003
Income taxes 19,153
 3,815
 4,037
 —
 —
 27,005
 9,946
 2,235
 2,679
 —
 —
 14,860
Net income 47,757
 6,567
 6,428
 —
 (12,767) 47,985
 25,914
 3,765
 4,400
 —
 (7,936) 26,143
Preferred stock dividends of subsidiaries —
 133
 95
 —
 —
 228
 —
 133
 96
 —
 —
 229
Net income attributable to Hawaiian Electric 47,757
 6,434
 6,333
 —
 (12,767) 47,757
 25,914
 3,632
 4,304
 —
 (7,936) 25,914
Preferred stock dividends of Hawaiian Electric 270
 —
 —
 —
 —
 270
 270
 —
 —
 —
 —
 270
Net income for common stock $47,487
 6,434
 6,333
 —
 (12,767) $47,487
 $25,644
 3,632
 4,304
 —
 (7,936) $25,644

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended SeptemberJune 30, 2017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries 
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock $47,487
 6,434
 6,333
 —
 (12,767) $47,487
 $25,644
 3,632
 4,304
 —
 (7,936) $25,644
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
  
  
  
  
  
  
Retirement benefit plans:  
  
  
  
  
  
  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 3,618
 476
 404
 —
 (880) 3,618
 3,621
 449
 344
 —
 (793) 3,621
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (3,596) (476) (404) —
 880
 (3,596) (3,581) (448) (343) —
 791
 (3,581)
Other comprehensive income, net of taxes 22
 —
 —
 —
 —
 22
 40
 1
 1
 —
 (2) 40
Comprehensive income attributable to common shareholder $47,509
 6,434
 6,333
 —
 (12,767) $47,509
 $25,684
 3,633
 4,305
 —
 (7,938) $25,684

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
22Condensed Consolidating Statement of Income
Six months ended June 30, 2018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $832,879
 177,481
 168,294
 —
 (101) $1,178,553
Expenses            
Fuel oil 234,505
 37,919
 66,261
 —
 —
 338,685
Purchased power 229,182
 48,498
 22,968
 —
 —
 300,648
Other operation and maintenance 149,785
 35,113
 35,354
 —
 —
 220,252
Depreciation 68,830
 20,093
 11,904
 —
 —
 100,827
Taxes, other than income taxes 79,118
 16,620
 15,890
 —
 —
 111,628
   Total expenses 761,420
 158,243
 152,377
 —
 —
 1,072,040
Operating income 71,459
 19,238
 15,917
 —
 (101) 106,513
Allowance for equity funds used during construction 5,475
 235
 567
 —
 —
 6,277
Equity in earnings of subsidiaries 18,405
 —
 —
 —
 (18,405) —
Retirement defined benefits expense—other than service costs (1,616) (208) (428) —
 —
 (2,252)
Interest expense and other charges, net (25,425) (5,829) (4,701) —
 101
 (35,854)
Allowance for borrowed funds used during construction 2,388
 141
 280
 —
 —
 2,809
Income before income taxes 70,686
 13,577
 11,635
 —
 (18,405) 77,493
Income taxes 11,502
 3,446
 2,903
 —
 —
 17,851
Net income 59,184
 10,131
 8,732
 —
 (18,405) 59,642
Preferred stock dividends of subsidiaries —
 267
 191
 —
 —
 458
Net income attributable to Hawaiian Electric 59,184
 9,864
 8,541
 —
 (18,405) 59,184
Preferred stock dividends of Hawaiian Electric 540
 —
 —
 —
 —
 540
Net income for common stock $58,644
 9,864
 8,541
 —
 (18,405) $58,644

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock $58,644
 9,864
 8,541
 —
 (18,405) $58,644
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 9,506
 1,409
 1,211
 —
 (2,620) 9,506
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (9,449) (1,408) (1,211) —
 2,619
 (9,449)
Other comprehensive income, net of taxes 57
 1
 —
 —
 (1) 57
Comprehensive income attributable to common shareholder $58,701
 9,865
 8,541
 —
 (18,406) $58,701

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
ThreeSix months ended SeptemberJune 30, 20162017

(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $404,352
 83,105
 84,831
 —
 (35) $572,253
 $757,257
 160,692
 157,558
 —
 (21) $1,075,486
Expenses                        
Fuel oil 88,676
 14,603
 25,345
 —
 —
 128,624
 197,815
 31,732
 55,982
 —
 —
 285,529
Purchased power 118,751
 22,728
 16,271
 —
 —
 157,750
 216,605
 42,071
 21,515
 —
 —
 280,191
Other operation and maintenance 64,683
 15,017
 15,089
 —
 —
 94,789
 135,652
 33,242
 34,862
 —
 —
 203,756
Depreciation 31,520
 9,449
 5,790
 —
 —
 46,759
 65,445
 19,371
 11,556
 —
 —
 96,372
Taxes, other than income taxes 38,666
 7,836
 8,017
 —
 —
 54,519
 72,659
 15,152
 14,984
 —
 —
 102,795
Total expenses 342,296
 69,633
 70,512
 —
 —
 482,441
 688,176
 141,568
 138,899
 —
 —
 968,643
Operating income 62,056
 13,472
 14,319
 —
 (35) 89,812
 69,081
 19,124
 18,659
 —
 (21) 106,843
Allowance for equity funds used during construction 1,806
 238
 230
 —
 —
 2,274
 4,715
 249
 462
 —
 —
 5,426
Equity in earnings of subsidiaries 14,729
 —
 —
 —
 (14,729) —
 16,539
 —
 —
 —
 (16,539) —
Retirement defined benefits expense—other than service costs (2,587) 168
 (439) —
 —
 (2,858)
Interest expense and other charges, net (11,903) (2,972) (2,483) —
 35
 (17,323) (24,619) (6,000) (5,120) —
 21
 (35,718)
Allowance for borrowed funds used during construction 669
 91
 94
 —
 —
 854
 1,737
 100
 195
 —
 —
 2,032
Income before income taxes 67,357
 10,829
 12,160
 —
 (14,729) 75,617
 64,866
 13,641
 13,757
 —
 (16,539) 75,725
Income taxes 20,113
 3,392
 4,640
 —
 —
 28,145
 17,217
 5,158
 5,243
 —
 —
 27,618
Net income 47,244
 7,437
 7,520
 —
 (14,729) 47,472
 47,649
 8,483
 8,514
 —
 (16,539) 48,107
Preferred stock dividends of subsidiaries —
 133
 95
 —
 —
 228
 —
 267
 191
 —
 —
 458
Net income attributable to Hawaiian Electric 47,244
 7,304
 7,425
 —
 (14,729) 47,244
 47,649
 8,216
 8,323
 —
 (16,539) 47,649
Preferred stock dividends of Hawaiian Electric 270
 —
 —
 —
 —
 270
 540
 —
 —
 —
 —
 540
Net income for common stock $46,974
 7,304
 7,425
 —
 (14,729) $46,974
 $47,109
 8,216
 8,323
 —
 (16,539) $47,109

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
ThreeSix months ended September 30, 2016
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries 
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock
 $46,974
 7,304
 7,425
 —
 (14,729) $46,974
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Derivatives qualified as cash flow hedges:            
Effective portion of foreign currency hedge net unrealized loss, net of tax benefits 321
 —
 —
 —
 —
 321
Reclassification adjustment to net income, net of taxes (173) —
 —
 —
 —
 (173)
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 3,314
 429
 387
 —
 (816) 3,314
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (3,311) (429) (389) —
 818
 (3,311)
Other comprehensive income (loss), net of taxes 151
 —
 (2) —
 2
 151
Comprehensive income attributable to common shareholder $47,125
 7,304
 7,423
 —
 (14,727) $47,125

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Nine months ended SeptemberJune 30, 2017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $1,186,524
 245,026
 242,756
 —
 (51) $1,674,255
Expenses            
Fuel oil 301,774
 47,486
 82,527
 —
 —
 431,787
Purchased power 340,498
 63,403
 36,637
 —
 —
 440,538
Other operation and maintenance 204,460
 49,667
 52,589
 —
 —
 306,716
Depreciation 98,167
 29,056
 17,355
 —
 —
 144,578
Taxes, other than income taxes 113,483
 23,080
 23,012
 —
 —
 159,575
   Total expenses 1,058,382
 212,692
 212,120
 —
 —
 1,483,194
Operating income 128,142
 32,334
 30,636
 —
 (51) 191,061
Allowance for equity funds used during construction 7,823
 416
 669
 —
 —
 8,908
Equity in earnings of subsidiaries 29,306
 —
 —
 —
 (29,306) —
Interest expense and other charges, net (36,405) (8,899) (7,372) —
 51
 (52,625)
Allowance for borrowed funds used during construction 2,910
 172
 289
 —
 —
 3,371
Income before income taxes 131,776
 24,023
 24,222
 —
 (29,306) 150,715
Income taxes 36,370
 8,973
 9,280
 —
 —
 54,623
Net income 95,406
 15,050
 14,942
 —
 (29,306) 96,092
Preferred stock dividends of subsidiaries —
 400
 286
 —
 —
 686
Net income attributable to Hawaiian Electric 95,406
 14,650
 14,656
 —
 (29,306) 95,406
Preferred stock dividends of Hawaiian Electric 810
 —
 —
 —
 —
 810
Net income for common stock $94,596
 14,650
 14,656
 —
 (29,306) $94,596
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries 
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock
 $47,109
 8,216
 8,323
 —
 (16,539) $47,109
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Derivatives qualifying as cash flow hedges:            
Reclassification adjustment to net income, net of taxes 454
 —
 —
 —
 —
 454
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 7,239
 952
 810
 —
 (1,762) 7,239
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (7,194) (951) (810) —
 1,761
 (7,194)
Other comprehensive income, net of taxes 499
 1
 —
 —
 (1) 499
Comprehensive income attributable to common shareholder $47,608
 8,217
 8,323
��—
 (16,540) $47,608

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Nine months ended September 30, 2017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock $94,596
 14,650
 14,656
 —
 (29,306) $94,596
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Derivatives qualifying as cash flow hedges:            
Reclassification adjustment to net income, net of tax benefits 454
 —
 —
 —
 —
 454
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 10,857
 1,428
 1,214
 —
 (2,642) 10,857
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (10,790) (1,427) (1,214) —
 2,641
 (10,790)
Other comprehensive income, net of taxes 521
 1
 —
 —
 (1) 521
Comprehensive income attributable to common shareholder $95,117
 14,651
 14,656
 —
 (29,307) $95,117

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Nine months ended September 30, 2016
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric
Consolidated
Revenues $1,088,537
 229,940
 231,295
 —
 (72) $1,549,700
Expenses            
Fuel oil 224,995
 40,725
 68,543
 —
 —
 334,263
Purchased power 313,730
 58,885
 40,052
 —
 —
 412,667
Other operation and maintenance 202,438
 46,574
 49,248
 —
 —
 298,260
Depreciation 94,564
 28,347
 17,389
 —
 —
 140,300
Taxes, other than income taxes 104,764
 21,632
 21,990
 —
 —
 148,386
   Total expenses 940,491
 196,163
 197,222
 —
 —
 1,333,876
Operating income 148,046
 33,777
 34,073
 —
 (72) 215,824
Allowance for equity funds used during construction 4,771
 571
 668
 —
 —
 6,010
Equity in earnings of subsidiaries 33,541
 —
 —
 —
 (33,541) —
Interest expense and other charges, net (34,113) (8,606) (7,087) —
 72
 (49,734)
Allowance for borrowed funds used during construction 1,785
 219
 272
 —
 —
 2,276
Income before income taxes 154,030
 25,961
 27,926
 —
 (33,541) 174,376
Income taxes 45,022
 9,075
 10,585
 —
 —
 64,682
Net income 109,008
 16,886
 17,341
 —
 (33,541) 109,694
Preferred stock dividends of subsidiaries —
 400
 286
 —
 —
 686
Net income attributable to Hawaiian Electric 109,008
 16,486
 17,055
 —
 (33,541) 109,008
Preferred stock dividends of Hawaiian Electric 810
 —
 —
 —
 —
 810
Net income for common stock $108,198
 16,486
 17,055
 —
 (33,541) $108,198

Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Nine months ended September 30, 2016
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries 
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Net income for common stock
 $108,198
 16,486
 17,055
 —
 (33,541) $108,198
Other comprehensive income (loss), net of taxes:  
  
  
  
  
  
Derivatives qualifying as cash flow hedges:            
Effective portion of foreign currency hedge net unrealized gain, net of taxes 578
 —
 —
 —
 —
 578
Reclassification adjustment to net income, net of taxes (173) —
 —
 —
 —
 (173)
Retirement benefit plans:  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits 9,941
 1,288
 1,162
 —
 (2,450) 9,941
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes (9,934) (1,289) (1,166) —
 2,455
 (9,934)
Other comprehensive income (loss), net of taxes 412
 (1) (4) —
 5
 412
Comprehensive income attributable to common shareholder $108,610
 16,485
 17,051
 —
 (33,536) $108,610

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
SeptemberJune 30, 20172018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consoli-
dating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consoli-
dating
adjustments
 Hawaiian Electric
Consolidated
Assets  
  
  
  
  
  
  
  
  
  
  
  
Property, plant and equipment                        
Utility property, plant and equipment  
  
  
  
  
  
  
  
  
  
  
  
Land $44,706
 6,191
 3,016
 —
 —
 $53,913
 $44,023
 5,876
 3,015
 —
 —
 $52,914
Plant and equipment 4,368,428
 1,278,884
 1,130,942
 —
 —
 6,778,254
 4,363,195
 1,217,147
 1,072,640
 —
 —
 6,652,982
Less accumulated depreciation (1,441,963) (524,759) (493,707) —
 —
 (2,460,429) (1,491,505) (536,210) (506,713) —
 —
 (2,534,428)
Construction in progress 262,098
 16,459
 28,935
 —
 —
 307,492
 127,343
 10,154
 28,111
 —
 —
 165,608
Utility property, plant and equipment, net 3,233,269
 776,775
 669,186
 —
 —
 4,679,230
 3,043,056
 696,967
 597,053
 —
 —
 4,337,076
Nonutility property, plant and equipment, less accumulated depreciation 5,762
 115
 1,532
 —
 —
 7,409
 5,934
 115
 1,532
 —
 —
 7,581
Total property, plant and equipment, net 3,239,031
 776,890
 670,718
 —
 —
 4,686,639
 3,048,990
 697,082
 598,585
 —
 —
 4,344,657
Investment in wholly owned subsidiaries, at equity 559,671
 —
 —
 —
 (559,671) —
 561,764
 —
 —
 —
 (561,764) —
Current assets  
  
  
  
  
  
  
  
  
  
  
  
Cash and cash equivalents 3,454
 4,714
 1,718
 101
 —
 9,987
 13,922
 4,516
 2,321
 101
 —
 20,860
Advances to affiliates —
 6,600
 4,000
 —
 (10,600) —
 5,600
 1,000
 —
 —
 (6,600) —
Customer accounts receivable, net 92,961
 20,830
 19,344
 —
 —
 133,135
 109,285
 24,005
 23,970
 —
 —
 157,260
Accrued unbilled revenues, net 80,644
 15,145
 13,918
 —
 —
 109,707
 80,239
 15,243
 15,357
 —
 —
 110,839
Other accounts receivable, net 7,402
 2,797
 1,244
 —
 (7,346) 4,097
 10,657
 2,561
 1,124
 —
 (7,446) 6,896
Fuel oil stock, at average cost 40,460
 8,034
 11,759
 —
 —
 60,253
 74,485
 12,632
 19,899
 —
 —
 107,016
Materials and supplies, at average cost 28,865
 8,960
 18,134
 —
 —
 55,959
 31,077
 8,600
 18,264
 —
 —
 57,941
Prepayments and other 22,197
 4,183
 3,647
 —
 (156) 29,871
 21,482
 6,329
 2,943
 —
 (1,514) 29,240
Regulatory assets 63,608
 4,341
 4,824
 —
 —
 72,773
 88,581
 6,353
 8,632
 —
 —
 103,566
Total current assets 339,591
 75,604
 78,588
 101
 (18,102) 475,782
 435,328
 81,239
 92,510
 101
 (15,560) 593,618
Other long-term assets  
  
  
  
  
  
  
  
  
  
  
  
Regulatory assets 639,689
 118,655
 105,847
 —
 —
 864,191
 538,925
 118,000
 99,919
 —
 —
 756,844
Unamortized debt expense 472
 83
 106
 —
 —
 661
Other 50,424
 14,981
 14,823
 —
 —
 80,228
 71,486
 19,378
 17,731
 —
 —
 108,595
Total other long-term assets 690,585
 133,719
 120,776
 —
 —
 945,080
 610,411
 137,378
 117,650
 —
 —
 865,439
Total assets $4,828,878
 986,213
 870,082
 101
 (577,773) $6,107,501
 $4,656,493
 915,699
 808,745
 101
 (577,324) $5,803,714
Capitalization and liabilities  
  
  
  
  
  
  
  
  
  
  
  
Capitalization  
  
  
  
  
  
  
  
  
  
  
  
Common stock equity $1,829,075
 294,319
 265,251
 101
 (559,671) $1,829,075
 $1,852,324
 288,865
 272,798
 101
 (561,764) $1,852,324
Cumulative preferred stock—not subject to mandatory redemption 22,293
 7,000
 5,000
 —
 —
 34,293
 22,293
 7,000
 5,000
 —
 —
 34,293
Long-term debt, net 915,097
 213,658
 189,868
 —
 —
 1,318,623
 999,915
 217,699
 200,860
 —
 —
 1,418,474
Total capitalization 2,766,465
 514,977
 460,119
 101
 (559,671) 3,181,991
 2,874,532
 513,564
 478,658
 101
 (561,764) 3,305,091
Current liabilities  
  
  
  
  
  
  
  
  
  
  
  
Current portion of long-term debt 29,990
 10,996
 8,997
 —
 —
 49,983
Short-term borrowings from non-affiliates 6,000
 —
 —
 —
 —
 6,000
 91,880
 —
 —
 —
 —
 91,880
Short-term borrowings from affiliate 10,600
 —
 —
 —
 (10,600) —
 1,000
 —
 5,600
 —
 (6,600) —
Accounts payable 94,618
 15,291
 14,331
 —
 —
 124,240
 115,806
 17,405
 20,548
 —
 —
 153,759
Interest and preferred dividends payable 17,870
 3,973
 3,429
 —
 (11) 25,261
 15,743
 4,203
 2,752
 —
 (14) 22,684
Taxes accrued 134,935
 27,571
 25,919
 —
 (5,060) 183,365
 120,513
 27,353
 25,711
 —
 (1,514) 172,063
Regulatory liabilities 576
 1,029
 1,794
 —
 —
 3,399
 2,751
 2,499
 4,537
 —
 —
 9,787
Other 45,662
 8,173
 13,111
 —
 (7,335) 59,611
 42,449
 10,223
 13,963
 —
 (7,432) 59,203
Total current liabilities 310,261
 56,037
 58,584
 —
 (23,006) 401,876
 420,132
 72,679
 82,108
 —
 (15,560) 559,359
Deferred credits and other liabilities  
  
  
  
  
  
  
  
  
  
  
  
Deferred income taxes 540,857
 113,277
 108,573
 —
 4,904
 767,611
 277,599
 54,505
 56,771
 —
 —
 388,875
Regulatory liabilities 328,530
 100,973
 33,314
 —
 —
 462,817
 627,369
 173,305
 94,755
 —
 —
 895,429
Unamortized tax credits 57,577
 16,048
 15,202
 —
 —
 88,827
 60,893
 16,463
 15,442
 —
 —
 92,798
Defined benefit pension and other postretirement benefit plans liability 431,191
 72,366
 78,156
 —
 —
 581,713
 330,356
 64,175
 63,422
 —
 —
 457,953
Other 27,097
 14,383
 16,068
 —
 —
 57,548
 65,612
 21,008
 17,589
 —
 —
 104,209
Total deferred credits and other liabilities 1,385,252
 317,047
 251,313
 —
 4,904
 1,958,516
 1,361,829
 329,456
 247,979
 —
 —
 1,939,264
Contributions in aid of construction 366,900
 98,152
 100,066
 —
 —
 565,118
Total capitalization and liabilities $4,828,878
 986,213
 870,082
 101
 (577,773) $6,107,501
 $4,656,493
 915,699
 808,745
 101
 (577,324) $5,803,714

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 20162017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consoli-
dating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consoli-
dating
adjustments
 Hawaiian Electric
Consolidated
Assets  
  
  
  
  
  
  
  
  
  
  
  
Property, plant and equipment                        
Utility property, plant and equipment  
  
  
  
  
  
  
  
  
  
  
  
Land $43,956
 6,181
 3,016
 —
 —
 $53,153
 $43,972
 6,189
 3,016
 —
 —
 $53,177
Plant and equipment 4,241,060
 1,255,185
 1,109,487
 —
 —
 6,605,732
 4,140,892
 1,206,776
 1,053,372
 —
 —
 6,401,040
Less accumulated depreciation (1,382,972) (507,666) (478,644) —
 —
 (2,369,282) (1,451,612) (528,024) (496,716) —
 —
 (2,476,352)
Construction in progress 180,194
 12,510
 19,038
 —
 —
 211,742
 231,571
 8,182
 23,341
 —
 —
 263,094
Utility property, plant and equipment, net 3,082,238
 766,210
 652,897
 —
 —
 4,501,345
 2,964,823
 693,123
 583,013
 —
 —
 4,240,959
Nonutility property, plant and equipment, less accumulated depreciation 5,760
 115
 1,532
 —
 —
 7,407
 5,933
 115
 1,532
 —
 —
 7,580
Total property, plant and equipment, net 3,087,998
 766,325
 654,429
 —
 —
 4,508,752
 2,970,756
 693,238
 584,545
 —
 —
 4,248,539
Investment in wholly owned subsidiaries, at equity
 550,946
 —
 —
 —
 (550,946) —
 557,013
 —
 —
 —
 (557,013) —
Current assets  
  
  
  
  
  
  
  
  
  
  
  
Cash and cash equivalents 61,388
 10,749
 2,048
 101
 —
 74,286
 2,059
 4,025
 6,332
 101
 —
 12,517
Advances to affiliates —
 3,500
 10,000
 —
 (13,500) —
 —
 —
 12,000
 —
 (12,000) —
Customer accounts receivable, net 86,373
 20,055
 17,260
 —
 —
 123,688
 86,987
 22,510
 18,392
 —
 —
 127,889
Accrued unbilled revenues, net 65,821
 13,564
 12,308
 —
 —
 91,693
 77,176
 15,940
 13,938
 —
 —
 107,054
Other accounts receivable, net 7,652
 2,445
 1,416
 —
 (6,280) 5,233
 11,376
 2,268
 1,210
 —
 (7,691) 7,163
Fuel oil stock, at average cost 47,239
 8,229
 10,962
 —
 —
 66,430
 64,972
 8,698
 13,203
 —
 —
 86,873
Materials and supplies, at average cost 29,928
 7,380
 16,371
 —
 —
 53,679
 28,325
 8,041
 18,031
 —
 —
 54,397
Prepayments and other 16,502
 5,352
 2,179
 —
 (933) 23,100
 17,928
 4,514
 2,913
 —
 —
 25,355
Regulatory assets 60,185
 3,483
 2,364
 —
 —
 66,032
 76,203
 5,038
 7,149
 —
 —
 88,390
Total current assets 375,088
 74,757
 74,908
 101
 (20,713) 504,141
 365,026
 71,034
 93,168
 101
 (19,691) 509,638
Other long-term assets  
  
  
  
  
  
  
  
  
  
  
  
Regulatory assets 662,232
 120,863
 108,324
 —
 —
 891,419
 557,464
 122,783
 100,660
 —
 —
 780,907
Unamortized debt expense 151
 23
 34
 —
 —
 208
Other 43,743
 13,573
 13,592
 —
 —
 70,908
 60,157
 16,311
 15,061
 —
 —
 91,529
Total other long-term assets 706,126
 134,459
 121,950
 —
 —
 962,535
 617,621
 139,094
 115,721
 —
 —
 872,436
Total assets $4,720,158
 975,541
 851,287
 101
 (571,659) $5,975,428
 $4,510,416
 903,366
 793,434
 101
 (576,704) $5,630,613
Capitalization and liabilities  
  
  
  
  
  
  
  
  
  
  
  
Capitalization  
  
  
  
  
  
  
  
  
  
  
  
Common stock equity $1,799,787
 291,291
 259,554
 101
 (550,946) $1,799,787
 $1,845,283
 286,647
 270,265
 101
 (557,013) $1,845,283
Cumulative preferred stock—not subject to mandatory redemption 22,293
 7,000
 5,000
 —
 —
 34,293
 22,293
 7,000
 5,000
 —
 —
 34,293
Long-term debt, net 915,437
 213,703
 190,120
 —
 —
 1,319,260
 924,979
 202,701
 190,836
 —
 —
 1,318,516
Total capitalization 2,737,517
 511,994
 454,674
 101
 (550,946) 3,153,340
 2,792,555
 496,348
 466,101
 101
 (557,013) 3,198,092
Current liabilities  
  
  
  
  
    
  
  
  
  
  
Short-term borrowings from affiliate 13,500
 —
 —
 —
 (13,500) —
Current portion of long-term debt 29,978
 10,992
 8,993
 —
 —
 49,963
Short-term borrowings-non-affiliate 4,999
 —
 —
 —
 —
 4,999
Short-term borrowings-affiliate 12,000
 —
 —
 —
 (12,000) —
Accounts payable 86,369
 18,126
 13,319
 —
 —
 117,814
 121,328
 17,855
 20,427
 —
 —
 159,610
Interest and preferred dividends payable 15,761
 4,206
 2,882
 —
 (11) 22,838
 15,677
 4,174
 2,735
 —
 (11) 22,575
Taxes accrued 120,176
 28,100
 25,387
 —
 (933) 172,730
 133,839
 34,950
 30,312
 —
 —
 199,101
Regulatory liabilities —
 2,219
 1,543
 —
 —
 3,762
 607
 1,245
 1,549
 —
 —
 3,401
Other 41,352
 7,637
 12,501
 —
 (6,269) 55,221
 43,121
 9,818
 14,197
 —
 (7,680) 59,456
Total current liabilities 277,158
 60,288
 55,632
 —
 (20,713) 372,365
 361,549
 79,034
 78,213
 —
 (19,691) 499,105
Deferred credits and other liabilities  
  
  
  
  
    
  
  
  
  
  
Deferred income taxes 524,433
 108,052
 100,911
 —
 263
 733,659
 281,223
 56,955
 55,863
 —
 —
 394,041
Regulatory liabilities 281,112
 93,974
 31,845
 —
 —
 406,931
 613,329
 169,139
 94,901
 —
 —
 877,369
Unamortized tax credits 57,844
 15,994
 15,123
 —
 —
 88,961
 59,039
 16,167
 15,163
 —
 —
 90,369
Defined benefit pension and other postretirement benefit plans liability 444,458
 75,005
 80,263
 —
 —
 599,726
 340,983
 66,447
 65,518
 —
 —
 472,948
Other 49,191
 13,024
 14,969
 —
 (263) 76,921
 61,738
 19,276
 17,675
 —
 —
 98,689
Total deferred credits and other liabilities 1,357,038
 306,049
 243,111
 —
 —
 1,906,198
 1,356,312
 327,984
 249,120
 —
 —
 1,933,416
Contributions in aid of construction 348,445
 97,210
 97,870
 —
 —
 543,525
Total capitalization and liabilities $4,720,158
 975,541
 851,287
 101
 (571,659) $5,975,428
 $4,510,416
 903,366
 793,434
 101
 (576,704) $5,630,613

27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
NineSix months ended SeptemberJune 30, 20172018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Balance, December 31, 2016 $1,799,787
 291,291
 259,554
 101
 (550,946) $1,799,787
Balance, December 31, 2017 $1,845,283
 286,647
 270,265
 101
 (557,013) $1,845,283
Net income for common stock 94,596
 14,650
 14,656
 —
 (29,306) 94,596
 58,644
 9,864
 8,541
 —
 (18,405) 58,644
Other comprehensive income, net of taxes 521
 1
 —
 —
 (1) 521
 57
 1
 —
 —
 (1) 57
Common stock dividends (65,825) (11,622) (8,959) —
 20,581
 (65,825) (51,652) (7,644) (6,010) —
 13,654
 (51,652)
Common stock issuance expenses (4) (1) —
 —
 1
 (4) (8) (3) 2
 —
 1
 (8)
Balance, September 30, 2017 $1,829,075
 294,319
 265,251
 101
 (559,671) $1,829,075
Balance, June 30, 2018 $1,852,324
 288,865
 272,798
 101
 (561,764) $1,852,324
 
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
NineSix months ended SeptemberJune 30, 20162017  
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Balance, December 31, 2015 $1,728,325
 292,702
 263,725
 101
 (556,528) $1,728,325
Balance, December 31, 2016 $1,799,787
 291,291
 259,554
 101
 (550,946) $1,799,787
Net income for common stock 108,198
 16,486
 17,055
 —
 (33,541) 108,198
 47,109
 8,216
 8,323
 —
 (16,539) 47,109
Other comprehensive income (loss), net of taxes 412
 (1) (4) —
 5
 412
Other comprehensive income, net of taxes 499
 1
 —
 —
 (1) 499
Common stock dividends (70,199) (9,906) (9,795) —
 19,701
 (70,199) (43,884) (7,748) (5,973) —
 13,721
 (43,884)
Common stock issuance expenses (9) (5) —
 —
 5
 (9) (5) —
 (1) —
 1
 (5)
Balance, September 30, 2016 $1,766,727
 299,276
 270,981
 101
 (570,358) $1,766,727
Balance, June 30, 2017 $1,803,506
 291,760
 261,903
 101
 (553,764) $1,803,506

28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
NineSix months ended SeptemberJune 30, 20172018
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric 
Other
subsidiaries
 
Consolidating
adjustments
 Hawaiian Electric
Consolidated
Cash flows from operating activities  
  
  
  
  
  
  
  
  
  
  
  
Net income $95,406
 15,050
 14,942
 —
 (29,306) $96,092
 $59,184
 10,131
 8,732
 —
 (18,405) $59,642
Adjustments to reconcile net income to net cash provided by operating activities:  
  
  
  
  
    
  
  
  
  
  
Equity in earnings of subsidiaries (29,381) —
 —
 —
 29,306
 (75) (18,455) —
 —
 —
 18,405
 (50)
Common stock dividends received from subsidiaries 20,656
 —
 —
 —
 (20,581) 75
 13,679
 —
 —
 —
 (13,654) 25
Depreciation of property, plant and equipment 98,167
 29,056
 17,355
 —
 —
 144,578
 68,830
 20,093
 11,904
 —
 —
 100,827
Other amortization 2,168
 1,718
 2,232
 —
 —
 6,118
 9,200
 2,976
 845
 —
 —
 13,021
Deferred income taxes 12,166
 5,237
 7,493
 —
 4,641
 29,537
 (6,708) (2,429) 794
 —
 —
 (8,343)
Allowance for equity funds used during construction (7,823) (416) (669) —
 —
 (8,908) (5,475) (235) (567) —
 —
 (6,277)
Other 216
 566
 (256) —
 —
 526
 1,469
 (322) (169) —
 —
 978
Changes in assets and liabilities:  
  
  
  
  
  
  
  
  
  
  
  
Increase in accounts receivable (6,114) (1,127) (1,912) —
 1,066
 (8,087) (25,673) (2,387) (5,763) —
 (245) (34,068)
Increase in accrued unbilled revenues (14,823) (1,581) (1,610) —
 —
 (18,014)
Decrease (increase) in fuel oil stock 6,779
 195
 (797) —
 —
 6,177
Decrease (increase) in materials and supplies 1,063
 (1,580) (1,763) —
 —
 (2,280)
Decrease (increase) in regulatory assets 9,471
 (2,935) (2,614) —
 —
 3,922
Increase (decrease) in accounts payable (22,224) (2,955) 2,338
 —
 —
 (22,841)
Decrease (increase) in accrued unbilled revenues (3,063) 697
 (1,419) —
 —
 (3,785)
Increase in fuel oil stock (9,513) (3,934) (6,696) —
 —
 (20,143)
Increase in materials and supplies (2,752) (559) (233) —
 —
 (3,544)
Increase in regulatory assets (14,728) (1,974) (2,898) —
 —
 (19,600)
Increase in accounts payable 13,093
 3,096
 2,095
 —
 —
 18,284
Change in prepaid and accrued income taxes, tax credits and revenue taxes 10,920
 (758) 210
 —
 (5,081) 5,291
 (15,343) (9,952) (5,165) —
 (601) (31,061)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability 532
 39
 (118) —
 —
 453
Decrease in defined benefit pension and other postretirement benefit plans liability (1,117) (380) (464) —
 —
 (1,961)
Change in other assets and liabilities (2,709) 1,059
 54
 —
 (1,066) (2,662) 1,116
 3,173
 1,357
 —
 245
 5,891
Net cash provided by operating activities 174,470
 41,568
 34,885
 —
 (21,021) 229,902
 63,744
 17,994
 2,353
 —
 (14,255) 69,836
Cash flows from investing activities  
  
  
  
  
  
  
  
  
  
  
  
Capital expenditures (207,493) (36,405) (34,106) —
 —
 (278,004) (156,600) (26,667) (29,953) —
 —
 (213,220)
Contributions in aid of construction 34,787
 3,460
 2,356
 —
 —
 40,603
 9,680
 2,243
 1,650
 —
 —
 13,573
Other 6,089
 871
 714
 —
 440
 8,114
 2,241
 884
 575
 —
 601
 4,301
Advances from affiliates —
 (3,100) 6,000
 —
 (2,900) —
Advances (to) from affiliates (5,600) (1,000) 12,000
 —
 (5,400) —
Net cash used in investing activities (166,617) (35,174) (25,036) —
 (2,460) (229,287) (150,279) (24,540) (15,728) —
 (4,799) (195,346)
Cash flows from financing activities  
  
  
  
  
  
  
  
  
  
  
  
Common stock dividends (65,825) (11,622) (8,959) —
 20,581
 (65,825) (51,652) (7,644) (6,010) —
 13,654
 (51,652)
Preferred stock dividends of Hawaiian Electric and subsidiaries (810) (400) (286) —
 —
 (1,496) (540) (267) (191) —
 —
 (998)
Proceeds from issuance of special purpose revenue bonds 162,000
 28,000
 75,000
 —
 

 265,000
Funds transferred for redemption of special purpose revenue bonds (162,000) (28,000) (75,000) —
 —
 (265,000)
Proceeds from issuance of long-term debt 75,000
 15,000
 10,000
 —
 —
 100,000
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less 3,100
 —
 —
 —
 2,900
 6,000
 75,881
 —
 5,600
 —
 5,400
 86,881
Other (2,252) (407) (934) —
 —
 (3,593) (291) (52) (35) —
 —
 (378)
Net cash used in financing activities (65,787) (12,429) (10,179) —
 23,481
 (64,914)
Net decrease in cash and cash equivalents (57,934) (6,035) (330) —
 —
 (64,299)
Net cash provided by financing activities 98,398
 7,037
 9,364
 —
 19,054
 133,853
Net increase (decrease) in cash and cash equivalents 11,863
 491
 (4,011) —
 —
 8,343
Cash and cash equivalents, beginning of period 61,388
 10,749
 2,048
 101
 —
 74,286
 2,059
 4,025
 6,332
 101
 —
 12,517
Cash and cash equivalents, end of period $3,454
 4,714
 1,718
 101
 —
 $9,987
 $13,922
 4,516
 2,321
 101
 —
 $20,860

29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
NineSix months ended SeptemberJune 30, 20162017
(in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other
subsidiaries		 Consolidating
adjustments		 Hawaiian Electric
Consolidated		 Hawaiian Electric Hawaii Electric Light Maui Electric Other
subsidiaries		 Consolidating
adjustments		 Hawaiian Electric
Consolidated
Cash flows from operating activities  
 ��
  
  
  
  
  
  
  
  
  
  
Net income $109,008
 16,886
 17,341
 —
 (33,541) $109,694
 $47,649
 8,483
 8,514
 —
 (16,539) $48,107
Adjustments to reconcile net income to net cash provided by operating activities:  
  
  
  
  
  
  
  
  
  
  
  
Equity in earnings of subsidiaries (33,616) —
 —
 —
 33,541
 (75) (16,589) —
 —
 —
 16,539
 (50)
Common stock dividends received from subsidiaries 19,776
 —
 —
 —
 (19,701) 75
 13,771
 —
 —
 —
 (13,721) 50
Depreciation of property, plant and equipment 94,564
 28,347
 17,389
 —
 —
 140,300
 65,445
 19,371
 11,556
 —
 —
 96,372
Other amortization 2,462
 1,366
 1,552
 —
 —
 5,380
 1,875
 905
 1,482
 —
 —
 4,262
Deferred income taxes 41,005
 4,529
 10,085
 —
 29
 55,648
 15,060
 3,590
 4,988
 —
 (39) 23,599
Allowance for equity funds used during construction (4,771) (571) (668) —
 —
 (6,010) (4,715) (249) (462) —
 —
 (5,426)
Other 2,925
 162
 147
 —
 —
 3,234
 1,089
 699
 (173) —
 —
 1,615
Changes in assets and liabilities:                        
Decrease (increase) in accounts receivable 328
 (2,716) (1,313) —
 3,046
 (655) (5,100) 1,182
 (1,067) —
 3,256
 (1,729)
Increase in accrued unbilled revenues (9,673) (373) (612) —
 —
 (10,658) (8,819) (602) (2,482) —
 —
 (11,903)
Decrease in fuel oil stock 4,157
 1,425
 1,154
 —
 —
 6,736
Decrease (increase) in materials and supplies (1,755) (1,559) 387
 —
 —
 (2,927)
Decrease (increase) in fuel oil stock (4,250) 94
 (1,806) —
 —
 (5,962)
Increase in materials and supplies (788) (1,472) (1,160) —
 —
 (3,420)
Decrease (increase) in regulatory assets (2,474) (150) 373
 —
 —
 (2,251) 11,378
 (1,575) (1,624) —
 —
 8,179
Increase (decrease) in accounts payable (2,628) 143
 1,809
 —
 —
 (676)
Increase in accounts payable 33,121
 970
 5,625
 —
 —
 39,716
Change in prepaid and accrued income taxes, tax credits and revenue taxes (7,324) 2,230
 (4,472) —
 (29) (9,595) (29,430) (6,290) (4,725) —
 (465) (40,910)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability 449
 40
 (129) —
 —
 360
 355
 26
 (79) —
 —
 302
Change in other assets and liabilities (10,548) 2,856
 (2,571) —
 (3,046) (13,309) (12,727) 129
 1,807
 —
 (3,256) (14,047)
Net cash provided by operating activities 201,885
 52,615
 40,472
 —
 (19,701) 275,271
 107,325
 25,261
 20,394
 —
 (14,225) 138,755
Cash flows from investing activities  
  
  
  
  
  
  
  
  
  
  
  
Capital expenditures (188,415) (37,835) (24,454) —
 —
 (250,704) (146,721) (22,423) (21,015) —
 —
 (190,159)
Contributions in aid of construction 18,181
 2,691
 2,696
 —
 —
 23,568
 14,078
 1,870
 1,623
 —
 —
 17,571
Other 901
 169
 30
 —
 —
 1,100
 4,820
 619
 307
 —
 504
 6,250
Advances from affiliates —
 (3,000) (8,000) —
 11,000
 —
Advances (to) from affiliates —
 (600) 9,000
 —
 (8,400) —
Net cash used in investing activities (169,333) (37,975) (29,728) —
 11,000
 (226,036) (127,823) (20,534) (10,085) —
 (7,896) (166,338)
Cash flows from financing activities  
  
  
  
  
    
  
  
  
  
  
Common stock dividends (70,199) (9,906) (9,795) —
 19,701
 (70,199) (43,884) (7,748) (5,973) —
 13,721
 (43,884)
Preferred stock dividends of Hawaiian Electric and subsidiaries (810) (400) (286) —
 —
 (1,496) (540) (267) (191) —
 —
 (998)
Proceeds from issuance of special purpose revenue bonds 162,000
 28,000
 75,000
 —
 —
 265,000
Funds transferred for redemption of special purpose revenue bonds (162,000) (28,000) (75,000) —
 —
 (265,000)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less 32,000
 —
 —
 —
 (11,000) 21,000
 35,590
 —
 —
 —
 8,400
 43,990
Other (3) (8) (1) —
 —
 (12) (2,068) (357) (804) —
 —
 (3,229)
Net cash used in financing activities (39,012) (10,314) (10,082) —
 8,701
 (50,707) (10,902) (8,372) (6,968) —
 22,121
 (4,121)
Net increase (decrease) in cash and cash equivalents (6,460) 4,326
 662
 —
 —
 (1,472) (31,400) (3,645) 3,341
 —
 —
 (31,704)
Cash and cash equivalents, beginning of period 16,281
 2,682
 5,385
 101
 —
 24,449
 61,388
 10,749
 2,048
 101
 —
 74,286
Cash and cash equivalents, end of period $9,821
 7,008
 6,047
 101
 —
 $22,977
 $29,988
 7,104
 5,389
 101
 —
 $42,582



30

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Note 4 · Bank segment
Selected financial information
American Savings Bank, F.S.B.
Statements of Income Data
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Interest and dividend income  
  
  
  
  
  
  
  
Interest and fees on loans $52,210
 $50,444
 $155,269
 $148,571
 $54,633
 $52,317
 $107,433
 $103,059
Interest and dividends on investment securities 6,850
 4,759
 20,593
 14,219
 8,628
 6,763
 17,830
 13,743
Total interest and dividend income 59,060
 55,203
 175,862
 162,790
 63,261
 59,080
 125,263
 116,802
Interest expense  
  
  
  
  
  
  
  
Interest on deposit liabilities 2,444
 1,871
 6,858
 5,154
 3,284
 2,311
 6,241
 4,414
Interest on other borrowings 470
 1,464
 2,110
 4,416
 393
 824
 889
 1,640
Total interest expense 2,914
 3,335
 8,968
 9,570
 3,677
 3,135
 7,130
 6,054
Net interest income 56,146
 51,868
 166,894
 153,220
 59,584
 55,945
 118,133
 110,748
Provision for loan losses 490
 5,747
 7,231
 15,266
 2,763
 2,834
 6,304
 6,741
Net interest income after provision for loan losses 55,656
 46,121
 159,663
 137,954
 56,821
 53,111
 111,829
 104,007
Noninterest income  
  
  
  
  
  
  
  
Fees from other financial services 5,635
 5,599
 17,055
 16,799
 4,744
 5,810
 9,398
 11,420
Fee income on deposit liabilities 5,533
 5,627
 16,526
 16,045
 5,138
 5,565
 10,327
 10,993
Fee income on other financial products 1,904
 2,151
 5,741
 6,563
 1,675
 1,971
 3,329
 3,837
Bank-owned life insurance 1,257
 1,616
 4,165
 3,620
 1,133
 1,925
 2,004
 2,908
Mortgage banking income 520
 2,347
 1,896
 5,096
 617
 587
 1,230
 1,376
Gains on sale of investment securities, net —
 —
 —
 598
Other income, net 380
 1,165
 1,229
 1,786
 536
 391
 972
 849
Total noninterest income 15,229
 18,505
 46,612
 50,507
 13,843
 16,249
 27,260
 31,383
Noninterest expense  
  
  
  
  
  
  
  
Compensation and employee benefits 23,724
 22,844
 71,703
 67,197
 23,655
 24,541
 48,095
 47,583
Occupancy 4,284
 3,991
 12,623
 12,244
 4,194
 4,185
 8,474
 8,339
Data processing 3,262
 3,150
 9,749
 9,599
 3,540
 3,207
 7,004
 6,487
Services 2,863
 2,427
 7,989
 8,093
 3,028
 2,766
 6,075
 5,126
Equipment 1,814
 1,759
 5,333
 5,193
 1,874
 1,771
 3,602
 3,519
Office supplies, printing and postage 1,444
 1,483
 4,506
 4,431
 1,491
 1,527
 2,998
 3,062
Marketing 934
 747
 2,290
 2,507
 1,085
 839
 1,730
 1,356
FDIC insurance 746
 907
 2,296
 2,704
 727
 822
 1,440
 1,550
Other expense 5,050
 4,591
 14,066
 13,948
 4,556
 4,906
 8,657
 9,412
Total noninterest expense 44,121
 41,899
 130,555
 125,916
 44,150
 44,564
 88,075
 86,434
Income before income taxes 26,764
 22,727
 75,720
 62,545
 26,514
 24,796
 51,014
 48,956
Income taxes 9,172
 7,623
 25,582
 21,483
 5,953
 8,063
 11,493
 16,410
Net income $17,592
 $15,104
 $50,138
 $41,062
 $20,561
 $16,733
 $39,521
 $32,546


31

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)



Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:
  Three months ended June 30 Six months ended June 30
(in thousands) 2018 2017 2018 2017
Interest and dividend income 63,261
 59,080
 $125,263
 $116,802
Noninterest income 13,843
 16,249
 27,260
 31,383
*Revenues-Bank 77,104
 75,329
 152,523
 148,185
Total interest expense 3,677
 3,135
 7,130
 6,054
Provision for loan losses 2,763
 2,834
 6,304
 6,741
Noninterest expense 44,150
 44,564
 88,075
 86,434
Less: Retirement defined benefits expense—other than service costs (403) (201) (790) (396)
*Expenses-Bank 50,187
 50,332
 100,719
 98,833
*Operating income-Bank 26,917
 24,997
 51,804
 49,352
Add back: Retirement defined benefits expense—other than service costs 403
 201
 790
 396
Income before income taxes $26,514
 $24,796
 $51,014
 $48,956

American Savings Bank, F.S.B.
Statements of Comprehensive Income Data
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Net income $17,592
 $15,104
 $50,138
 $41,062
 $20,561
 $16,733
 $39,521
 $32,546
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 $(137), $1,417, $(1,619) and $(5,413), respectively 208
 (2,147) 2,452
 8,197
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $238, respectively —
 —
 —
 (360)
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of tax benefits (taxes) of $1,592, $(1,334), $6,459 and $(1,482), respectively (4,348) 2,021
 (17,645) 2,244
Retirement benefit plans:  
  
  
  
  
  
  
  
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $138, $144, $675 and $421, respectively 209
 219
 1,023
 638
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $133, $133, $827 and $537, respectively 366
 202
 1,588
 814
Other comprehensive income (loss), net of taxes 417
 (1,928) 3,475
 8,475
 (3,982) 2,223
 (16,057) 3,058
Comprehensive income $18,009
 $13,176
 $53,613
 $49,537
 $16,579
 $18,956
 $23,464
 $35,604

32

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


American Savings Bank, F.S.B.
Balance Sheets Data
(in thousands) September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Assets  
  
  
  
  
  
  
  
Cash and due from banks  
 $120,492
  
 $137,083
  
 $120,189
  
 $140,934
Interest-bearing deposits   69,223
   52,128
   109,230
   93,165
Restricted cash   —
   1,764
Available-for-sale investment securities, at fair value  
 1,320,110
  
 1,105,182
Investment securities        
Available-for-sale, at fair value  
 1,409,528
  
 1,401,198
Held-to-maturity, at amortized cost (fair value of $61,444 and $44,412, respectively)   62,630
   44,515
Stock in Federal Home Loan Bank, at cost  
 9,706
  
 11,218
  
 10,158
  
 9,706
Loans receivable held for investment  
 4,676,281
  
 4,738,693
Loans held for investment  
 4,774,744
  
 4,670,768
Allowance for loan losses  
 (53,047)  
 (55,533)  
 (52,803)  
 (53,637)
Net loans  
 4,623,234
  
 4,683,160
  
 4,721,941
  
 4,617,131
Loans held for sale, at lower of cost or fair value  
 15,728
  
 18,817
  
 5,248
  
 11,250
Other  
 378,224
  
 329,815
  
 462,469
  
 398,570
Goodwill  
 82,190
  
 82,190
  
 82,190
  
 82,190
Total assets  
 $6,618,907
  
 $6,421,357
  
 $6,983,583
  
 $6,798,659
        
Liabilities and shareholder’s equity  
  
  
  
  
  
  
  
Deposit liabilities—noninterest-bearing  
 $1,710,698
  
 $1,639,051
  
 $1,812,348
  
 $1,760,233
Deposit liabilities—interest-bearing  
 4,041,628
  
 3,909,878
  
 4,303,761
  
 4,130,364
Other borrowings  
 153,552
  
 192,618
  
 126,930
  
 190,859
Other  
 107,558
  
 101,635
  
 131,063
  
 110,356
Total liabilities  
 6,013,436
  
 5,843,182
  
 6,374,102
  
 6,191,812
Commitments and contingencies  
 

  
 

  
 

  
 

Common stock  
 1
  
 1
  
 1
  
 1
Additional paid in capital   344,512
   342,704
   346,188
   345,018
Retained earnings  
 279,956
  
 257,943
  
 310,298
  
 292,957
Accumulated other comprehensive loss, net of tax benefits  
  
  
  
  
  
  
  
Net unrealized losses on securities $(5,479)  
 $(7,931)  
 $(32,596)  
 $(14,951)  
Retirement benefit plans (13,519) (18,998) (14,542) (22,473) (14,410) (47,006) (16,178) (31,129)
Total shareholder’s equity  
 605,471
  
 578,175
  
 609,481
  
 606,847
Total liabilities and shareholder’s equity  
 $6,618,907
  
 $6,421,357
  
 $6,983,583
  
 $6,798,659
                
Other assets  
  
  
  
  
  
  
  
Bank-owned life insurance  
 $147,391
  
 $143,197
  
 $150,797
  
 $148,775
Premises and equipment, net  
 123,326
  
 90,570
  
 186,620
  
 136,270
Prepaid expenses  
 5,356
  
 3,348
  
 4,993
  
 3,961
Accrued interest receivable  
 17,488
  
 16,824
  
 19,597
  
 18,724
Mortgage-servicing rights  
 9,070
  
 9,373
  
 8,509
  
 8,639
Low-income housing equity investments   54,515
   47,081
   63,033
   59,016
Real estate acquired in settlement of loans, net  
 1,183
  
 1,189
  
 —
  
 133
Other  
 19,895
  
 18,233
  
 28,920
  
 23,052
  
 $378,224
  
 $329,815
  
 $462,469
  
 $398,570
Other liabilities  
  
  
  
  
  
  
  
Accrued expenses  
 $41,698
  
 $36,754
  
 $63,734
  
 $39,312
Federal and state income taxes payable  
 6,829
  
 4,728
  
 1,200
  
 3,736
Cashier’s checks  
 27,448
  
 24,156
  
 28,236
  
 27,000
Advance payments by borrowers  
 4,867
  
 10,335
  
 10,415
  
 10,245
Other  
 26,716
  
 25,662
  
 27,478
  
 30,063
  
 $107,558
  
 $101,635
  
 $131,063
  
 $110,356
    

33

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.
Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of $10477 million and $50 million, respectively, as of SeptemberJune 30, 20172018 and $93$141 million and $100$50 million, respectively, as of December 31, 20162017.
Available-for-sale investmentInvestment securities.  The major components of investment securities were as follows:
 Amortized cost Gross unrealized gains Gross unrealized losses 
Estimated fair
value
 Gross unrealized losses Amortized cost Gross unrealized gains Gross unrealized losses 
Estimated fair
value
 Gross unrealized losses
 Less than 12 months 12 months or longer Less than 12 months 12 months or longer
(dollars in thousands) Number of issues 
Fair 
value
 Amount Number of issues 
Fair 
value
 Amount Number of issues 
Fair 
value
 Amount Number of issues 
Fair 
value
 Amount
September 30, 2017  
  
  
  
    
  
    
  
June 30, 2018  
  
  
  
    
  
    
  
Available-for-sale                    
U.S. Treasury and federal agency obligations $179,986
 $72
 $(4,125) $175,933
 19
 $98,578
 $(2,018) 9
 $67,283
 $(2,107)
Mortgage-related securities- FNMA, FHLMC and GNMA 1,218,313
 350
 (40,831) 1,177,832
 81
 694,629
 (19,345) 83
 456,218
 (21,486)
Corporate bonds 40,331
 23
 (18) 40,336
 4
 23,841
 (18) —
 —
 —
Mortgage revenue bond 15,427
 —
 —
 15,427
 —
 —
 —
 —
 —
 —
 $1,454,057
 $445
 $(44,974) $1,409,528
 104
 $817,048
 $(21,381) 92
 $523,501
 $(23,593)
Held-to-maturity                    
Mortgage-related securities- FNMA, FHLMC and GNMA $62,630
 $41
 $(1,227) $61,444
 3
 $41,138
 $(1,227) —
 $—
 $—
 $62,630
 $41
 $(1,227) $61,444
 3
 $41,138
 $(1,227) —
 $—
 $—
December 31, 2017                    
Available-for-sale                                        
U.S. Treasury and federal agency obligations $182,535
 $882
 $(1,299) $182,118
 15
 $91,203
 $(1,064) 2
 $13,072
 $(235) $185,891
 $438
 $(2,031) $184,298
 15
 $83,137
 $(825) 8
 $62,296
 $(1,206)
Mortgage-related securities- FNMA, FHLMC and GNMA 1,131,245
 2,127
 (10,807) 1,122,565
 84
 686,186
 (7,709) 29
 138,051
 (3,098) 1,220,304
 793
 (19,624) 1,201,473
 67
 653,635
 (6,839) 77
 459,912
 (12,785)
Mortgage revenue bond 15,427
 —
 —
 15,427
 —
 —
 —
 —
 —
 —
 15,427
 —
 —
 15,427
 —
 —
 —
 —
 —
 —
 $1,329,207
 $3,009
 $(12,106) $1,320,110
 99
 $777,389
 $(8,773) 31
 $151,123
 $(3,333) $1,421,622
 $1,231
 $(21,655) $1,401,198
 82
 $736,772
 $(7,664) 85
 $522,208
 $(13,991)
December 31, 2016                    
Available-for-sale                    
U.S. Treasury and federal agency obligations $193,515
 $920
 $(2,154) $192,281
 18
 $123,475
 $(2,010) 1
 $3,485
 $(144)
Held-to-maturity                    
Mortgage-related securities- FNMA, FHLMC and GNMA 909,408
 1,742
 (13,676) 897,474
 88
 709,655
 (12,143) 13
 47,485
 (1,533) $44,515
 $1
 $(104) $44,412
 2
 $35,744
 $(104) —
 $—
 $—
Mortgage revenue bond 15,427
 —
 —
 15,427
 —
 —
 —
 —
 —
 —
 $1,118,350
 $2,662
 $(15,830) $1,105,182
 106
 $833,130
 $(14,153) 14
 $50,970
 $(1,677) $44,515
 $1
 $(104) $44,412
 2
 $35,744
 $(104) —
 $—
 $—
ASB does not believe that the investment securities that were in an unrealized loss position at SeptemberJune 30, 2017,2018, represent an other-than-temporary impairment (OTTI). Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the U.S. Treasury, federal agency obligations and mortgage-related securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. The corporate bonds are all investment grade and rated A- or higher. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for the quarters and nine month periodssix months ended SeptemberJune 30, 20172018 and 2016.2017.
U.S. Treasury, federal agency obligations, corporate, and the mortgage revenue bond have contractual terms to maturity. Mortgage-related securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.
The contractual maturities of available-for-sale investment securities were as follows:
September 30, 2017 Amortized cost Fair value
(in thousands)    
Due in one year or less $9,998
 $9,999
Due after one year through five years 77,138
 77,331
Due after five years through ten years 81,464
 81,170
Due after ten years 29,362
 29,045
  197,962
 197,545
Mortgage-related securities-FNMA, FHLMC and GNMA 1,131,245
 1,122,565
Total available-for-sale securities $1,329,207
 $1,320,110

34

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


The contractual maturities of investment securities were as follows:
June 30, 2018 Amortized cost Fair value
(in thousands)    
Available-for-sale    
Due in one year or less $25,005
 $24,860
Due after one year through five years 105,425
 104,020
Due after five years through ten years 77,526
 75,563
Due after ten years 27,788
 27,253
  235,744
 231,696
Mortgage-related securities-FNMA, FHLMC and GNMA 1,218,313
 1,177,832
Total available-for-sale securities $1,454,057
 $1,409,528
Held-to-maturity    
Mortgage-related securities-FNMA, FHLMC and GNMA $62,630
 $61,444
Total held-to-maturity securities $62,630
 $61,444
Proceeds from the sale of available-for-sale securities were nil for both the three month periods ended September 30, 2017 and 2016 and nil and $16.4 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively.2017. Gross realized gains and losses were nil for both the three month periods ended September 30, 2017 and 2016, and nil and $0.6 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively. Gross realized losses were nil or not material for all periods presented.2017.
Loans receivable.Loans. The components of loans receivable were summarized as follows:
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
(in thousands) 
  
 
  
Real estate: 
  
 
  
Residential 1-4 family$2,066,023
 $2,048,051
$2,099,950
 $2,118,047
Commercial real estate745,583
 800,395
758,835
 733,106
Home equity line of credit905,249
 863,163
938,902
 913,052
Residential land18,611
 18,889
16,032
 15,797
Commercial construction128,407
 126,768
124,421
 108,273
Residential construction13,031
 16,080
14,873
 14,910
Total real estate3,876,904
 3,873,346
3,953,013
 3,903,185
Commercial589,669
 692,051
593,596
 544,828
Consumer211,571
 178,222
228,804
 223,564
Total loans4,678,144
 4,743,619
4,775,413
 4,671,577
Less: Deferred fees and discounts(1,863) (4,926)(669) (809)
Allowance for loan losses(53,047) (55,533)(52,803) (53,637)
Total loans, net$4,623,234
 $4,683,160
$4,721,941
 $4,617,131
ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. ASB is subject to the risk that the private mortgage insurance company cannot satisfy the bank's claim on policies.

35

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Allowance for loan losses. The allowance for loan losses (balances and changes) and financing receivables were as follows:
(in thousands) 
Residential
1-4 family
 
Commercial real
estate
 Home
equity line of credit		 Residential land Commercial construction Residential construction Commercial loans Consumer loans Unallo-cated Total 
Residential
1-4 family
 
Commercial real
estate
 Home
equity line of credit		 Residential land Commercial construction Residential construction Commercial loans Consumer loans Unallo-cated Total
Three months ended September 30, 2017  
  
  
  
  
  
  
  
  
  
Three months ended June 30, 2018  
  
  
  
  
  
  
  
  
  
Allowance for loan losses:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Beginning balance $3,130
 $18,840
 $5,527
 $1,264
 $4,706
 $9
 $14,552
 $8,328
 $—
 $56,356
 $2,525
 $15,959
 $7,982
 $674
 $4,361
 $4
 $10,355
 $12,035
 $—
 $53,895
Charge-offs (522) —
 —
 —
 —
 —
 (1,215) (3,160) —
 (4,897) —
 —
 (144) (9) —
 —
 (540) (3,888) —
 (4,581)
Recoveries 33
 —
 164
 259
 —
 —
 326
 316
 —
 1,098
 14
 —
 13
 46
 —
 —
 280
 373
 —
 726
Provision 347
 (2,800) (36) (141) 370
 2
 (595) 3,343
 —
 490
 400
 (661) (517) (69) 255
 —
 66
 3,289
 —
 2,763
Ending balance $2,988
 $16,040
 $5,655
 $1,382
 $5,076
 $11
 $13,068
 $8,827
 $—
 $53,047
 $2,939
 $15,298
 $7,334
 $642
 $4,616
 $4
 $10,161
 $11,809
 $—
 $52,803
Three months ended September 30, 2016  
  
  
  
  
  
  
  
  
  
Three months ended June 30, 2017  
  
  
  
  
  
  
  
  
  
Allowance for loan losses:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Beginning balance $4,384
 $13,561
 $7,836
 $1,689
 $6,993
 $12
 $17,085
 $3,771
 $—
 $55,331
 $2,781
 $16,504
 $5,417
 $1,479
 $7,257
 $11
 $14,902
 $7,646
 $—
 $55,997
Charge-offs (373) —
 (108) —
 —
 —
 (833) (1,879) —
 (3,193) —
 —
 —
 (92) —
 —
 (752) (2,390) —
 (3,234)
Recoveries 92
 —
 15
 187
 —
 —
 347
 211
 —
 852
 49
 —
 39
 15
 —
 —
 299
 357
 —
 759
Provision 154
 1,289
 (248) 23
 179
 (2) 2,457
 1,895
 —
 5,747
 300
 2,336
 71
 (138) (2,551) (2) 103
 2,715
 —
 2,834
Ending balance $4,257
 $14,850
 $7,495
 $1,899
 $7,172
 $10
 $19,056
 $3,998
 $—
 $58,737
 $3,130
 $18,840
 $5,527
 $1,264
 $4,706
 $9
 $14,552
 $8,328
 $—
 $56,356
Nine months ended September 30, 2017  
  
  
  
  
  
  
  
  
  
Six months ended June 30, 2018Six months ended June 30, 2018  
  
  
  
  
  
  
  
  
Allowance for loan losses:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Beginning balance $2,873
 $16,004
 $5,039
 $1,738
 $6,449
 $12
 $16,618
 $6,800
 $—
 $55,533
 $2,902
 $15,796
 $7,522
 $896
 $4,671
 $12
 $10,851
 $10,987
 $—
 $53,637
Charge-offs (528) —
 (14) (92) —
 —
 (3,477) (8,360) —
 (12,471) (31) —
 (144) (17) —
 —
 (1,142) (8,120) —
 (9,454)
Recoveries 91
 —
 294
 477
 —
 —
 922
 970
 —
 2,754
 68
 —
 27
 51
 —
 —
 1,450
 720
 —
 2,316
Provision 552
 36
 336
 (741) (1,373) (1) (995) 9,417
 —
 7,231
 —
 (498) (71) (288) (55) (8) (998) 8,222
 —
 6,304
Ending balance $2,988
 $16,040
 $5,655
 $1,382
 $5,076
 $11
 $13,068
 $8,827
 $—
 $53,047
 $2,939
 $15,298
 $7,334
 $642
 $4,616
 $4
 $10,161
 $11,809
 $—
 $52,803
September 30, 2017                    
June 30, 2018                    
Ending balance: individually evaluated for impairment $1,317
 $72
 $409
 $373
 $—
 $—
 $667
 $30
   $2,868
 $1,027
 $53
 $1,161
 $7
 $—
 $—
 $597
 $3
   $2,848
Ending balance: collectively evaluated for impairment $1,671
 $15,968
 $5,246
 $1,009
 $5,076
 $11
 $12,401
 $8,797
 $—
 $50,179
 $1,912
 $15,245
 $6,173
 $635
 $4,616
 $4
 $9,564
 $11,806
 $—
 $49,955
Financing Receivables:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Ending balance $2,066,023
 $745,583
 $905,249
 $18,611
 $128,407
 $13,031
 $589,669
 $211,571
   $4,678,144
 $2,099,950
 $758,835
 $938,902
 $16,032
 $124,421
 $14,873
 $593,596
 $228,804
   $4,775,413
Ending balance: individually evaluated for impairment $19,757
 $1,281
 $7,078
 $2,385
 $—
 $—
 $5,486
 $67
   $36,054
 $17,605
 $993
 $13,849
 $1,171
 $—
 $—
 $5,874
 $91
   $39,583
Ending balance: collectively evaluated for impairment $2,046,266
 $744,302
 $898,171
 $16,226
 $128,407
 $13,031
 $584,183
 $211,504
   $4,642,090
 $2,082,345
 $757,842
 $925,053
 $14,861
 $124,421
 $14,873
 $587,722
 $228,713
   $4,735,830
Nine months ended September 30, 2016  
  
  
  
  
  
  
  
  
  
Six months ended June 30, 2017Six months ended June 30, 2017  
  
  
  
  
  
  
  
  
Allowance for loan losses:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Beginning balance $4,186
 $11,342
 $7,260
 $1,671
 $4,461
 $13
 $17,208
 $3,897
 $—
 $50,038
 $2,873
 $16,004
 $5,039
 $1,738
 $6,449
 $12
 $16,618
 $6,800
 $—
 $55,533
Charge-offs (433) —
 (108) —
 —
 —
 (3,138) (4,977) —
 (8,656) (6) —
 (14) (92) —
 —
 (2,262) (5,200) —
 (7,574)
Recoveries 144
 —
 46
 306
 —
 —
 907
 686
 —
 2,089
 58
 —
 130
 218
 —
 —
 596
 654
 —
 1,656
Provision 360
 3,508
 297
 (78) 2,711
 (3) 4,079
 4,392
 —
 15,266
 205
 2,836
 372
 (600) (1,743) (3) (400) 6,074
 —
 6,741
Ending balance $4,257
 $14,850
 $7,495
 $1,899
 $7,172
 $10
 $19,056
 $3,998
 $—
 $58,737
 $3,130
 $18,840
 $5,527
 $1,264
 $4,706
 $9
 $14,552
 $8,328
 $—
 $56,356
December 31, 2016                    
December 31, 2017                    
Ending balance: individually evaluated for impairment $1,352
 $80
 $215
 $789
 $—
 $—
 $1,641
 $6
   $4,083
 $1,248
 $65
 $647
 $47
 $—
 $—
 $694
 $29
   $2,730
Ending balance: collectively evaluated for impairment $1,521
 $15,924
 $4,824
 $949
 $6,449
 $12
 $14,977
 $6,794
 $—
 $51,450
 $1,654
 $15,731
 $6,875
 $849
 $4,671
 $12
 $10,157
 $10,958
 $—
 $50,907
Financing Receivables:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Ending balance $2,048,051
 $800,395
 $863,163
 $18,889
 $126,768
 $16,080
 $692,051
 $178,222
   $4,743,619
 $2,118,047
 $733,106
 $913,052
 $15,797
 $108,273
 $14,910
 $544,828
 $223,564
   $4,671,577
Ending balance: individually evaluated for impairment $19,854
 $1,569
 $6,158
 $3,629
 $—
 $—
 $20,539
 $10
   $51,759
 $18,284
 $1,016
 $8,188
 $1,265
 $—
 $—
 $4,574
 $66
   $33,393
Ending balance: collectively evaluated for impairment $2,028,197
 $798,826
 $857,005
 $15,260
 $126,768
 $16,080
 $671,512
 $178,212
   $4,691,860
 $2,099,763
 $732,090
 $904,864
 $14,532
 $108,273
 $14,910
 $540,254
 $223,498
   $4,638,184

36

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Credit quality.  ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.
Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications:  Pass, Special Mention, Substandard, Doubtful and Loss. The AQR is a function of the probability of default model rating, the loss given default and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt.  Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.
The credit risk profile by internally assigned grade for loans was as follows:
 September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
(in thousands) 
Commercial
real estate
 
Commercial
construction
 Commercial 
Commercial
real estate
 
Commercial
construction
 Commercial 
Commercial
real estate
 
Commercial
construction
 Commercial 
Commercial
real estate
 
Commercial
construction
 Commercial
Grade:  
  
  
  
  
  
  
  
  
  
  
  
Pass $647,599
 $103,892
 $539,336
 $701,657
 $102,955
 $614,139
 $671,592
 $99,632
 $539,168
 $630,877
 $83,757
 $492,942
Special mention 44,088
 22,500
 25,053
 65,541
 —
 25,229
 38,424
 22,500
 32,711
 49,347
 22,500
 27,997
Substandard 53,896
 2,015
 23,130
 33,197
 23,813
 52,683
 48,819
 2,289
 21,717
 52,882
 2,016
 23,421
Doubtful —
 —
 2,150
 —
 —
 —
 —
 —
 —
 —
 —
 468
Loss —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total $745,583
 $128,407
 $589,669
 $800,395
 $126,768
 $692,051
 $758,835
 $124,421
 $593,596
 $733,106
 $108,273
 $544,828


37

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


The credit risk profile based on payment activity for loans was as follows:
(in thousands) 
30-59
days
past due
 
60-89
days
past due
 
Greater
than
90 days
 
Total
past due
 Current 
Total
financing
receivables
 
Recorded
investment>
90 days and
accruing
 
30-59
days
past due
 
60-89
days
past due
 
Greater
than
90 days
 
Total
past due
 Current 
Total
financing
receivables
 
Recorded
investment>
90 days and
accruing
September 30, 2017  
  
  
  
  
  
  
June 30, 2018  
  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $3,905
 $1,513
 $4,452
 $9,870
 $2,056,153
 $2,066,023
 $—
 $2,975
 $1,348
 $4,360
 $8,683
 $2,091,267
 $2,099,950
 $—
Commercial real estate 5,414
 —
 —
 5,414
 740,169
 745,583
 —
 —
 725
 —
 725
 758,110
 758,835
 —
Home equity line of credit 1,936
 177
 1,367
 3,480
 901,769
 905,249
 —
 2,075
 288
 2,545
 4,908
 933,994
 938,902
 —
Residential land 498
 984
 497
 1,979
 16,632
 18,611
 —
 741
 111
 631
 1,483
 14,549
 16,032
 —
Commercial construction —
 —
 —
 —
 128,407
 128,407
 —
 —
 —
 —
 —
 124,421
 124,421
 —
Residential construction —
 —
 —
 —
 13,031
 13,031
 —
 —
 —
 —
 —
 14,873
 14,873
 —
Commercial 1,095
 218
 648
 1,961
 587,708
 589,669
 —
 1,721
 491
 551
 2,763
 590,833
 593,596
 —
Consumer 2,508
 1,465
 1,178
 5,151
 206,420
 211,571
 —
 3,421
 2,019
 1,579
 7,019
 221,785
 228,804
 —
Total loans $15,356
 $4,357
 $8,142
 $27,855
 $4,650,289
 $4,678,144
 $—
 $10,933
 $4,982
 $9,666
 $25,581
 $4,749,832
 $4,775,413
 $—
December 31, 2016  
  
  
  
  
  
  
December 31, 2017  
  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $5,467
 $2,338
 $3,505
 $11,310
 $2,036,741
 $2,048,051
 $—
 $1,532
 $1,715
 $5,071
 $8,318
 $2,109,729
 $2,118,047
 $—
Commercial real estate 2,416
 —
 —
 2,416
 797,979
 800,395
 —
 —
 —
 —
 —
 733,106
 733,106
 —
Home equity line of credit 1,263
 381
 1,342
 2,986
 860,177
 863,163
 —
 425
 114
 2,051
 2,590
 910,462
 913,052
 —
Residential land —
 —
 255
 255
 18,634
 18,889
 —
 23
 —
 625
 648
 15,149
 15,797
 —
Commercial construction —
 —
 —
 —
 126,768
 126,768
 —
 —
 —
 —
 —
 108,273
 108,273
 —
Residential construction —
 —
 —
 —
 16,080
 16,080
 —
 —
 —
 —
 —
 14,910
 14,910
 —
Commercial 413
 510
 1,303
 2,226
 689,825
 692,051
 —
 1,825
 2,025
 730
 4,580
 540,248
 544,828
 —
Consumer 1,945
 1,001
 963
 3,909
 174,313
 178,222
 —
 3,432
 2,159
 1,876
 7,467
 216,097
 223,564
 —
Total loans $11,504
 $4,230
 $7,368
 $23,102
 $4,720,517
 $4,743,619
 $—
 $7,237
 $6,013
 $10,353
 $23,603
 $4,647,974
 $4,671,577
 $—


38

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due and TDRtroubled debt restructuring (TDR) loans was as follows:
(in thousands) September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Real estate:  
  
  
  
Residential 1-4 family $12,853
 $11,154
 $13,121
 $12,598
Commercial real estate —
 223
 —
 —
Home equity line of credit 4,000
 3,080
 6,051
 4,466
Residential land 1,022
 878
 843
 841
Commercial construction —
 —
 —
 —
Residential construction —
 —
 —
 —
Commercial 3,691
 6,708
 4,385
 3,069
Consumer 1,791
 1,282
 2,820
 2,617
Total nonaccrual loans $23,357
 $23,325
 $27,220
 $23,591
Real estate:        
Residential 1-4 family $—
 $—
 $—
 $—
Commercial real estate —
 —
 —
 —
Home equity line of credit —
 —
 —
 —
Residential land —
 —
 —
 —
Commercial construction —
 —
 —
 —
Residential construction —
 —
 —
 —
Commercial —
 —
 —
 —
Consumer —
 —
 —
 —
Total accruing loans 90 days or more past due $—
 $—
 $—
 $—
Real estate:        
Residential 1-4 family $11,592
 $14,450
 $10,777
 $10,982
Commercial real estate 1,281
 1,346
 993
 1,016
Home equity line of credit 5,250
 4,934
 10,255
 6,584
Residential land 1,555
 2,751
 328
 425
Commercial construction —
 —
 —
 —
Residential construction —
 —
 —
 —
Commercial 2,052
 14,146
 1,716
 1,741
Consumer 67
 10
 64
 66
Total troubled debt restructured loans not included above $21,797
 $37,637
 $24,133
 $20,814


39

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
 September 30, 2017 Three months ended September 30, 2017 Nine months ended September 30, 2017 June 30, 2018 Three months ended June 30, 2018 Six months ended June 30, 2018
(in thousands) 
Recorded
investment
 
Unpaid
principal
balance
 
Related
Allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
 
Recorded
investment
 
Unpaid
principal
balance
 
Related
Allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
With no related allowance recorded  
  
  
  
  
  
  
With no related allowance recorded  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $9,987
 $10,541
 $—
 $9,650
 $70
 $9,503
 $230
 $8,966
 $9,498
 $—
 $8,900
 $50
 $8,699
 $157
Commercial real estate —
 —
 —
 —
 —
 121
 11
 —
 —
 —
 —
 —
 —
 —
Home equity line of credit 1,565
 1,889
 —
 1,918
 32
 2,108
 97
 2,505
 2,803
 —
 2,374
 7
 2,037
 12
Residential land 1,134
 1,425
 —
 1,209
 73
 1,080
 107
 1,141
 1,449
 —
 1,132
 5
 1,150
 10
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 2,901
 6,257
 —
 1,808
 29
 2,888
 37
 4,158
 5,079
 —
 3,026
 10
 2,691
 20
Consumer —
 —
 —
 —
 —
 —
 —
 33
 33
 —
 15
 —
 11
 —
 $15,587
 $20,112
 $—
 $14,585
 $204
 $15,700
 $482
 $16,803
 $18,862
 $—
 $15,447
 $72
 $14,588
 $199
With an allowance recorded  
  
  
  
  
  
  
With an allowance recorded  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $9,770
 $9,972
 $1,317
 $9,788
 $97
 $9,963
 $333
 $8,639
 $8,842
 $1,027
 $8,778
 $97
 $8,953
 $190
Commercial real estate 1,281
 1,281
 72
 1,284
 13
 1,292
 41
 993
 993
 53
 997
 10
 1,003
 21
Home equity line of credit 5,513
 5,543
 409
 5,076
 68
 4,670
 164
 11,344
 11,414
 1,161
 10,420
 96
 9,080
 177
Residential land 1,251
 1,251
 373
 1,251
 12
 1,620
 73
 30
 30
 7
 40
 1
 58
 3
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 2,585
 2,595
 667
 2,482
 225
 4,104
 694
 1,716
 1,716
 597
 1,738
 30
 1,848
 66
Consumer 67
 67
 30
 67
 1
 55
 2
 58
 58
 3
 58
 1
 58
 2
 $20,467
 $20,709
 $2,868
 $19,948
 $416
 $21,704
 $1,307
 $22,780
 $23,053
 $2,848
 $22,031
 $235
 $21,000
 $459
Total  
  
  
  
  
  
  
  
  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $19,757
 $20,513
 $1,317
 $19,438
 $167
 $19,466
 $563
 $17,605
 $18,340
 $1,027
 $17,678
 $147
 $17,652
 $347
Commercial real estate 1,281
 1,281
 72
 1,284
 13
 1,413
 52
 993
 993
 53
 997
 10
 1,003
 21
Home equity line of credit 7,078
 7,432
 409
 6,994
 100
 6,778
 261
 13,849
 14,217
 1,161
 12,794
 103
 11,117
 189
Residential land 2,385
 2,676
 373
 2,460
 85
 2,700
 180
 1,171
 1,479
 7
 1,172
 6
 1,208
 13
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 5,486
 8,852
 667
 4,290
 254
 6,992
 731
 5,874
 6,795
 597
 4,764
 40
 4,539
 86
Consumer 67
 67
 30
 67
 1
 55
 2
 91
 91
 3
 73
 1
 69
 2
 $36,054
 $40,821
 $2,868
 $34,533
 $620
 $37,404
 $1,789
 $39,583
 $41,915
 $2,848
 $37,478
 $307
 $35,588
 $658


40

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


 December 31, 2016 Three months ended September 30, 2016 Nine months ended September 30, 2016 December 31, 2017 Three months ended June 30, 2017 Six months ended June 30, 2017
(in thousands) 
Recorded
investment
 
Unpaid
principal
balance
 
Related
allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
 
Recorded
investment
 
Unpaid
principal
balance
 
Related
allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
With no related allowance recorded  
  
  
  
  
  
  
With no related allowance recorded  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $9,571
 $10,400
 $—
 $10,069
 $65
 $10,378
 $268
 $9,097
 $9,644
 $—
 $9,304
 $76
 $9,429
 $160
Commercial real estate 223
 228
 —
 1,206
 —
 1,177
 —
 —
 —
 —
 143
 11
 182
 11
Home equity line of credit 1,500
 1,900
 —
 1,220
 6
 1,035
 15
 1,496
 1,789
 —
 2,401
 51
 2,203
 65
Residential land 1,218
 1,803
 —
 1,521
 16
 1,532
 47
 1,143
 1,434
 —
 1,075
 8
 1,016
 34
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 6,299
 8,869
 —
 14,352
 141
 9,240
 154
 2,328
 3,166
 —
 1,949
 2
 3,428
 8
Consumer —
 —
 —
 10
 —
 3
 —
 8
 8
 —
 1
 —
 —
 —
 $18,811
 $23,200
 $—
 $28,378
 $228
 $23,365
 $484
 $14,072
 $16,041
 $—
 $14,873
 $148
 $16,258
 $278
With an allowance recorded  
  
  
  
  
  
  
  
  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $10,283
 $10,486
 $1,352
 $11,800
 $119
 $11,933
 $356
 $9,187
 $9,390
 $1,248
 $10,054
 $117
 $10,051
 $236
Commercial real estate 1,346
 1,346
 80
 2,444
 —
 1,939
 —
 1,016
 1,016
 65
 1,292
 14
 1,296
 28
Home equity line of credit 4,658
 4,712
 215
 4,165
 36
 3,470
 91
 6,692
 6,736
 647
 4,372
 47
 4,467
 96
Residential land 2,411
 2,411
 789
 2,915
 44
 3,090
 165
 122
 122
 47
 1,532
 24
 1,804
 61
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 14,240
 14,240
 1,641
 11,433
 65
 15,075
 275
 2,246
 2,252
 694
 2,562
 68
 4,915
 469
Consumer 10
 10
 6
 11
 —
 12
 —
 58
 58
 29
 68
 1
 49
 1
 $32,948
 $33,205
 $4,083
 $32,768
 $264
 $35,519
 $887
 $19,321
 $19,574
 $2,730
 $19,880
 $271
 $22,582
 $891
Total  
  
  
  
  
  
  
  
  
  
  
  
  
  
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
  
  
Residential 1-4 family $19,854
 $20,886
 $1,352
 $21,869
 $184
 $22,311
 $624
 $18,284
 $19,034
 $1,248
 $19,358
 $193
 $19,480
 $396
Commercial real estate 1,569
 1,574
 80
 3,650
 —
 3,116
 —
 1,016
 1,016
 65
 1,435
 25
 1,478
 39
Home equity line of credit 6,158
 6,612
 215
 5,385
 42
 4,505
 106
 8,188
 8,525
 647
 6,773
 98
 6,670
 161
Residential land 3,629
 4,214
 789
 4,436
 60
 4,622
 212
 1,265
 1,556
 47
 2,607
 32
 2,820
 95
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 20,539
 23,109
 1,641
 25,785
 206
 24,315
 429
 4,574
 5,418
 694
 4,511
 70
 8,343
 477
Consumer 10
 10
 6
 21
 —
 15
 —
 66
 66
 29
 69
 1
 49
 1
 $51,759
 $56,405
 $4,083
 $61,146
 $492
 $58,884
 $1,371
 $33,393
 $35,615
 $2,730
 $34,753
 $419
 $38,840
 $1,169
*Since loan was classified as impaired.
 Troubled debt restructurings.  A loan modification is deemed to be a troubled debt restructuring (TDR)TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty.consider. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectibilitycollectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction,

41

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period and temporary deferral or reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment:  (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for loan losses.
Loan modifications that occurred during the thirdsecond quarters and first ninesix months of 20172018 and 20162017 and the impact on the allowance for loan losses were as follows:
  Three months ended June 30, 2018 Six months ended June 30, 2018
  Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance
(dollars in thousands)  Pre-modification Post-modification (as of period end)  Pre-modification Post-modification (as of period end)
Troubled debt restructurings  
  
  
    
  
  
  
Real estate:  
  
  
    
  
  
  
Residential 1-4 family —
 $—
 $—
 $—
 1
 $339
 $344
 $16
Commercial real estate —
 —
 —
 —
 —
 —
 —
 —
Home equity line of credit 21
 3,338
 3,338
 554
 39
 5,508
 5,512
 942
Residential land —
 —
 —
 —
 1
 109
 109
 —
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
Commercial 2
 43
 43
 42
 7
 2,294
 2,294
 42
Consumer —
 —
 —
 —
 —
 —
 —
 —
  23
 $3,381
 $3,381
 $596
 48
 $8,250
 $8,259
 $1,000
  Three months ended September 30, 2017 Nine months ended September 30, 2017
  Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance
(dollars in thousands)  Pre-modification Post-modification (as of period end)  Pre-modification Post-modification (as of period end)
Troubled debt restructurings  
  
  
    
  
  
  
Real estate:  
  
  
    
  
  
  
Residential 1-4 family 2
 $83
 $83
 $—
 7
 $955
 $963
 $45
Commercial real estate —
 —
 —
 —
 —
 —
 —
 —
Home equity line of credit 15
 862
 862
 184
 28
 1,386
 1,372
 277
Residential land —
 —
 —
 —
 —
 —
 —
 —
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
Commercial 1
 330
 330
 38
 2
 672
 672
 38
Consumer —
 —
 —
 —
 1
 59
 59
 27
  18
 $1,275
 $1,275
 $222
 38
 $3,072
 $3,066
 $387
 Three months ended September 30, 2016 Nine months ended September 30, 2016 Three months ended June 30, 2017 Six months ended June 30, 2017
 Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance Number of contracts 
Outstanding recorded 
investment1
 Net increase in allowance
(dollars in thousands) Pre-modification Post-modification (as of period end) Pre-modification Post-modification (as of period end) Pre-modification Post-modification (as of period end) Pre-modification Post-modification (as of period end)
Troubled debt restructurings  
  
  
      
  
    
  
  
      
  
  
Real estate:  
  
  
      
  
    
  
  
      
  
  
Residential 1-4 family 2
 $251
 $251
 $46
 11
 $2,239
 $2,351
 $305
 2
 $360
 $360
 $—
 5
 $872
 $880
 $45
Commercial real estate —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Home equity line of credit 12
 1,268
 1,268
 237
 30
 2,705
 2,705
 492
 5
 298
 298
 59
 13
 524
 510
 93
Residential land —
 —
 —
 —
 1
 120
 121
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Residential construction —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Commercial 6
 3,462
 3,462
 53
 14
 20,119
 20,119
 723
 —
 —
 —
 —
 1
 342
 342
 —
Consumer —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 1
 59
 59
 27
 20
 $4,981
 $4,981
 $336
 56
 $25,183
 $25,296
 $1,520
 7
 $658
 $658
 $59
 20
 $1,797
 $1,791
 $165
1
The reported balances include loans that became TDR during the period, and were fully paid-off, charged-off, or sold prior to period end.

42

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Loans modified in TDRs that experienced a payment default of 90 days or more during the thirdsecond quarters and first ninesix months of 20172018 and 2016,2017, and for which the payment of default occurred within one year of the modification, were as follows:
 Three months ended September 30, 2017 Nine months ended September 30, 2017 Three months ended June 30, 2018 Six months ended June 30, 2018
(dollars in thousands) Number of contracts Recorded investment Number of contracts Recorded investment Number of contracts Recorded investment Number of contracts Recorded investment
Troubled debt restructurings that
subsequently defaulted
                
Real estate:    
    
    
    
Residential 1-4 family — $—
 1 $222
 — $—
 — $—
Commercial real estate — —
 — —
 — —
 — —
Home equity line of credit — —
 — —
 1 100
 2 181
Residential land — —
 — —
 — —
 — —
Commercial construction — —
 — —
 — —
 — —
Residential construction — —
 — —
 — —
 — —
Commercial — —
 — —
 1 291
 1 291
Consumer — —
 — —
 — —
 — —
 — $—
 1 $222
 2 $391
 3 $472
 Three months ended September 30, 2016 Nine months ended September 30, 2016 Three months ended June 30, 2017 Six months ended June 30, 2017
(dollars in thousands) Number of contracts Recorded investment Number of contracts Recorded investment Number of contracts Recorded investment Number of contracts Recorded investment
Troubled debt restructurings that
subsequently defaulted		                
Real estate:    
    
    
    
Residential 1-4 family 1 $239
 1 $239
 1 $222
 2 $523
Commercial real estate — —
 — —
 — —
 — —
Home equity line of credit — —
 — —
 — —
 — —
Residential land — —
 — —
 — —
 — —
Commercial construction — —
 — —
 — —
 — —
Residential construction — —
 — —
 — —
 — —
Commercial — —
 1 25
 — —
 — —
Consumer — —
 — —
 — —
 — —
 1 $239
 2 $264
 1 $222
 2 $523
If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled nil$0.01 million and $2.6 millionnil at SeptemberJune 30, 20172018 and December 31, 2016, respectively.2017.
The Company had $4.9$5.0 million and $3.9$4.3 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.
ASB received proceeds from the sale of residential mortgages of $39.8$44.3 million and $70.0$39.3 million for the three months ended SeptemberJune 30, 2018 and 2017 and 2016 and $119.7$77.4 million and $168.5$79.9 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and recognized gains on such sales of $0.5$0.6 million and $2.4 million for both the three months ended SeptemberJune 30, 2018 and 2017 and 2016 and $1.9$1.2 million and $5.1$1.4 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively.
There were no repurchased mortgage loans for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. The repurchase reserve was $0.1 million as of SeptemberJune 30, 20172018 and 2016.

43

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


2017.
Mortgage servicing fees, a component of other income, net, were $0.8 million and $0.7 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $2.3 million and $2.1$1.5 million for both the ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively.2017.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Changes in the carrying value of mortgage servicing rights were as follows:
(in thousands) 
Gross
carrying amount1
 
Accumulated amortization1
 Valuation allowance Net
carrying amount
June 30, 2018 $18,238
 $(9,729) $—
 $8,509
December 31, 2017 17,511
 (8,872) —
 8,639
(in thousands) 
Gross
carrying amount1
 
Accumulated amortization1
 Valuation allowance Net
carrying amount
September 30, 2017 $18,463
 $(9,393) $—
 $9,070
December 31, 2016 17,271
 (7,898) —
 9,373
1 Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Mortgage servicing rights                
Beginning balance $9,181
 $9,016
 $9,373
 $8,884
 $8,541
 $9,294
 $8,639
 $9,373
Amount capitalized 394
 824
 1,192
 1,944
 392
 362
 727
 798
Amortization (505) (649) (1,495) (1,637) (424) (475) (857) (990)
Other-than-temporary impairment —
 —
 —
 —
 —
 —
 —
 —
Carrying amount before valuation allowance 9,070
 9,191
 9,070
 9,191
 8,509
 9,181
 8,509
 9,181
Valuation allowance for mortgage servicing rights                
Beginning balance —
 —
 —
 —
 —
 —
 —
 —
Provision (recovery) —
 —
 —
 —
 —
 —
 —
 —
Other-than-temporary impairment —
 —
 —
 —
 —
 —
 —
 —
Ending balance —
 —
 —
 —
 —
 —
 —
 —
Net carrying value of mortgage servicing rights $9,070
 $9,191
 $9,070
 $9,191
 $8,509
 $9,181
 $8,509
 $9,181
ASB capitalizes mortgage servicing rights (MSRs) acquired through either the purchase or upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the mortgage servicing rights to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30 year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization of the mortgage servicing rights. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.
ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.

44

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Key assumptions used in estimating the fair value of ASB’s mortgage servicing rights used in the impairment analysis were as follows:
(dollars in thousands) September 30, 2017
 December 31, 2016
 June 30, 2018
 December 31, 2017
Unpaid principal balance $1,212,730
 $1,188,380
 $1,192,901
 $1,195,454
Weighted average note rate 3.94% 3.96% 3.96% 3.94%
Weighted average discount rate 10.0% 9.4% 10.0% 10.0%
Weighted average prepayment speed 9.2% 8.5% 6.8% 9.0%

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions was as follows:
(dollars in thousands) September 30, 2017
 December 31, 2016
 June 30, 2018
 December 31, 2017
Prepayment rate:        
25 basis points adverse rate change $(878) $(567) $(344) $(869)
50 basis points adverse rate change (1,847) (1,154) (797) (1,828)
Discount rate:        
25 basis points adverse rate change (111) (128) (135) (111)
50 basis points adverse rate change (220) (254) (268) (220)

The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.
Other borrowings.  Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the condensed consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for a conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:
(in millions) 
Gross amount of
recognized liabilities
 
Gross amount offset in
the Balance Sheet
 
Net amount of liabilities presented
in the Balance Sheet
 
Gross amount of
recognized liabilities
 
Gross amount offset in
the Balance Sheet
 
Net amount of liabilities presented
in the Balance Sheet
Repurchase agreements        
  
  
September 30, 2017 $104 $— $104
December 31, 2016 93 — 93
June 30, 2018 $77
 $—
 $77
December 31, 2017 141
 —
 141
  Gross amount not offset in the Balance Sheet
(in millions) 
 Net amount of liabilities presented
in the Balance Sheet
 
Financial
instruments
 
Cash
collateral
pledged
September 30, 2017  
  
  
Financial institution $—
 $—
 $—
Government entities —
 —
 —
Commercial account holders 104
 165
 —
Total $104
 $165
 $—
December 31, 2016  
  
  
Financial institution $—
 $—
 $—
Government entities 14
 15
 —
Commercial account holders 79
 101
 —
Total $93
 $116
 $—

45

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


  Gross amount not offset in the Balance Sheet
(in millions) 
 Net amount of liabilities presented
in the Balance Sheet
 
Financial
instruments
 
Cash
collateral
pledged
June 30, 2018  
  
  
Commercial account holders $77
 $193
 $—
Total $77
 $193
 $—
December 31, 2017  
  
  
Commercial account holders $141
 $165
 $—
Total $141
 $165
 $—
The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
 September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
(in thousands) Notional amount Fair value Notional amount Fair value Notional amount Fair value Notional amount Fair value
Interest rate lock commitments $385
 $7
 $25,883
 $421
 $21,954
 $248
 $13,669
 $131
Forward commitments 500
 (2) 30,813
 (177) 24,911
 (62) 14,465
 (24)
ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:
Derivative Financial Instruments Not Designated as Hedging Instruments 1
 September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
(in thousands)  Asset derivatives 
 Liability
derivatives
  Asset derivatives  Liability
derivatives		  Asset derivatives 
 Liability
derivatives
  Asset derivatives  Liability
derivatives
Interest rate lock commitments $7
 $—
 $445
 $24
 $248
 $—
 $133
 $2
Forward commitments —
 2
 8
 185
 2
 64
 4
 28
 $7
 $2
 $453
 $209
 $250
 $64
 $137
 $30
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.
The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB’s statements of income:
Derivative Financial Instruments Not Designated as Hedging Instruments Location of net gains (losses) recognized in the Statement of Income Three months ended September 30 Nine months ended September 30 Location of net gains (losses) recognized in the Statement of Income Three months ended June 30 Six months ended June 30
(in thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Interest rate lock commitments Mortgage banking income $(119) $48
 $(414) $459
 Mortgage banking income $(7) $(191) $117
 $(295)
Forward commitments Mortgage banking income (90) 103
 175
 (134) Mortgage banking income (2) 192
 (38) 265
 $(209) $151
 $(239) $325
 $(9) $1
 $79
 $(30)
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $18.6$20.6 million and $14.0$15.8 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. These unfunded commitments

46

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of SeptemberJune 30, 2017,2018, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
Contingencies.  ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Note 5 · Credit agreements and long-term debt
Credit agreements. HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Facilities), effective July 3, 2017, to amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility extended the term of the facility to June 30, 2022. TheIn March 2018, the PUC approved Hawaiian Electric’s request to extend the term of the $200 million Hawaiian Electric Facility has an initial term that expires on June 29, 2018, but its term will extend to June 30, 2022 upon approval by the PUC during the initial term, which approval is currently being requested.2022. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, no amounts were outstanding under the Facilities or previously existing facilities.Facilities.
The Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be drawn on to meet each company’s respective working capital needs and general corporate purposes.
Changes in long-term debt. On June 29, 2017, the Department of Budget and Finance of the State of Hawaii (Department) for the benefit ofMay 30, 2018, the Utilities issued, at par:through a private placement pursuant to separate Note Purchase Agreements (the Note Purchase Agreements), the following unsecured notes bearing taxable interest (the Notes):
Refunding Series 2017A Special Purpose Revenue BondsRefunding Series 2017B Special Purpose Revenue BondsSeries 2018ASeries 2018BSeries 2018C
Aggregate principal amount$125 million$140 million$67.5 million$17.5 million$15 million
Fixed coupon interest rate3.10%4.00%4.38%4.53%4.72%
Maturity dateMay 1, 2026March 1, 2037May 30, 2028March 30, 2033May 30, 2048
Department loaned the proceeds to: 
Principal amount by company: 
Hawaiian Electric$62 million$100 million$52 million$12.5 million$10.5 million
Hawaii Electric Light$8 million$20 million$9 million$3 million
Maui Electric$55 million$20 million$6.5 million$2 million$1.5 million

Proceeds from the sale were applied to redeem at par bonds previously issued by the Department for the benefit of the Utilities:
 Refunding Series 2007B Special Purpose Revenue BondsSeries 2007A Special Purpose Revenue Bonds
Aggregate principal amount$125 million$140 million
Fixed coupon interest rate4.60%4.65%
Maturity dateMay 1, 2026March 1, 2037

Subsequent event - changes in debt.    
October 2017 loan.  On October 6, 2017, HEI entered into a loan agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd., which agreement includesNotes include substantially the same financial covenantcovenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the loan agreement with The BankNote Purchase Agreements entered into by Hawaii Electric Light and Maui Electric. All the proceeds of Tokyo-Mitsubishi UFJ, Ltd. and U.S. Bank, National Association that matured on the same date. On October 6, 2017, HEI drew a $125 million Eurodollar loan for a term of 364 days at resetting interest rates.  The initial Eurodollar Borrowing was for a one month interest period at an annualized interest rate of 1.99%. The proceeds from this loanNotes were used by Hawaiian Electric, Hawaii Electric Light and Maui Electric to pay offfinance their capital expenditures and/or to reimburse funds used for the $125payment of capital expenditures. The Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount,” as defined in the Note Purchase Agreements.
In June 2018, Mauo, LLC, an indirect subsidiary of Pacific Current, LLC, entered into an unsecured $50.5 million maturing loan.construction loan facility in connection with the construction of the solar-plus-storage PPA project. The loan bears interest at LIBOR plus 1.375% and matures in March 2021. As of June 30, 2018, no amounts were outstanding under the facility. The loan is guaranteed by HEI.
Note 6 · Shareholders’ equity
Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other comprehensive income/(loss) (AOCI) were as follows:

47
 HEI Consolidated Hawaiian Electric Consolidated
 (in thousands) Net unrealized gains (losses) on securities  Unrealized gains (losses) on derivatives Retirement benefit plans AOCI Unrealized gains (losses) on derivatives Retirement benefit plans AOCI
Balance, December 31, 2017$(14,951) $—
 $(26,990) $(41,941) $—
 $(1,219) $(1,219)
Current period other comprehensive income (loss)(17,645) —
 1,047
 (16,598) —
 57
 57
Balance, June 30, 2018$(32,596) $—
 $(25,943) $(58,539) $—
 $(1,162) $(1,162)
Balance, December 31, 2016$(7,931) $(454) $(24,744) $(33,129) $(454) $132
 $(322)
Current period other comprehensive income2,244
 454
 657
 3,355
 454
 45
 499
Balance, June 30, 2017$(5,687) $—
 $(24,087) $(29,774) $—
 $177
 $177

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


 HEI Consolidated Hawaiian Electric Consolidated
 (in thousands) Net unrealized gains (losses) on securities  Unrealized gains (losses) on derivatives Retirement benefit plans AOCI Unrealized gains (losses) on derivatives Retirement benefit plans AOCI
Balance, December 31, 2016$(7,931) $(454) $(24,744) $(33,129) $(454) $132
 $(322)
Current period other comprehensive income2,452
 454
 1,003
 3,909
 454
 67
 521
Balance, September 30, 2017$(5,479) $—
 $(23,741) $(29,220) $—
 $199
 $199
Balance, December 31, 2015$(1,872) $(54) $(24,336) $(26,262) $—
 $925
 $925
Current period other comprehensive income7,837
 459
 943
 9,239
 405
 7
 412
Balance, September 30, 2016$5,965
 $405
 $(23,393) $(17,023) $405
 $932
 $1,337
Reclassifications out of AOCI were as follows:
 Amount reclassified from AOCI   Amount reclassified from AOCI  
 Three months ended September 30 Nine months ended September 30 Affected line item in the Three months ended June 30 Six months ended June 30 Affected line item in the
(in thousands) 2017 2016 2017 2016  Statements of Income / Balance Sheets 2018 2017 2018 2017  Statements of Income / Balance Sheets
HEI consolidated                  
Net realized gains on securities included in net income $—
 $—
 $—
 $(360) Revenues-bank (net gains on sales of securities)
Derivatives qualifying as cash flow hedges:  
  
  
  
    
  
  
  
  
Window forward contracts —
 (173) 454
 (173) Property, plant and equipment-electric utilities $—
 $—
 $—
 $454
 Property, plant and equipment-electric utilities
Interest rate contracts (settled in 2011) —
 —
 —
 54
 Interest expense
Retirement benefit plans:  
  
  
  
    
  
  
  
  
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost 3,942
 3,641
 11,793
 10,877
 See Note 7 for additional details 5,350
 3,930
 10,496
 7,851
 See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets (3,596) (3,311) (10,790) (9,934) See Note 7 for additional details (4,827) (3,581) (9,449) (7,194) See Note 8 for additional details
Total reclassifications $346
 $157
 $1,457
 $464
   $523
 $349
 $1,047
 $1,111
  
Hawaiian Electric consolidated                  
Derivatives qualifying as cash flow hedges:                  
Window forward contracts $—
 $(173) $454
 $(173) Construction in progress $—
 $—
 $—
 $454
 Property, plant and equipment
Retirement benefit plans:    
    
      
    
  
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost 3,618
 3,314
 10,857
 9,941
 See Note 7 for additional details 4,853
 3,621
 9,506
 7,239
 See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets (3,596) (3,311) (10,790) (9,934) See Note 7 for additional details (4,827) (3,581) (9,449) (7,194) See Note 8 for additional details
Total reclassifications $22
 $(170) $521
 $(166)   $26
 $40
 $57
 $499
  
Note 7 · Revenues
Adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” In the first quarter of 2018, the Company and Hawaiian Electric adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with accounting standards in effect for those periods. The adoption of Topic 606 had no significant impact on the timing or pattern of revenue recognition for the Company or Hawaiian Electric. No practical expedients were used by the Company or Hawaiian Electric in the adoption of ASU No. 2014-09.
Revenue from contracts with customers. The revenues subject to Topic 606 include the Utilities’ electric energy sales revenue and the Utilities’ and ASB’s transaction fees, as further described below.
Electric Utilities.
Electric energy sales and fees under tariff.Electric energy sales represent revenues from the generation and transmission of electricity to customers and utility fees include transaction-based fees associated with the delivery of electricity provided by the Utilities under tariffs approved by the PUC.
Electric energy sales under tariff- Transaction pricing for electricity is determined and approved by the PUC for each rate class and includes revenues from the base electric charges, which are composed of (1) the customer, demand, energy, and minimum charges, and (2) the power factor, service voltage, and other adjustments as provided in each rate and rate rider schedule. The Utilities satisfy performance obligations over time, i.e., the Utilities generate and transfer control of the electricity over time as the customer simultaneously receives and consumes the benefits provided by the Utilities' performance. Payments from customers are generally due within 30 days from the end of the billing period.
Utility fees - Pricing for transaction fees associated with electric service are set and approved by the PUC. Adjustments to the fee schedules are either requested by the Utilities during ratemaking years or during off cycle periods as needed. Such transaction fees include connection fees, late payment fees and other one-time transaction fees. These transaction-

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)



based fees are recognized at the point in time when the transaction has occurred and the performance obligation satisfied (e.g., connection fees are recognized when an electric connection is completed).
Bank.
48Bankfees. Bank fees are primarily transaction-based and are recognized when the transaction has occurred and the performance obligation satisfied. From time to time, customers will request a fee waiver and ASB may grant reversals of fees. Revenues are not recorded for the estimated amount of fee reversals for each period. Under the new standard, certain fees paid to third parties that were previously recognized as a component of noninterest expense are now netted with fee income. The change in presentation will have no effect on the reported amount of operating income.
Fees from other financial services - These fees primarily include debit card interchange income and fees, automated teller machine fees, credit card interchange income and fees, check ordering fees, wire fees, safe deposit rental fees, corporate/business fees, merchant income, online banking fees and international banking fees. Amounts paid to third parties for payment network expenses are included in this financial statement caption in ASB’s Statements of Income Data (in Revenues—Bank financial statement caption of HEI’s Consolidated Statements of Income). Previously, these expenses were recorded in the other expense financial statement caption of ASB’s Statements of Income Data (in Expenses—Bank financial statement caption of HEI’s Consolidated Statements of Income).
Fee income on deposit liabilities - These fees primarily include “not sufficient funds” fees, monthly deposit account service charge fees, commercial account analysis fees and other deposit fees.
Fee income on other financial products - These fees primarily include commission income from the sales of annuity, mutual fund, and life insurance products. In 2017, ASB began offering a fee-based, managed account product in which income is based on a percentage of assets under management. ASB satisfies its performance obligations under the managed account arrangement over time, and consequently, fees for assets under management are recognized over time as the customer simultaneously receives and consumes the benefit of asset management services. Fees recognized to date from the managed account product were minimal.
Revenues from other sources. Revenues from other sources not subject to Topic 606 are accounted for as follows:
Electric Utilities.
Regulatory revenues. Regulatory revenues primarily consist of revenues from decoupling mechanism, cost recovery surcharges and the Tax Act adjustments.
Decoupling mechanism - Under the decoupling mechanism, the Utilities are allowed to recover or refund the difference between actual revenue and the target revenue as determined by the PUC. These adjustments will be reflected in tariffs in future periods.
Cost recovery surcharges- For the timely recovery of additional costs incurred, and reconciliation of costs and expenses included in tariffed rates, the Utilities recognize revenues under surcharge mechanisms approved by the PUC. These will be reflected in tariffs in future periods (e.g., ECAC and PPAC).
Tax Act adjustments - These represent adjustments to revenues for the amounts included in tariffed revenues that will be returned to customers as a result of the Tax Act.
Since revenue adjustments discussed above resulted from either agreements with the PUC or change in tax law, rather than contracts with customers, they are not subject to the scope of Topic 606. See Notes 1, 3 and 10 to the audited consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2017.
Bank.
Interest and dividend income. Interest and fees on loans are recognized in accordance with ASC Topic 310, Receivables, including the related allowance for loan losses. Interest and dividends on investment securities are recognized in accordance with ASC Topic 320, Investments-Debt and Equity Securities. See Notes 1 and 4 to the audited consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2017.
Other bank noninterest income. Other bank noninterest income primarily consists of mortgage banking income and bank-owned life insurance income.
Mortgage banking income - Mortgage banking income consists primarily of realized and unrealized gains on sale of loans accounted for pursuant to ASC Topic 860, Transfers and Servicing. Interest rate lock commitments and forward loan sales are considered derivatives and are accounted pursuant to ASC Topic 815, Derivatives and Hedging.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


7Bank-Owned Life Insurance (BOLI) - The recognition of BOLI cash surrender value does not represent a contract with a customer and is accounted for in accordance with Emerging Issues Task Force Issue 06-05, Accounting for Purchases of Life Insurance-Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.
Revenue disaggregation. The following tables disaggregates revenues by major source, timing of revenue recognition, and segment:
  Three months ended June 30, 2018 Six months ended June 30, 2018
  Electric  utility Bank Other Total Electric  utility Bank Other Total
(in thousands)   
  
  
  
  
  
  
  
Revenues from contracts with customers                
Electric energy sales - residential $185,217
 $—
 $—
 $185,217
 $363,806
 $—
 $—
 $363,806
Electric energy sales - commercial 206,169
 —
 —
 206,169
 395,167
 —
 —
 395,167
Electric energy sales - large light and power 214,676
 —
 —
 214,676
 406,997
 —
 —
 406,997
Electric energy sales - other 3,217
 —
 —
 3,217
 6,480
 —
 —
 6,480
Utility fees 751
 —
 —
 751
 1,548
 —
 —
 1,548
Bank fees —
 11,557
 —
 11,557
 —
 23,054
 —
 23,054
Total revenues from contracts with customers 610,030
 11,557
 —
 621,587
 1,173,998
 23,054
 —
 1,197,052
Revenues from other sources                
Regulatory revenue (4,643) —
 —
 (4,643) 107
 —
 —
 107
Bank interest and dividend income —
 63,261
 —
 63,261
 —
 125,263
 —
 125,263
Other bank noninterest income —
 2,286
 —
 2,286
 —
 4,206
 —
 4,206
Other 2,739
 —
 47
 2,786
 4,448
 —
 75
 4,523
Total revenues from other sources (1,904) 65,547
 47
 63,690
 4,555
 129,469
 75
 134,099
Total revenues $608,126
 $77,104
 $47
 $685,277
 $1,178,553
 $152,523
 $75
 $1,331,151
Timing of revenue recognition                
Services/goods transferred at a point in time $751
 $11,557
 $—
 $12,308
 $1,548
 $23,054
 $—
 $24,602
Services/goods transferred over time 609,279
 —
 —
 609,279
 1,172,450
 —
 —
 1,172,450
Total revenues from contracts with customers $610,030
 $11,557
 $—
 $621,587
 $1,173,998
 $23,054
 $—
 $1,197,052
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at the beginning or at the end of the six months ended June 30, 2018. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.
As of June 30, 2018, the Company had no material remaining performance obligations due to the nature of the Company’s contracts with its customers. For the Utilities, performance obligations are fulfilled as electricity is delivered to customers. For the bank, fees are recognized when a transaction is completed.
Note 8 · Retirement benefits
Defined benefit pension and other postretirement benefit plans information.  For the first ninesix months of 20172018, the Company contributed $5032 million ($4932 million by the Utilities) to its pension and other postretirement benefit plans, compared to $4933 million ($4833 million by the Utilities) in the first ninesix months of 2016.2017. The Company’s current estimate of contributions to its pension and other postretirement benefit plans in 20172018 is $67$42 million ($6641 million by the Utilities, $1 million by HEI and nil by ASB), compared to $6567 million ($6466 million by the Utilities, $1 million by HEI and nil by ASB) in 20162017. In addition, the Company expects to pay directly $2 million ($1 million by the Utilities) of benefits in 20172018, comparablecompared to benefits$1 million ($0.5 million by the Utilities) paid directly in 20162017.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


The components of NPPC and NPBC for HEI consolidated and Hawaiian Electric consolidated were as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
 Pension benefits Other benefits Pension benefits Other benefits Pension benefits Other benefits Pension benefits Other benefits
(in thousands) 2017 2016 2017 2016 2017 2016 2017 2016 2018 2017 2018 2017 2018 2017 2018 2017
HEI consolidated                                
Service cost $16,271
 $15,126
 $843
 $831
 $48,635
 $45,430
 $2,530
 $2,499
 $17,428
 $15,870
 $692
 $847
 $34,541
 $32,364
 $1,361
 $1,687
Interest cost 20,304
 20,396
 2,363
 2,417
 60,881
 61,154
 7,089
 7,254
 19,459
 20,361
 2,030
 2,315
 38,693
 40,577
 3,961
 4,726
Expected return on plan assets (25,689) (24,640) (3,078) (3,064) (77,056) (73,920) (9,248) (9,207) (27,224) (25,646) (3,267) (3,104) (54,478) (51,367) (6,459) (6,170)
Amortization of net prior service gain (14) (15) (448) (449) (41) (43) (1,345) (1,345) (11) (13) (451) (448) (21) (27) (903) (897)
Amortization of net actuarial loss 6,638
 6,228
 283
 200
 19,858
 18,605
 848
 603
 7,634
 6,707
 48
 199
 15,029
 13,220
 46
 565
Net periodic pension/benefit cost 17,510
 17,095
 (37) (65) 52,277
 51,226
 (126) (196)
Net periodic pension/benefit cost (return) 17,286
 17,279
 (948) (191) 33,764
 34,767
 (1,994) (89)
Impact of PUC D&Os (4,534) (4,653) 346
 336
 (14,557) (13,464) 1,019
 1,008
 7,179
 (4,867) 1,024
 527
 9,836
 (10,023) 2,095
 673
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) $12,976
 $12,442
 $309
 $271
 $37,720
 $37,762
 $893
 $812
 $24,465
 $12,412
 $76
 $336
 $43,600
 $24,744
 $101
 $584
Hawaiian Electric consolidated                                
Service cost $15,764
 $14,699
 $839
 $821
 $47,294
 $44,097
 $2,515
 $2,463
 $17,007
 $15,436
 $688
 $841
 $33,680
 $31,530
 $1,352
 $1,676
Interest cost 18,659
 18,702
 2,279
 2,334
 55,974
 56,106
 6,837
 7,003
 17,937
 18,726
 1,955
 2,231
 35,647
 37,315
 3,814
 4,558
Expected return on plan assets (23,973) (22,908) (3,037) (3,023) (71,919) (68,725) (9,110) (9,072) (25,577) (23,935) (3,216) (3,056) (51,184) (47,946) (6,356) (6,073)
Amortization of net prior service loss (gain) 2
 3
 (451) (451) 6
 10
 (1,353) (1,353) 2
 2
 (451) (451) 4
 4
 (902) (902)
Amortization of net actuarial loss 6,098
 5,674
 275
 198
 18,294
 17,020
 826
 595
 6,941
 6,190
 49
 192
 13,651
 12,196
 49
 551
Net periodic pension/benefit cost 16,550
 16,170
 (95) (121) 49,649
 48,508
 (285) (364)
Net periodic pension/benefit cost (return) 16,310
 16,419
 (975) (243) 31,798
 33,099
 (2,043) (190)
Impact of PUC D&Os (4,534) (4,653) 346
 336
 (14,557) (13,464) 1,019
 1,008
 7,179
 (4,867) 1,024
 527
 9,836
 (10,023) 2,095
 673
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) $12,016
 $11,517
 $251
 $215
 $35,092
 $35,044
 $734
 $644
 $23,489
 $11,552
 $49
 $284
 $41,634
 $23,076
 $52
 $483
HEI consolidated recorded retirement benefits expense of $2527 million ($2225 million by the Utilities) and $2617 million ($2315 million by the Utilities) in the first ninesix months of 20172018 and 2016,2017, respectively, and charged the remaining net periodic benefit cost primarily to electric utility plant.
The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, these retirement benefit costs that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will be amortized over 5 years beginning with the issuance of the PUC’s D&O in the respective utility’s next rate case.
Defined contribution plans information.  For the first ninesix months of 20172018 and 2016,2017, the Company’s expenses for its defined contribution pension plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $5.13.2 million and $4.13.3 million, respectively, and cash contributions were $5.04.8 million and $4.64.0 million, respectively. For the first ninesix months of 20172018 and 2016,2017, the Utilities’ expenses for its defined contribution pension plan under the HEIRSP were $1.4$1.1 million and $1.2$1.0 million, respectively, and cash contributions were $1.4$1.1 million and $1.2$1.0 million, respectively.

49

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


8Note 9 · Share-based compensation
Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares waswere added to the shares available for issuance under these programs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


As of SeptemberJune 30, 2017,2018, approximately 3.33.2 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an estimated 0.40.6 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved at maximum levels).
Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. As of SeptemberJune 30, 2017,2018, there were 85,42846,607 shares remaining available for future issuance under the 2011 Director Plan.
Share-based compensation expense and the related income tax benefit were as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
(in millions) 2017 2016 2017 2016 2018 2017 2018 2017
HEI consolidated                
Share-based compensation expense 1
 $1.1
 $1.6
 $4.4
 $3.6
 $2.8
 $2.2
 $4.4
 $3.3
Income tax benefit 0.4
 0.5
 1.5
 1.2
 0.5
 0.8
 0.7
 1.2
Hawaiian Electric consolidated                
Share-based compensation expense 1
 0.4
 0.5
 1.6
 1.0
 0.9
 0.7
 1.5
 1.1
Income tax benefit 0.2
 0.2
 0.6
 0.4
 0.2
 0.3
 0.3
 0.4
1 
For the three months and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company has not capitalized any share-based compensation.

Stock awards. No nonemployee director stock grants were awarded from January 1 to September 29, 2016. Nonemployee director awards totaling $0.2 million were paid in cash in July 2016. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
($ in millions) 2017 2016 2017 2016
(dollars in millions) 2018 2017 2018 2017
Shares granted —
 19,846
 35,770
 19,846
 37,747
 35,000
 38,821
 35,770
Fair value $—
 $0.6
 $1.2
 $0.6
 $1.3
 $1.1
 $1.3
 $1.2
Income tax benefit —
 0.2
 0.5
 0.2
 0.3
 0.4
 0.3
 0.5
The number of shares issued to each nonemployee directorsdirector of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI Common Stock on the grant date.
Restricted stock units.  Information about HEI’s grants of restricted stock units was as follows:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2017 2016 2017 20162018 2017 2018 2017
Shares (1) Shares (1) Shares (1) Shares (1)Shares (1) Shares (1) Shares (1) Shares (1)
Outstanding, beginning of period206,483
 $31.50
 225,752
 $29.59
 220,683
 $29.57
 210,634
 $28.82
208,088
 $32.97
 236,036
 $31.42
 197,047
 $31.53
 220,683
 $29.57
Granted—

—
 766
 30.65
 97,873

33.47
 95,048

29.91
3,159

33.78
 896
 33.06
 92,064

34.09
 97,873

33.47
Vested(687) 24.48
 (4,419) 27.26
 (89,681) 28.84
 (83,583) 27.88
(448) 31.94
 (7,370) 29.17
 (75,683) 30.56
 (88,994) 28.88
Forfeited—
 —
 (2,352) 29.69
 (23,079) 31.50
 (2,352) 29.69
(9,943) 32.05
 (23,079) 31.50
 (12,572) 32.27
 (23,079) 31.50
Outstanding, end of period205,796
 $31.53
 219,747
 $29.64
 205,796
 $31.53
 219,747
 $29.64
200,856
 $33.03
 206,483
 $31.50
 200,856
 $33.03
 206,483
 $31.50
Total weighted-average grant-date fair value of shares granted ($ millions)$—
   $—
   $3.3
   $2.8
  
Total weighted-average grant-date fair value of shares granted (in millions)$0.1
   $—
   $3.1
   $3.3
  
(1)Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.

50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


For the first ninesix months of 20172018 and 2016,2017, total restricted stock units that vested and related dividends that vested had a fair value of $3.42.7 million and $2.73.3 million, respectively, and the related tax benefits were $1.10.4 million and $0.91.2 million, respectively.
As of SeptemberJune 30, 2017,2018, there was $4.8$5.4 million of total unrecognized compensation cost related to the nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.62.8 years.
Long-term incentive plan payable in stock.  The 2017-2019 and 2018-2020 long-term incentive planplans (LTIP) providesprovide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals, including a market condition goal. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


made, subject to the achievement of specified performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target shares depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR) compared to the Edison Electric Institute Index over the three-year period. The other performance condition goals relate to EPS growth, return on average common equity (ROACE) and ASB’s efficiency ratio. The 2015-2017 and 2016-2018 LTIPs provideLTIP provides for performance awards payable in cash, and thus areis not included in the tables below.
LTIP linked to TSR.  Information about HEI’s LTIP grants linked to TSR was as follows:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2017 2016 2017 20162018 2017 2018 2017
Shares (1) Shares (1) Shares (1) Shares (1)Shares (1) Shares (1) Shares (1) Shares (1)
Outstanding, beginning of period33,770
 $39.51
 83,947
 $22.95
 83,106
 $22.95
 162,500
 $27.66
66,791
 $38.84
 36,971
 $39.51
 32,904
 $39.51
 83,106
 $22.95
Granted (target level)—
 —
 —
 —
 37,204
 39.51
 —

—
Granted1,315
 38.20
 233
 39.51
 36,941
 38.21
 37,204

39.51
Vested (issued or unissued and cancelled)—
 —
 —
 —
 (83,106) 22.95
 (78,553) 32.69
—
 —
 —
 —
 —
 —
 (83,106) 22.95
Forfeited—
 —
 (175) 22.95
 (3,434) 39.51
 (175) 22.95
(1,929) 38.85
 (3,434) 39.51
 (3,668) 38.84
 (3,434) 39.51
Outstanding, end of period33,770
 $39.51
 83,772
 $22.95
 33,770
 $39.51
 83,772
 $22.95
66,177
 $38.82
 33,770
 $39.51
 66,177
 $38.82
 33,770
 $39.51
Total weighted-average grant-date fair value of shares granted ($ millions)$—
   $—
   $1.5
   $—
  
Total weighted-average grant-date fair value of shares granted (in millions)$0.1
   $—
   $1.4
   $1.5
  
(1)Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.
The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same three-year historical period.
The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TSR and the resulting fair value of LTIP awards granted:
2017
Risk-free interest rate1.46%
Expected life in years3
Expected volatility20.1%
Range of expected volatility for Peer Group15.4% to 26.0%
Grant date fair value (per share)$39.51
  2018
 2017
Risk-free interest rate 2.29% 1.46%
Expected life in years 3
 3
Expected volatility 17.0% 20.1%
Range of expected volatility for Peer Group 15.1% to 26.2%
 15.4% to 26.0%
Grant date fair value (per share) $38.20 $39.51
For the ninesix months ended SeptemberJune 30, 2017, total vested LTIP awards linked to TSR and related dividends had a fair value of $1.9 million and the related tax benefits were $0.7 million. For the nine months ended September 30, 2016, all vested shares in the table above were unissued and cancelled (i.e., lapsed) because the TSR goal was not met.
As of SeptemberJune 30, 2017,2018, there was $1.0$1.7 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of 2.32.0 years.

51

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


LTIP awards linked to other performance conditions.  Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:
Three months ended September 30 Nine months ended September 30Three months ended June 30 Six months ended June 30
2017 2016 2017 20162018 2017 2018 2017
Shares (1) Shares (1) Shares (1) Shares (1)Shares (1) Shares (1) Shares (1) Shares (1)
Outstanding, beginning of period135,078
 $33.47
 113,550
 $25.18
 109,816
 $25.18
 222,647
 $26.02
267,167
 $33.80
 147,888
 $33.48
 131,616
 $33.47
 109,816
 $25.18
Granted (target level)—
 —
 —

—
 148,818
 33.47
 —

—
Vested (issued)—
 —
 —
 —
 (109,816) 25.18
 (109,097) 26.89
Granted5,257
 33.52
 930

32.58
 147,766
 34.08
 148,818

33.47
Vested—
 —
 —
 —
 —
 —
 (109,816) 25.18
Forfeited—
 —
 (699) 25.19
 (13,740) 33.48
 (699) 25.19
(7,717) 33.80
 (13,740) 33.48
 (14,675) 33.80
 (13,740) 33.48
Outstanding, end of period135,078
 $33.47
 112,851
 $25.18
 135,078
 $33.47
 112,851
 $25.18
264,707
 $33.79
 135,078
 $33.47
 264,707
 $33.79
 135,078
 $33.47
Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions)$—
   $—
   $5.0
   $—
  
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions)$0.2
   $—
   $5.0
   $5.0
  
(1)Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For the ninesix months ended SeptemberJune 30, 2017, and 2016, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $4.2 million and $3.6 million and the related tax benefits were $1.6 million and $1.4 million, respectively.million.
As of SeptemberJune 30, 2017,2018, there was $3.4$6.0 million of total unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TSR. The cost is expected to be recognized over a weighted-average period of 2.32.0 years.
9Note 10 · Income taxes
        The Company’s ETRs (combined federal and stateStaff Accounting Bulletin No. 118 (SAB No. 118). On December 22, 2017, the SEC staff issued SAB No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax rates) foreffects of the third quarters ofTax Act. In 2017, and 2016 were 36% and 29%, respectively, and for the first nine months of 2017 and 2016 were 35% and 32%, respectively. The ETR was higher for the three months and nine months ended September 30, 2017 compared to the same periods in 2016 dueCompany calculated its best estimate, primarily to 2016 tax benefits recognized on previously nondeductible merger- and spin-off-related expenses and higher tax benefits recognized for the Domestic Production Activities Deduction (DPAD) in 2016 related to the Utilities’ generation activities whenbonus depreciation rule changes, in accordance with its understanding of the law and available guidance. As of June 30, 2018, there were no adjustments made to provisional tax impacts previously recognized in the Company’s and Utilities were in a consolidated net operating loss position.
        Hawaiian Electric’s ETRs for the third quarters of 2017 and 2016 were 36% and 37%, respectively, and for the first nine months of 2017 and 2016 were 36% and 37%, respectively.financial statements. The lower ETR was due in part to the tax benefits recognized for the DPADprovisional impacts will be updated as additional information is received as a result of moving out of a federal net operating loss position in 2017.
Recent tax developments. The extension of bonus depreciation under the “Protecting Americans from Tax Hikes (PATH) Act of 2015” continues to be the most significant recent tax change. The PATH Act provides 50% bonus depreciation through 2017, phases down the percentage to 40% in 2018 and 30% in 2019 and then terminates bonus depreciation thereafter. Tax depreciation is expected to increase by approximately $120 million in 2017 due to bonus depreciation, which has the effect of increasing accumulated deferred tax liabilities. However, the rate of growth of accumulated deferred tax liabilities is decreasing over time as book depreciation “catches up” with the tax depreciation takenchanges in the past.Company and Utilities interpretations and assumptions, the issuance of Internal Revenue Service and Joint Committee on Taxation guidance, and actions the Company and Utilities may take as a result of the Tax Act. The provisional tax impacts will be finalized by the end of 2018.

52

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


10Note 11 · Cash flows
Nine months ended September 30 2017 2016
Six months ended June 30 2018 2017
(in millions)        
Supplemental disclosures of cash flow information  
  
  
  
HEI consolidated        
Interest paid to non-affiliates $62
 $61
 $45
 $46
Income taxes paid (including refundable credits) 32
 19
 36
 21
Income taxes refunded (including refundable credits) —
 45
Hawaiian Electric consolidated        
Interest paid to non-affiliates 45
 43
 32
 36
Income taxes paid (including refundable credits) 9
 —
 35
 8
Income taxes refunded (including refundable credits) —
 20
Supplemental disclosures of noncash activities  
  
  
  
HEI consolidated        
Property, plant and equipment        
Estimated fair value of noncash contributions in aid of construction (investing) 3
 12
 5
 2
Unpaid invoices and accruals for capital expenditures (investing)    
Change during the period 31
 (6)
Balance, end of period 116
 64
Common stock dividends reinvested in HEI common stock (financing)1
 —
 17
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) 42
 38
Loans transferred from held for investment to held for sale (investing) 41
 14
 1
 9
Common stock issued (gross) for director and executive/management compensation (financing)2
 11
 7
Common stock issued (gross) for director and executive/management compensation (financing)1
 4
 11
Obligations to fund low income housing investments (investing) 10
 —
 6
 —
Transfer of retail repurchase agreements to deposit liabilities (financing) 102
 —
Unsettled trades to purchase investment securities (investing) 10
 —
Hawaiian Electric consolidated        
Electric utility property, plant and equipment        
Estimated fair value of noncash contributions in aid of construction (investing) 3
 12
 5
 2
Unpaid invoices and accruals for capital expenditures (investing)    
Change during the period 29
 (7)
Balance, end of period 113
 63
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) 28
 36
1The amounts shown represent common stock dividends reinvested in HEI common stock under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP) in noncash transactions.
2 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
11 ·Fair value measurements
Fair value estimates are estimates of the price that would be received to sell an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their own assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s and the Utilities’ financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:

53

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Level 1:Note 12 · Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.
Level 2:Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans and goodwill.measurements
Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value:
Short-term borrowings—other than bank.  The carrying amount of short-term borrowings approximated fair value because of the short maturity of these instruments.
Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that fall under Level 2 of the ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds, and other observable market factors.
To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker.
The fair value of the mortgage revenue bond is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, securitizations and, therefore, are classified within Level 2 of the valuation hierarchy. Commercial loans are valued at quoted market prices determined in the active market in which the loans are traded.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates and the underlying interest rate of the portfolio. This information is input into the valuation models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These assumptions are derived from internal and third party sources. NotingSince the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.

54

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is determined primarily by using an income, cost or market approach and is normally provided through appraisals. Impaired loans carried at fair value generally receive specific allocations within the allowance for loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Generally, impaired loans are evaluated quarterly for additional impairment and adjusted accordingly.
Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair value of collateral-dependent loans and real estate owned using the sales comparison approach.
Mortgage servicing rights. Mortgage servicing rights (MSRs) are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing rights are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate.
Time depositsDeposit liabilities. Includes only fixed-maturity certificates of deposit beginning in 2018. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Other borrowings. For fixed-rate advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources, including broker market transactions and third party pricing services.
Long-term debt—other than bank.  Fair value of long-term debt of HEI and the Utilities was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar risks, terms, and remaining maturities.
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
Window forward contracts. The estimated fair value of the Utilities’ window forward contracts was obtained from a third-party financial services provider based on the effective exchange rate offered for the foreign currency denominated transaction. Window forward contracts are classified as Level 2 measurements.
The following table presents the carrying or notional amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments. For stock in Federal Home Loan Bank, the carrying amount is a reasonable estimate of fair value because it can only be redeemed at par. For bank-owned life insurance, the carrying amount is the cash surrender value of the insurance policies, which is a reasonable estimate of fair value.For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings and money market deposits, the carrying amount is a reasonable estimate of fair value as these liabilities have no stated maturity.

55

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


    Estimated fair value
  Carrying or notional amount 
Quoted prices in
active markets
for identical assets
 
Significant
 other observable
 inputs
 
Significant
unobservable
inputs
  
(in thousands)  (Level 1) (Level 2) (Level 3) Total
June 30, 2018  
  
  
  
  
Financial assets  
  
  
  
  
HEI consolidated          
Available-for-sale investment securities $1,409,528
 $—
 $1,394,101
 $15,427
 $1,409,528
Held-to-maturity investment securities 62,630
 —
 61,444
 —
 61,444
Stock in Federal Home Loan Bank 10,158
 —
 10,158
 —
 10,158
Loans, net 4,727,189
 —
 5,250
 4,774,079
 4,779,329
Mortgage servicing rights 8,509
 —
 —
 13,423
 13,423
Derivative assets 24,537
 —
 250
 —
 250
Financial liabilities  
  
  
  
  
HEI consolidated          
Deposit liabilities1
 757,265
 —
 745,295
 —
 745,295
Short-term borrowings—other than bank 202,857
 —
 202,857
 —
 202,857
Other bank borrowings 126,930
 —
 126,904
 —
 126,904
Long-term debt, net—other than bank 1,783,009
 —
 1,816,310
 —
 1,816,310
   Derivative liabilities 25,445
 56
 114
 —
 170
Hawaiian Electric consolidated          
Short-term borrowings 91,880
 —
 91,880
 —
 91,880
Long-term debt, net 1,468,457
 —
 1,511,103
 —
 1,511,103
Derivative liabilities-window forward contracts 3,117
 —
 106
 —
 106
December 31, 2017  
  
  
  
  
Financial assets  
  
  
  
  
HEI consolidated          
Available-for-sale investment securities 1,401,198
 —
 1,385,771
 15,427
 1,401,198
Held-to-maturity investment securities 44,515
 —
 44,412
 —
 44,412
Stock in Federal Home Loan Bank 9,706
 —
 9,706
 —
 9,706
Loans, net 4,628,381
 —
 11,254
 4,770,497
 4,781,751
Mortgage servicing rights 8,639
 —
 —
 12,052
 12,052
Derivative assets 17,812
 —
 393
 —
 393
Hawaiian Electric consolidated          
Derivative assets-window forward contracts 3,240
 —
 256
 —
 256
Financial liabilities  
  
  
  
  
HEI consolidated          
Deposit liabilities1
 5,890,597
 —
 5,884,071
 —
 5,884,071
Short-term borrowings—other than bank 117,945
 —
 117,945
 —
 117,945
Other bank borrowings 190,859
 —
 190,829
 —
 190,829
Long-term debt, net—other than bank 1,683,797
 —
 1,813,295
 —
 1,813,295
Derivative liabilities 13,562
 20
 10
 —
 30
Hawaiian Electric consolidated          
Short-term borrowings 4,999
 —
 4,999
 —
 4,999
Long-term debt, net 1,368,479
 —
 1,497,079
 —
 1,497,079
these1  Deposit liabilities as of December 31, 2017 include noninterest-bearing demand, interest-bearing demand, and savings and money market deposits, for which the carrying amount represents a reasonable estimate of fair value, as such liabilities have no stated maturity. The fair value of such financial liabilities are not included as of June 30, 2018 as a result of the Company’s adoption of ASU No. 2016-01.
    Estimated fair value
  Carrying or notional amount 
Quoted prices in
active markets
for identical assets
 
Significant
 other observable
 inputs
 
Significant
unobservable
inputs
  
(in thousands)  (Level 1) (Level 2) (Level 3) Total
September 30, 2017  
  
  
  
  
Financial assets  
  
  
  
  
HEI consolidated          
Available-for-sale investment securities $1,320,110
 $—
 $1,304,683
 $15,427
 $1,320,110
Stock in Federal Home Loan Bank 9,706
 —
 9,706
 —
 9,706
Loans receivable, net 4,638,962
 13,260
 2,468
 4,791,209
 4,806,937
Mortgage servicing rights 9,070
 —
 —
 12,091
 12,091
Bank-owned life insurance 147,391
 —
 147,391
 —
 147,391
Derivative assets 8,399
 —
 591
 —
 591
Hawaiian Electric consolidated          
Derivative assets-window forward contracts 8,014
 —
 584
 —
 584
Financial liabilities  
  
  
  
  
HEI consolidated          
Deposit liabilities 5,752,326
 —
 5,748,858
 —
 5,748,858
Short-term borrowings—other than bank 24,498
 —
 24,498
 —
 24,498
Other bank borrowings 153,552
 —
 153,717
 —
 153,717
Long-term debt, net—other than bank 1,618,446
 —
 1,747,972
 —
 1,747,972
   Derivative liabilities 500
 2
 —
 —
 2
Hawaiian Electric consolidated          
Short-term borrowings 6,000
 —
 6,000
 —
 6,000
Long-term debt, net 1,318,623
 —
 1,441,855
 —
 1,441,855
December 31, 2016  
  
  
  
  
Financial assets  
  
  
  
  
HEI consolidated          
Money market funds $13,085
 $—
 $13,085
 $—
 $13,085
Available-for-sale investment securities 1,105,182
 —
 1,089,755
 15,427
 1,105,182
Stock in Federal Home Loan Bank 11,218
 —
 11,218
 —
 11,218
Loans receivable, net 4,701,977
 —
 13,333
 4,839,493
 4,852,826
Mortgage servicing rights 9,373
 —
 —
 13,216
 13,216
Bank-owned life insurance 143,197
 —
 143,197
 —
 143,197
Derivative assets 23,578
 —
 453
 —
 453
Financial liabilities  
  
  
  
  
HEI consolidated          
Deposit liabilities 5,548,929
 —
 5,546,644
 —
 5,546,644
Other bank borrowings 192,618
 —
 193,991
 —
 193,991
Long-term debt, net—other than bank 1,619,019
 —
 1,704,717
 —
 1,704,717
Derivative liabilities 53,852
 129
 823
 —
 952
Hawaiian Electric consolidated          
Long-term debt, net 1,319,260
 —
 1,399,490
 —
 1,399,490
Derivative liabilities-window forward contracts 20,734
 —
 743
 —
 743

56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Fair value measurements on a recurring basis.  Assets and liabilities measured at fair value on a recurring basis were as follows:
  September 30, 2017 December 31, 2016
  Fair value measurements using Fair value measurements using
(in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Money market funds (“other” segment) $—
 $—
 $—
 $—
 $13,085
 $—
Available-for-sale investment securities (bank segment)  
  
  
  
  
  
Mortgage-related securities-FNMA, FHLMC and GNMA $—
 $1,122,565
 $—
 $—
 $897,474
 $—
U.S. Treasury and federal agency obligations —
 182,118
 —
 —
 192,281
 —
Mortgage revenue bond —
 —
 15,427
 —
 —
 15,427
  $—
 $1,304,683
 $15,427
 $—
 $1,089,755
 $15,427
Derivative assets  
  
  
  
  
  
Interest rate lock commitments (bank segment) 1
 $—
 $7
 $—
 $—
 $445
 $—
Forward commitments (bank segment) 1
 —
 —
 —
 —
 8
 —
Window forward contracts (electric utility segment)2
 —
 584
 —
 —
 —
 —
  $—
 $591
 $—
 $—
 $453
 $—
Derivative liabilities            
Interest rate lock commitments (bank segment) 1
 $—
 $—
 $—
 $—
 $24
 $—
Forward commitments (bank segment) 1
 2
 —
 —
 129
 56
 —
Window forward contracts (electric utility segment)2
 —
 —
 —
 —
 743
 —
  $2
 $—
 $—
 $129
 $823
 $—
  June 30, 2018 December 31, 2017
  Fair value measurements using Fair value measurements using
(in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Available-for-sale investment securities (bank segment)  
  
  
  
  
  
Mortgage-related securities-FNMA, FHLMC and GNMA $—
 $1,177,832
 $—
 $—
 $1,201,473
 $—
U.S. Treasury and federal agency obligations —
 175,933
 —
 —
 184,298
 —
Corporate bonds —
 40,336
 —
 —
 —
 —
Mortgage revenue bond —
 —
 15,427
 —
 —
 15,427
  $—
 $1,394,101
 $15,427
 $—
 $1,385,771
 $15,427
Derivative assets  
  
  
  
  
  
Interest rate lock commitments (bank segment) 1
 $—
 $248
 $—
 $—
 $133
 $—
Forward commitments (bank segment) 1
 —
 2
 —
 —
 4
 —
Window forward contracts (electric utility segment)2
 —
 —
 —
 —
 256
 —
  $—
 $250
 $—
 $—
 $393
 $—
Derivative liabilities            
Interest rate lock commitments (bank segment) 1
 $—
 $—
 $—
 $—
 $2
 $—
Forward commitments (bank segment) 1
 56
 8
 —
 20
 8
 —
Window forward contracts (electric utility segment)2
 —
 106
 —
 —
 —
 —
  $56
 $114
 $—
 $20
 $10
 $—
1  Derivatives are carried at fair value with changes in value reflected in the balance sheet in other assets or other liabilities and included in mortgage banking income.
2 Derivatives are included in noncurrent regulatory assets and/or liabilities in the balance sheets.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the ninesix months ended SeptemberJune 30, 2017.2018.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
 Three months ended September 30 Nine months ended September 30 Three months ended June 30 Six months ended June 30
Mortgage revenue bond 20172016 20172016 20182017 20182017
(in thousands)        
Beginning balance $15,427
$—
 $15,427
$—
 $15,427
$15,427
 $15,427
$15,427
Principal payments received —
—
 —
—
 —
—
 —
—
Purchases —
—
 —
—
 —
—
 —
—
Unrealized gain (loss) included in other comprehensive income —
—
 —
—
 —
—
 —
—
Ending balance $15,427
$—
 $15,427
$—
 $15,427
$15,427
 $15,427
$15,427
ASB holds one mortgage revenue bond issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of SeptemberJune 30, 2017,2018, the weighted average discount rate was 2.826%3.40% which was derived by incorporating a credit spread over the one month LIBOR rate. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

57

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Fair value measurements on a nonrecurring basis.  Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of cost or fair value or from impairment of individual assets. The carrying value of assets measured at fair value on a nonrecurring basis were as follows:
    Fair value measurements
(in thousands)  Balance Level 1 Level 2 Level 3
September 30, 2017        
Loans $2,881
 $—
 $—
 $2,881
Real estate acquired in settlement of loans 93
 —
 —
 93
December 31, 2016        
Loans 2,767
 —
 —
 2,767
Real estate acquired in settlement of loans 1,189
 —
 —
 1,189
    Fair value measurements
(in thousands)  Balance Level 1 Level 2 Level 3
June 30, 2018        
Loans $232
 $—
 $—
 $232
December 31, 2017        
Loans 2,621
 —
 —
 2,621
For ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, there were no adjustments to fair value for ASB’s loans held for sale.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis:
   
Significant unobservable
 input value (1)
   
Significant unobservable
 input value (1)
($ in thousands) Fair value Valuation technique Significant unobservable input Range 
Weighted
Average
 Fair value Valuation technique Significant unobservable input Range 
Weighted
Average
September 30, 2017   
June 30, 2018   
Residential loans $232
 Fair value of collateral Appraised value less 7% selling cost 62-69% 68%
Total loans $232
       
   
December 31, 2017   
Residential loans $731
 Fair value of collateral Appraised value less 7% selling cost 50-91% 69% $613
 Fair value of collateral Appraised value less 7% selling cost 71-92% 84%
Commercial loans 2,150
 Fair value of collateral Appraised value 72-76% 76% 2,008
 Fair value of collateral Appraised value 71-76% 75%
Total loans $2,881
        $2,621
       
Real estate acquired in settlement of loans $93
 Sales price Sales price less 7% selling cost 
 N/A (2)
   
December 31, 2016   
Residential loans $2,468
 Sales price Sales price 95-100% 97%
Residential loans 287
 Fair value of property or collateral Appraised value less 7% selling cost 42-65% 61%
Home equity lines of credit 12
 Fair value of property or collateral Appraised value less 7% selling cost N/A (2)
Total loans $2,767
       
Real estate acquired in settlement of loans $1,189
 Fair value of property or collateral Appraised value less 7% selling cost 100% 100%
(1) Represent percent of outstanding principal balance.
(2) N/A - Not applicable. There is one loan or property in each fair value measurement type.
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements.

58

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)


12 · Termination of proposed merger and other matters
On December 3, 2014, HEI, NextEra Energy, Inc. (NEE) and two subsidiaries of NEE entered into an Agreement and Plan of Merger (the Merger Agreement), under which Hawaiian Electric was to become a subsidiary of NEE. The Merger Agreement contemplated that, prior to the Merger, HEI would distribute to its shareholders all of the common stock of ASB Hawaii, Inc. (ASB Hawaii), the parent company of ASB (such distribution referred to as the Spin-Off).
The closing of the Merger was subject to various conditions, including receipt of regulatory approval from the PUC. In July 2016: (1) the PUC dismissed NEE and Hawaiian Electric’s application requesting approval of the proposed Merger, (2) NEE terminated the Merger Agreement and (3) pursuant to the terms of the Merger Agreement, NEE paid HEI a $90 million termination fee and $5 million for the reimbursement of expenses associated with the transaction. In 2016, the Company recognized $60 million of net income ($2 million of net loss in each of the first and second quarters and $64 million of net income in the third quarter), comprised of the termination fee ($55 million), reimbursements of expenses from NEE and insurance ($3 million), and additional tax benefits on the previously non-tax-deductible merger- and Spin-Off-related expenses incurred through June 30, 2016 ($8 million), less merger- and Spin-Off-related expenses incurred in 2016 ($6 million) (all net of income tax impacts). The Spin-Off of ASB Hawaii was cancelled as it was cross-conditioned on the merger consummation.
In May 2016, the Utilities had filed an application for approval of an liquefied natural gas (LNG) supply and transport agreement and LNG-related capital equipment, which application was conditioned on the PUC’s approval of the proposed Merger. Subsequently, the Utilities terminated the LNG agreement and withdrew the application. In 2016, Hawaiian Electric recognized expenses related to the terminated LNG agreement of $1 million, net of tax benefits, in each of the first and second quarters.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion updates “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in HEI’s and Hawaiian Electric’s 20162017 Form 10-K and should be read in conjunction with such discussion and the 20162017 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 20162017 Form 10-K, as well as the quarterly (as of and for the three and ninesix months ended SeptemberJune 30, 2017)2018) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
RESULTS OF OPERATIONS
(in thousands, except per Three months ended September 30 %  
share amounts) 2017 2016 change Primary reason(s)*
Revenues $673,185
 $646,055
 4
 Increases for the electric utility and bank segments
Operating income 109,545
 105,442
 4
 Increase for the bank segment and lower losses for the “other” segment, partly offset by a decrease at the electric utility segment
Merger termination fee —
 90,000
 (100) See Note 12 of the Condensed Consolidated Financial Statements
Net income for common stock 60,073
 127,142
 (53) Merger termination fee at corporate in 2016 (in the “other” segment), partly offset by higher bank net income in 2017
Basic earnings per common share $0.55
 $1.17
 (53) Lower net income
Weighted-average number of common shares outstanding 108,786
 108,268
 —
 Issuances of shares under the HEI Dividend Reinvestment and Stock Purchase Plan and other plans

(in thousands, except per Nine months ended September 30 %  Three months ended June 30 % 
share amounts) 2017 2016 change Primary reason(s)* 2018 2017 change Primary reason(s)*
Revenues $1,897,028
 $1,763,259
 8
 Increases for the electric utility and bank segments $685,277
 $632,281
 8 Increases for the electric utility and bank segments
Operating income 253,303
 259,748
 (2) Decrease for the electric utility segment, partly offset by an increase at the bank segment and lower losses for the “other” segment 78,799
 77,802
 1 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Merger termination fee —
 90,000
 (100) See Note 12 of the Condensed Consolidated Financial Statements
Net income for common stock 132,927
 203,622
 (35) Merger termination fee at corporate in 2016 (in the “other” segment) and lower net income at the electric utility segment, partly offset by higher net income at the bank segment 46,054
 38,661
 19 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $1.22
 $1.89
 (35) Lower net income $0.42
 $0.36
 17 Higher net income
Weighted-average number of common shares outstanding 108,737
 107,951
 1
 Issuances of shares under the HEI Dividend Reinvestment and Stock Purchase Plan and other plans 108,842
 108,750
 — Issuances of shares under compensation and director stock plans.

(in thousands, except per Six months ended June 30 %  
share amounts) 2018 2017 change Primary reason(s)*
Revenues $1,331,151
 $1,223,843
 9 Increases for the electric utility and bank segments
Operating income 150,688
 147,540
 2 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Net income for common stock 86,301
 72,854
 18 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $0.79
 $0.67
 18 Higher net income
Weighted-average number of common shares outstanding 108,830
 108,712
 — Issuances of shares under compensation and director stock plans.
* Also, see segment discussions which follow.
The Company’s effective tax rates (combined federal and state income tax rates) for the second quarters of 2018 and 2017 were 22% and 34%, respectively. The Company’s effective tax rates for the first six months of 2018 and 2017 were 23% and 34%, respectively. The effective tax rates were lower for the three and six months ended June 30, 2018 compared to the same periods in 2017 due primarily to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%. The lower tax rate was partially offset by lower excess tax benefits associated with share-based awards in the first six months of 2018 as compared to the same period of 2017 and other Tax Act changes (the non-deductibility of excess executive compensation and various fringe benefit costs and loss of the domestic production activities deduction). Note that although the Utilities’ effective income tax rate decreased, the net benefits of the Tax Act, including the lower effective tax rate, are being returned to customers through rates.
HEI’s consolidated ROACE was 8.5%8.6% for the twelve months ended SeptemberJune 30, 20172018 and 12.3%12.1% for the twelve months ended SeptemberJune 30, 2016.2017. The higherlower ROACE for the twelve months ended SeptemberJune 30, 20162018 compared to the twelve months ended June 30,


2017 was primarily due to the merger termination fee received in July 2016.2016 when HEI’s planned merger with NextEra Energy was terminated.
Dividends.  The payout ratios for the first ninesix months of 20172018 and full year 20162017 were 76%78% and 54%82%, respectively. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company and current and expected future economic conditions.


Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers).
After three quartersThrough the first half of 2017,2018, Hawaii’s tourism industry, a significant driver of Hawaii’s economy, ended with strong growthcontinued to grow in both visitor spending and arrivals. Visitor expenditures increased 7.1%10.8% and arrivals increased 4.9%8.2% compared to the same time period in 2016.2017. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii for the fourth quarter of 2017 to increase by 4.7% overas the fourth quarter of 2016year progresses, driven primarily by an increase in seats from Asia, CanadaWest Coast, East Coast and the West Coast.Asia.
Hawaii’s unemployment rate continued to decline to 2.5% in September 2017remained steady at 2.1% for June 2018, which was lower than the 3.0%2.4% rate for the same period a year ago in September 2016 and lower than the national unemployment rate of 4.2% in September 2017.4.0%. It wasis also the second lowest unemployment rate in the nation along with Colorado.nation.
Hawaii real estate activity, as indicated by the home resale market, experienced a decline in median sales prices for single family homes and growth in median sales prices for condominiums so far in 2017.2018. Median sales prices for single family residential homes and condominiums on Oahu through September 2017June 2018 were higher by 3.4%3.9% and 5.4%for condominiums were higher by 6.5%, respectively, over the same time period in 2016.2017. The number of closed sales for both single family residential homes was down by 1.6% and for condominiums was up 1.3% through SeptemberJune of 2017 were also up2018 compared to same time period of 2016 by 5.0% and 5.8%, respectively.2017.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Following steady price increases through 2016,Although the price of crude oil fluctuates month to month, the general trend has remained relatively stable throughbeen an increasing one over the first three quarters of 2017.last 2.5 years.
At its September 2017June 2018 meeting, the Federal Open Market Committee (FOMC) decided to maintainraise the target range for the federal funds rate target range of “1.0%from “1.75% to 1.25%2%” in view of itsrealized and expected labor market conditions and inflation. The FOMC will continue to assess economic conditions relative to its objectives of maximum employment and 2% inflation in determining the size and timing of future adjustments to the target range.
Overall, Hawaii’s economyeconomic expansion continues with strong visitor arrivals and spending. The construction industry is more volatile, with expected slowing as major projects in the near term is expected to be buoyed by a strong tourism industry. Tourism continues to fare well however, future gains may be hindered by capacity constraints in visitor accommodations. The growthresort, retail and multifamily residential sectors are scheduled for completion in the number of jobs is anticipatednext few years. Record low unemployment rates are likely to decline as construction activity easessupport stronger gains in income. Potential risks include infrastructure constraints, tight labor markets and unemployment remains low. Risks remain stemming from geopoliticalhigh housing costs creating inflationary pressures, uncertainty in the national economic outlook due to potential trade wars and its impact on tourism and from the impact of the financial markets on real estate development and sales.natural disasters.
“Other” segment.
 Three months ended September 30 Nine months ended September 30  Three months ended June 30 Six months ended June 30 
(in thousands) 2017 2016 2017 2016 Primary reason(s) 2018 2017 2018 2017 Primary reason(s)
Revenues $127
 $94
 $299
 $262
  $47
 $77
 $75
 $172
 
Operating loss (4,295) (7,097) (13,478) (18,621) Third quarter and first nine months of 2016 merger and spin-off-related expenses (see below) and lower other administrative and general expenses in the third quarter and first nine months of 2017 (3,262) (3,677) (7,629) (8,655) 
Second quarter and first six months of 2018 includes $1.3 million and $2.3 million, respectively, of operating income from Pacific Current, LLC1. Second quarter and first six months of 2018 corporate expense was slightly higher than same periods in 2017.
Merger termination fee —
 90,000
 —
 90,000
 See Note 12 of the Condensed Consolidated Financial Statements
Net income (loss) (5,006) 65,064
 (11,807) 54,362
 Third quarter of 2016 merger termination fee and $8 million of tax benefits on previously non-deductible expenses related to the previously proposed merger with NEE and spin-off of ASBH and tax benefits recognized for the Domestic Production Activities Deduction in 2016 (see Note 9 of the Condensed Consolidated Financial Statements)
Net loss (5,676) (3,716) (11,864) (6,801) Second quarter and first six months of 2018 includes higher interest expense (due to higher interest rates and balances at corporate and new debt at Pacific Current, LLC related to Hamakua Energy’s acquisition of a power plant) and lower tax benefits on expenses as a result of tax reform in second quarter and first six months of 2018 as compared to the same periods in 2017.
1
Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation, but Hamakua Energy's profit on electricity sales to Hawaii Electric Light is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the ratemaking process, future revenue from Hawaii Electric Light’s sale of the electricity will approximate its purchase price from Hamakua Energy under the PPA.



The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI and ASB Hawaii, Inc. (ASBH), both holding companies;as well as the results of Pacific Current, LLC, a newly created direct subsidiary of HEI focused on investing in clean energy and sustainability projects; Pacific Current’s indirect subsidiary, Hamakua Energy, LLC, which owns a 60-MW combined cycle power plant, formerly owned by Hamakua Energy Partners, L.P.; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is currently constructing a solar-plus-storage project; HEI Properties, Inc., a company which held passive, venture capital investments (all of which have been sold or abandoned prior to its dissolution in December 2015 and final winding up in June 2017); and The Old Oahu Tug Service, Inc., a maritime freight transportation company that ceased operations in 1999, but has remaining employee benefit payments;payments obligations; as well as eliminations of intercompany transactions. For
Acquisition of a Solar + Storage Power Purchase Agreement (PPA). On February 2, 2018, Mauo executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project that will provide 8.6 MW of solar capacity and 42.3 MWH of storage capacity on the third quarterislands of Maui and first nine monthsOahu. The PPA has a 15-year term with an option for the customer to extend for an additional five years. The system will be constructed by a third-party contractor under an Engineering, Procurement and Construction (EPC) contract that was contemporaneously negotiated and executed by Mauo. The EPC contract provides a fixed price for the construction of 2016, mergerthe system, a project completion schedule and spin-off related expenses (netperformance obligations designed to match the requirements of $6 millionthe PPA. Mauo plans to fund the construction of reimbursementsthe project with a construction loan facility that will be repaid at the commercial operation date (ultimately with cash from NEEinvestment tax credits, state renewable tax credits and insurers) recorded at HEInon-recourse project debt). The facilities are expected to be operational in 2019.


contributed $2 million and $5 million to operating losses, respectively. See Note 12, “Termination of proposed merger and other matters,” of the Condensed Consolidated Financial Statements.

FINANCIAL CONDITIONRESULTS OF OPERATIONS
Liquidity
(in thousands, except per Three months ended June 30 %  
share amounts) 2018 2017 change Primary reason(s)*
Revenues $685,277
 $632,281
 8 Increases for the electric utility and bank segments
Operating income 78,799
 77,802
 1 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Net income for common stock 46,054
 38,661
 19 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $0.42
 $0.36
 17 Higher net income
Weighted-average number of common shares outstanding 108,842
 108,750
 — Issuances of shares under compensation and director stock plans.

(in thousands, except per Six months ended June 30 %  
share amounts) 2018 2017 change Primary reason(s)*
Revenues $1,331,151
 $1,223,843
 9 Increases for the electric utility and bank segments
Operating income 150,688
 147,540
 2 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Net income for common stock 86,301
 72,854
 18 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $0.79
 $0.67
 18 Higher net income
Weighted-average number of common shares outstanding 108,830
 108,712
 — Issuances of shares under compensation and director stock plans.
* Also, see segment discussions which follow.
The Company’s effective tax rates (combined federal and capital resources.  The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirementsstate income tax rates) for the foreseeable future.
second quarters of 2018 and 2017 were 22% and 34%, respectively. The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
(dollars in millions) September 30, 2017 December 31, 2016
Short-term borrowings—other than bank $25
 —% $—
 —%
Long-term debt, net—other than bank 1,618
 43
 1,619
 43
Preferred stock of subsidiaries 34
 1
 34
 1
Common stock equity 2,103
 56
 2,067
 56
  $3,780
 100% $3,720
 100%
HEI’s short-term borrowings and HEI’s line of credit facility were as follows:
  Average balance Balance
(in millions)  Nine months ended September 30, 2017 September 30, 2017 December 31, 2016
Short-term borrowings 1
  
  
  
Commercial paper $3
 $19
 $—
Line of credit draws —
 —
 —
Undrawn capacity under HEI’s line of credit facility   150
 150
1 This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s external short-term borrowings duringCompany’s effective tax rates for the first ninesix months of 2018 and 2017 were 23% and 34%, respectively. The effective tax rates were lower for the three and six months ended June 30, 2018 compared to the same periods in 2017 due primarily to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%. The lower tax rate was $18.5 million. As of October 27, 2017, HEI had $17.5 million of outstanding commercial paper, and its line of credit facility was undrawn.
HEI has a $150 million line of credit facility and refinanced a $125 million loan on October 6, 2017. See Note 5 of the Condensed Consolidated Financial Statements.
From December 7, 2016 to date, HEI satisfied the share purchase requirements of the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP and ASB 401(k) Plan through open market purchases of its common stock rather than through new issuances.
In December 2014, HEI filed an omnibus registration statement to register an indeterminate amount of debt and equity securities.
Forpartially offset by lower excess tax benefits associated with share-based awards in the first ninesix months of 2017, net cash provided by operating activities of HEI consolidated was $291 million. Net cash used by investing activities for2018 as compared to the same period of 2017 and other Tax Act changes (the non-deductibility of excess executive compensation and various fringe benefit costs and loss of the domestic production activities deduction). Note that although the Utilities’ effective income tax rate decreased, the net benefits of the Tax Act, including the lower effective tax rate, are being returned to customers through rates.
HEI’s consolidated ROACE was $440 million, primarily due to Hawaiian Electric’s consolidated capital expenditures and ASB’s purchases of investment securities, partly offset by ASB’s receipt of repayments from investment securities, proceeds from the sale of commercial loans and net decrease in loans held for investment and Hawaiian Electric’s contributions in aid of construction. Net cash provided by financing activities during this period was $73 million as a result of several factors, including increases in short-term borrowings and ASB’s deposit liabilities, proceeds from other bank borrowings and net increases in ASB’s retail purchase agreements, partly offset by the payment of common stock dividends and repayments of other bank borrowings. Also included in cash provided by financing activities were proceeds from the issuance of special purpose revenue bonds (SPRBs), which were offset by the transfer of funds to a trustee8.6% for the redemption of previously issued SPRBs. Other than capital contributions from their parent company, intercompany services (and related intercompany payablestwelve months ended June 30, 2018 and receivables), Hawaiian Electric’s periodic short-term borrowings from HEI (and related interest) and12.1% for the payment of dividendstwelve months ended June 30, 2017. The lower ROACE for the twelve months ended June 30, 2018 compared to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank segments’ discussions of their cash flows in their respective “Financial condition—Liquidity and capital resources” sections below.) During the first ninetwelve months of 2017, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $66 million and $28 million, respectively.ended June 30,


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company’s results of operations and financial condition can be affected by numerous factors, many of which are beyond the Company’s control and could cause future results of operations to differ materially from historical results. For information about certain of these factors, see pages 47, 62 to 64, and 73 to 75 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2016 Form 10-K.
Additional factors that may affect future results and financial condition are described on pages iv and v under “Cautionary Note Regarding Forward-Looking Statements.”
MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical2017 was primarily due to the Company’s financial statements—that is, management believes that these policies are bothmerger termination fee received in July 2016 when HEI’s planned merger with NextEra Energy was terminated.
Dividends.  The payout ratios for the most importantfirst six months of 2018 and full year 2017 were 78% and 82%, respectively. HEI currently expects to maintain its dividend at its present level; however, the portrayalHEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company and financial condition,current and currently require management’s most difficult, subjective or complex judgments.expected future economic conditions.
For information about these material estimatesEconomic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and critical accounting policies, see pages 48Tourism (DBEDT), University of Hawaii Economic Research Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers).
Through the first half of 2018, Hawaii’s tourism industry, a significant driver of Hawaii’s economy, continued to 49, 64grow in both visitor spending and arrivals. Visitor expenditures increased 10.8% and arrivals increased 8.2% compared to 65,the same period in 2017. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii to increase as the year progresses, driven primarily by an increase in seats from West Coast, East Coast and 75Asia.
Hawaii’s unemployment rate remained steady at 2.1% for June 2018, which was lower than the 2.4% rate for the same period a year ago and lower than the national unemployment rate of 4.0%. It is also the lowest unemployment rate in the nation.
Hawaii real estate activity, as indicated by the home resale market, experienced a decline in median sales prices for single family homes and growth in median sales prices for condominiums so far in 2018. Median sales prices for single family residential homes on Oahu through June 2018 were higher by 3.9% and for condominiums were higher by 6.5%, over the same time period in 2017. The number of closed sales for single family residential homes was down by 1.6% and for condominiums was up 1.3% through June of 2018 compared to 78same time period of HEI’s MD&A included2017.
Hawaii’s petroleum product prices reflect supply and demand in Part II, Item 7the Asia-Pacific region and the price of HEI’s 2016 Form 10-K.crude oil in international markets. Although the price of crude oil fluctuates month to month, the general trend has been an increasing one over the last 2.5 years.
At its June 2018 meeting, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate from “1.75% to 2%” in view of realized and expected labor market conditions and inflation. The FOMC will continue to assess economic conditions relative to its objectives of maximum employment and 2% inflation in determining the size and timing of future adjustments to the target range.
Hawaii’s economic expansion continues with strong visitor arrivals and spending. The construction industry is more volatile, with expected slowing as major projects in the resort, retail and multifamily residential sectors are scheduled for completion in the next few years. Record low unemployment rates are likely to support stronger gains in income. Potential risks include infrastructure constraints, tight labor markets and high housing costs creating inflationary pressures, uncertainty in the national economic outlook due to potential trade wars and natural disasters.
“Other” segment.
  Three months ended June 30 Six months ended June 30  
(in thousands) 2018 2017 2018 2017 Primary reason(s)
Revenues $47
 $77
 $75
 $172
  
Operating loss (3,262) (3,677) (7,629) (8,655) 
Second quarter and first six months of 2018 includes $1.3 million and $2.3 million, respectively, of operating income from Pacific Current, LLC1. Second quarter and first six months of 2018 corporate expense was slightly higher than same periods in 2017.
Net loss (5,676) (3,716) (11,864) (6,801) Second quarter and first six months of 2018 includes higher interest expense (due to higher interest rates and balances at corporate and new debt at Pacific Current, LLC related to Hamakua Energy’s acquisition of a power plant) and lower tax benefits on expenses as a result of tax reform in second quarter and first six months of 2018 as compared to the same periods in 2017.
1
Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation, but Hamakua Energy's profit on electricity sales to Hawaii Electric Light is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the ratemaking process, future revenue from Hawaii Electric Light’s sale of the electricity will approximate its purchase price from Hamakua Energy under the PPA.


Following are discussions
The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI and ASB Hawaii, Inc. (ASBH), as well as the results of Pacific Current, LLC, a newly created direct subsidiary of HEI focused on investing in clean energy and sustainability projects; Pacific Current’s indirect subsidiary, Hamakua Energy, LLC, which owns a 60-MW combined cycle power plant, formerly owned by Hamakua Energy Partners, L.P.; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is currently constructing a solar-plus-storage project; HEI Properties, Inc., a company which held passive, venture capital investments (all of which have been sold or abandoned prior to its dissolution in December 2015 and final winding up in June 2017); and The Old Oahu Tug Service, Inc., a maritime freight transportation company that ceased operations liquidityin 1999, but has remaining employee benefit payments obligations; as well as eliminations of intercompany transactions.
Acquisition of a Solar + Storage Power Purchase Agreement (PPA). On February 2, 2018, Mauo executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project that will provide 8.6 MW of solar capacity and capital resources42.3 MWH of storage capacity on the islands of Maui and Oahu. The PPA has a 15-year term with an option for the customer to extend for an additional five years. The system will be constructed by a third-party contractor under an Engineering, Procurement and Construction (EPC) contract that was contemporaneously negotiated and executed by Mauo. The EPC contract provides a fixed price for the construction of the electric utilitysystem, a project completion schedule and bank segments.performance obligations designed to match the requirements of the PPA. Mauo plans to fund the construction of the project with a construction loan facility that will be repaid at the commercial operation date (ultimately with cash from investment tax credits, state renewable tax credits and non-recourse project debt). The facilities are expected to be operational in 2019.
Electric utility
RESULTS OF OPERATIONS

(in thousands, except per Three months ended June 30 %  
share amounts) 2018 2017 change Primary reason(s)*
Revenues $685,277
 $632,281
 8 Increases for the electric utility and bank segments
Operating income 78,799
 77,802
 1 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Net income for common stock 46,054
 38,661
 19 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $0.42
 $0.36
 17 Higher net income
Weighted-average number of common shares outstanding 108,842
 108,750
 — Issuances of shares under compensation and director stock plans.

(in thousands, except per Six months ended June 30 %  
share amounts) 2018 2017 change Primary reason(s)*
Revenues $1,331,151
 $1,223,843
 9 Increases for the electric utility and bank segments
Operating income 150,688
 147,540
 2 Increase for the bank segment and lower operating losses for the “other” segment, partly offset by slight decrease for the electric utility segment
Net income for common stock 86,301
 72,854
 18 Higher net income at the electric utility and bank segments, partly offset by higher net losses at the “other” segment. See below for effective tax rate explanation.
Basic earnings per common share $0.79
 $0.67
 18 Higher net income
Weighted-average number of common shares outstanding 108,830
 108,712
 — Issuances of shares under compensation and director stock plans.
* Also, see segment discussions which follow.
The Company’s effective tax rates (combined federal and state income tax rates) for the second quarters of 2018 and 2017 were 22% and 34%, respectively. The Company’s effective tax rates for the first six months of 2018 and 2017 were 23% and 34%, respectively. The effective tax rates were lower for the three and six months ended June 30, 2018 compared to the same periods in 2017 due primarily to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%. The lower tax rate was partially offset by lower excess tax benefits associated with share-based awards in the first six months of 2018 as compared to the same period of 2017 and other Tax Act changes (the non-deductibility of excess executive compensation and various fringe benefit costs and loss of the domestic production activities deduction). Note that although the Utilities’ effective income tax rate decreased, the net benefits of the Tax Act, including the lower effective tax rate, are being returned to customers through rates.
HEI’s consolidated ROACE was 8.6% for the twelve months ended June 30, 2018 and 12.1% for the twelve months ended June 30, 2017. The lower ROACE for the twelve months ended June 30, 2018 compared to the twelve months ended June 30,


2017 was primarily due to the merger termination fee received in July 2016 when HEI’s planned merger with NextEra Energy was terminated.
Results.Dividends.  The payout ratios for the first six months of 2018 and full year 2017 were 78% and 82%, respectively. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company and current and expected future economic conditions.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers).
Through the first half of 2018, Hawaii’s tourism industry, a significant driver of Hawaii’s economy, continued to grow in both visitor spending and arrivals. Visitor expenditures increased 10.8% and arrivals increased 8.2% compared to the same period in 2017. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii to increase as the year progresses, driven primarily by an increase in seats from West Coast, East Coast and Asia.
Hawaii’s unemployment rate remained steady at 2.1% for June 2018, which was lower than the 2.4% rate for the same period a year ago and lower than the national unemployment rate of 4.0%. It is also the lowest unemployment rate in the nation.
Hawaii real estate activity, as indicated by the home resale market, experienced a decline in median sales prices for single family homes and growth in median sales prices for condominiums so far in 2018. Median sales prices for single family residential homes on Oahu through June 2018 were higher by 3.9% and for condominiums were higher by 6.5%, over the same time period in 2017. The number of closed sales for single family residential homes was down by 1.6% and for condominiums was up 1.3% through June of 2018 compared to same time period of 2017.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Although the price of crude oil fluctuates month to month, the general trend has been an increasing one over the last 2.5 years.
At its June 2018 meeting, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate from “1.75% to 2%” in view of realized and expected labor market conditions and inflation. The FOMC will continue to assess economic conditions relative to its objectives of maximum employment and 2% inflation in determining the size and timing of future adjustments to the target range.
Hawaii’s economic expansion continues with strong visitor arrivals and spending. The construction industry is more volatile, with expected slowing as major projects in the resort, retail and multifamily residential sectors are scheduled for completion in the next few years. Record low unemployment rates are likely to support stronger gains in income. Potential risks include infrastructure constraints, tight labor markets and high housing costs creating inflationary pressures, uncertainty in the national economic outlook due to potential trade wars and natural disasters.
“Other” segment.
Three months ended September 30 Increase  
2017 2016 (decrease) (dollars in millions, except per barrel amounts)
$599
 $572
 $27
   
Revenues. Net increase largely due to:
      $25
 
higher fuel oil prices1
      5
 higher RAM revenues
      2
 
higher purchased power energy costs2
      (5) lower KWH generated
146
 129
 17
   
Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower KWH generated
160
 158
 2
   
Purchased power expense. Increase due to higher fuel oil prices
100
 95
 5
   
Operation and maintenance expenses. Net increase due to:
      6
 higher overhaul costs due to more overhauls being performed in 2017
      2
 ERP project costs commencing in 2017
      (1) lower production operating and maintenance cost
      (1) PSIP consulting costs incurred in 2016
105
 101
 4
   
Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2016
87
 90
 (3)   
Operating income. Decrease due to higher O&M and other expenses
47
 47
 —
   
Net income for common stock. Lower operating income, offset by higher AFUDC in 2017 due to larger capital projects, primarily Schofield generating station
         
2,340
 2,372
 (32)   
Kilowatthour sales (millions)4
$66.73
 $57.72
 $9.01
   
Average fuel oil cost per barrel1
  Three months ended June 30 Six months ended June 30  
(in thousands) 2018 2017 2018 2017 Primary reason(s)
Revenues $47
 $77
 $75
 $172
  
Operating loss (3,262) (3,677) (7,629) (8,655) 
Second quarter and first six months of 2018 includes $1.3 million and $2.3 million, respectively, of operating income from Pacific Current, LLC1. Second quarter and first six months of 2018 corporate expense was slightly higher than same periods in 2017.
Net loss (5,676) (3,716) (11,864) (6,801) Second quarter and first six months of 2018 includes higher interest expense (due to higher interest rates and balances at corporate and new debt at Pacific Current, LLC related to Hamakua Energy’s acquisition of a power plant) and lower tax benefits on expenses as a result of tax reform in second quarter and first six months of 2018 as compared to the same periods in 2017.
1
Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation, but Hamakua Energy's profit on electricity sales to Hawaii Electric Light is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the ratemaking process, future revenue from Hawaii Electric Light’s sale of the electricity will approximate its purchase price from Hamakua Energy under the PPA.



The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI and ASB Hawaii, Inc. (ASBH), as well as the results of Pacific Current, LLC, a newly created direct subsidiary of HEI focused on investing in clean energy and sustainability projects; Pacific Current’s indirect subsidiary, Hamakua Energy, LLC, which owns a 60-MW combined cycle power plant, formerly owned by Hamakua Energy Partners, L.P.; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is currently constructing a solar-plus-storage project; HEI Properties, Inc., a company which held passive, venture capital investments (all of which have been sold or abandoned prior to its dissolution in December 2015 and final winding up in June 2017); and The Old Oahu Tug Service, Inc., a maritime freight transportation company that ceased operations in 1999, but has remaining employee benefit payments obligations; as well as eliminations of intercompany transactions.
Nine months ended September 30 Increase  
2017 2016 (decrease) (dollars in millions, except per barrel amounts)
$1,674
 $1,550
 $124
   
Revenues. Net increase largely due to:
      $114
 
higher fuel oil prices1
      35
 
higher purchased power energy costs2
      (20) lower RAM revenues due to expiration of 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric
      (7) lower KWH generated
432
 334
 98
   
Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower KWH generated
441
 413
 28
   
Purchased power expense. Increase due to higher fuel oil prices
307
 298
 9
   
Operation and maintenance expenses. Net increase due to:
      6
 higher overhaul costs due to more overhauls being performed in 2017
      4
 ERP project costs commencing in 2017
      2
 
higher transmission and distribution operating and maintenance costs

      1
 
Grid modernization consultant costs

      1
 
write off of portion of deferred Geothermal RFP costs

      1
 
additional reserves for environmental costs in 20173
      (4) PSIP consulting costs incurred in 2016
      (3) LNG consulting costs incurred in 2016 to negotiate an LNG contract that was subsequently terminated following HEI/NextEra merger termination
304
 289
 15
   
Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2016
191
 216
 (25)   
Operating income. Decrease due to lower RAM revenues and higher O&M and other expenses
95
 108
 (13)   
Net income for common stock. Decrease due to lower operating income, partially offset by resulting lower income taxes
         
6,528
 6,613
 (85)   
Kilowatthour sales (millions)4
$67.42
 $52.06
 $15.36
   
Average fuel oil cost per barrel1
461,408
 459,590
 1,818
   Customer accounts (end of period)
1The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in purchase power expenses (except purchased energy costs) are passed on to customers.
3Increase reserve for additional costs for investigation of PCB contamination onshore and offshore of Waiau Power Plant
4KWH sales were lower when compared to the same quarter in the prior year due largely to continued energy efficiency and conservation efforts by customers and increasing levels of private customer-sited renewable generation.
Hawaiian Electric’s consolidated ROACE was 7.2%Acquisition of a Solar + Storage Power Purchase Agreement (PPA). On February 2, 2018, Mauo executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project that will provide 8.6 MW of solar capacity and 42.3 MWH of storage capacity on the islands of Maui and Oahu. The PPA has a 15-year term with an option for the twelve months ended September 30, 2017,customer to extend for an additional five years. The system will be constructed by a third-party contractor under an Engineering, Procurement and 8.1%Construction (EPC) contract that was contemporaneously negotiated and executed by Mauo. The EPC contract provides a fixed price for the twelve months ended September 30, 2016.
construction of the system, a project completion schedule and performance obligations designed to match the requirements of the PPA. Mauo plans to fund the construction of the project with a construction loan facility that will be repaid at the commercial operation date (ultimately with cash from investment tax credits, state renewable tax credits and non-recourse project debt). The Utilities’ consolidated KWH sales have declined each year since 2007. Based on expectations of additional customer renewable self-generation and energy-efficiency installations, the Utilities’ full year 2017 KWH salesfacilities are expected to be below the 2016 level.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of September 30, 2017 amounted to $4 billion, of which approximately 25% related to production PPE, 67% related to transmission and distribution PPE, and 8% related to other PPE. Approximately 11% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission. See “Adequacy of supply” below.
See “Economic conditions”operational in the “HEI Consolidated” section above.


Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state other than Kauai and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources (such as private rooftop solar), demand response and grid-scale resources to achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are committed to assisting the State of Hawaii in achieving its Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s Renewable Portfolio Standards (RPS) law was revised in the 2015 Legislature and requires electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045, respectively. The Utilities have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal. The Utilities' RPS for 2016 was about 26% and on its way to achieving the 2020 RPS goal of 30%. (See "Developments in renewable energy efforts” below).
In April 2014, the PUC issued orders that collectively address certain key policy, resource planning and operational issues for the Utilities. The April 2014 regulatory orders were to address: (1) Integrated Resource Planning and Power Supply Improvement Plans (PSIPs), (2) Reliability Standards Working Group, and (3) Policy Statement and Order Regarding Demand Response Programs, which are described below. The PUC also provided its inclinations on the future of Hawaii’s electric utilities in one of the orders. The PUC provided its perspectives on the vision, business strategies and regulatory policy changes required to align the Utilities' business model with customers’ interests and the state’s public policy goals.
Integrated Resource Planning and Power Supply Improvement Plans. The PUC did not accept the Utilities’ Integrated Resource Plan and Action Plans submission, and, in lieu of an approved plan, commenced other initiatives to enable resource planning. As required by the PUC orders, the Utilities filed proposed PSIPs with the PUC in August 2014. Updated PSIPs were filed in April 2016 and December 2016 in response to PUC orders. The PSIPs provided plans to achieve 100% renewable energy using a diverse mix of energy resources by 2045. Under these plans, the Utilities support sustainable growth of private rooftop solar, expand use of energy storage systems, empower customers by developing smart grids and offer new products and services to customers (e.g., community solar, microgrids and voluntary “demand response” programs).
In the December 2016 PSIP Update Report, the updated plans describe greater and faster expansion of the Utilities’ renewable energy portfolio than in the plans filed in April 2016. The plans include the continued growth of private rooftop solar and describe the grid and generation modernization work needed to reliably integrate an estimated total of 165,000 private systems by 2030, and additional grid-scale renewable energy resources. The Utilities already have the highest percentage of customers using private rooftop solar of any utility in the U.S. and customer-sited resources are seen as a key contributor to the growth of the renewable portfolio on every island. In addition, the plans forecast the addition of 360 MW of grid-scale solar and 157 MW of grid-scale wind, with 32 MW derived from community-based renewable energy (CBRE). The plans also include 115 MW from Demand Response (DR) programs, which can shift customer use of electricity to times when more renewable energy is available, potentially making room to add even more renewable resources. Unlike the April 2016 updated PSIPs, the December 2016 update does not include the use of LNG to generate power in the near-term or the Kahe 3x1 Combined Cycle Plant. While LNG remains a potential lower-cost bridge fuel to be evaluated, the Utilities’ priority is to continue replacing fossil fuel generation with renewables over the next five years as federal tax incentives for renewables begin to phase out. An interisland cable is not in the near-term plan, which states that its costs and benefits should continue to be evaluated. The December 2016 Update Report emphasizes work that is in progress or planned over the next five years on each of the five islands the Utilities serve.
On July 14, 2017, the PUC accepted the Utilities’ PSIP December 2016 Update Report and closed the proceeding. In its order, the PUC provided guidance regarding the implementation of the Utilities’ near-term action plan and future planning activities, requiring the Utilities to file a report that details an updated resource planning approach and schedule by March 1, 2018. The PUC order stated that it intends to use the PSIPs in conjunction with its evaluation of specific filings for approval of capital and other projects.
Reliability standards working group. In April 2014, the PUC ordered the Utilities to take timely actions intended to lower energy costs, improve system reliability and address emerging challenges to integrate additional renewable energy. In addition to the PSIPs mentioned above, the PUC ordered certain filing requirements, including a Distributed Generation Interconnection Plan, which the Utilities filed in August 2014.
The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and policy issues associated with distributed energy resources (DER) and (3) the Hawaii electricity reliability administrator, which is a third-party position that the legislature has authorized the PUC to create by contract to provide support for the PUC in developing and periodically updating local grid reliability standards and procedures and interconnection requirements and overseeing grid access and operation. The PUC has not yet opened new dockets to address the first and third topics above. To


address DER, the second topic, the PUC opened an investigative proceeding on August 21, 2014 (see “DER investigative proceeding” below).
Policy statement and order regarding demand response programs. The PUC provided guidance concerning the objectives and goals for DR programs, and ordered the Utilities to develop an integrated DR Portfolio Plan that will enhance system operations and reduce costs to customers. The Utilities’ Plan was filed in July 2014. Subsequently, the Utilities submitted status updates and an update and supplemental report to the Plan. In July 2015, the PUC issued an order appointing a special adviser to guide, monitor and review the Utility’s Plan design and implementation. In December 2015, the Utilities filed an application with the PUC for approval of their proposed DR Portfolio Tariff Structure, Reporting Schedule and Cost Recovery of Program Costs. The Utilities filed an updated DR Portfolio Plan in February 2017. In May 2017, the Utilities filed their reply to the statements of position submitted by the other parties and are awaiting a PUC decision.
In October 2017, the PUC approved the Utilities request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of AFUDC, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities expect the DR Management System to be in service by the end of 2018.
DER investigative proceeding. In March 2015, the PUC issued an order to address DER issues.
In June 2015, the Utilities submitted their final Statement of Position in the DER proceeding, which included new pricing provisions for future private rooftop photovoltaic (PV) systems, technical standards for advanced inverters, new options for customers including battery-equipped private rooftop PV systems, a pilot time-of-use rate, an improved method of calculating the amount of private rooftop PV that can be safely installed, and a streamlined and standardized PV application process.
In October 2015, the PUC issued a D&O establishing DER reforms that: (1) promote rapid adoption of the next generation of solar PV and other distributed energy technologies; (2) encourage more competitive pricing of distributed energy resource systems; (3) lower overall energy supply costs for all customers; and (4) help to manage DER in terms of each island’s limited grid capacity. The D&O capped the Utilities Net Energy Metering (NEM) programs at “existing” levels (i.e., for existing NEM customers and customers who already applied and were waiting for approval), closed the NEM programs to new participants, and approved new interim options for customers to interconnect DER to the utility electric grids, including Self Supply and Grid Supply tariff options and modified interconnection standards. The PUC placed caps on the availability of the Grid Supply program. The Self Supply Program is designed for customers who do not export to the grid.
On October 20, 2017, the PUC issued a D&O which further revises interconnection requirements, creates a Smart Export program, modifies the customer-grid supply program (Controllable Customer Grid Supply), clarifies that non-export customer systems can be added to the existing NEM program, and provides guidance and reporting requirements regarding hosting capacity analyses. The Smart Export program is designed for PV systems with battery storage and features zero compensation during mid-day, but enhanced compensation at other times of the day to reflect the value of the energy to the grid at different times of the day. The Controllable Customer Grid Supply program allows PV systems without battery storage to deliver energy to the grid on an as-available basis except when system-wide technical conditions require reduction of output. The D&O specified island-specific pricing and program caps for the Smart Export and Controllable Customer Grid Supply programs. Customers currently under the customer-grid supply program are grandfathered under existing rates for the next five years. The D&O also authorizes activation of new advanced inverter functions in PV and storage systems, which will provide support to the electric grid during different types of grid disturbances. The utilities must file tariffs consistent with the programs described in the D&O.
Grid modernization. After launching a smart grid customer engagement plan during the second quarter of 2014, Hawaiian Electric replaced approximately 5,200 residential and commercial meters with smart meters, 160 direct load control switches, fault circuit indicators and remote controlled switches in selected areas across Oahu as part of the Smart Grid Initial Phase implementation. Also under the Initial Phase a grid efficiency measure called Volt/Var Optimization (or Conservation Voltage Reduction) was enabled, customer energy portals were launched and are available for customer use and a PrePay Application was launched. The Initial Phase implementation was completed in 2015. The smart grid provides benefits such as customer tools to manage their electric bills, potentially shortening outages and enabling the Utilities to integrate more low-cost renewable energy, like wind and solar, which will reduce Hawaii’s dependence on imported oil.
In March 2016, the Utilities sought PUC approval to commit funds for an expansion of the smart grid project. The proposed smart grid project was estimated to cost $340 million and to be implemented over 5 years. On January 4, 2017, the PUC issued an order dismissing the application without prejudice and directing the Utilities to submit a Grid Modernization Strategy.
The PUC indicated that the overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and


obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. On June 30, 2017, the Utilities filed an initial draft of the Grid Modernization Strategy describing how new technology will help triple private rooftop solar and make use of rapidly evolving products including storage and advanced inverters. The cost of the first segment of the modernization is estimated at about $205 million over six years. The Utilities filed their final Grid Modernization Strategy on August 29, 2017. The PUC will set forth any next steps after reviewing the final Strategy and public comments.
Community-Based Renewable Energy. On October 1, 2015, the Utilities filed a proposed CBRE program and tariff with the PUC that would allow customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. In November 2015, the PUC suspended the tariff submittal and opened an investigatory docket. In February 2017, the PUC issued a proposed CBRE Program Framework and a Proposed Model Tariff Language, which significantly increased the scope of the program. Under the proposed CBRE Program Framework, the CBRE program will utilize a phased approach. The Program Framework proposes a Phase 1 with an 80 MW capacity statewide with 73 MW allocated to the Utilities' service territories. During Tranche A of the CBRE Phase 1 Program, the Utilities' primary role is to serve as the program administrator. In Tranche B, the Utilities are allowed to develop 9 MW in the service territories, 75% of the capacity is reserved for low-to-moderate income subscribers. In March 2017, the Utilities submitted comments to the Program Framework, which identified certain concerns should the proposed CBRE Program Framework be adopted and requested a technical conference before a decision is issued. In June 2017, a technical conference with the PUC was completed with the Utilities, the Consumer Advocate and industry stakeholders. The Utilities are awaiting the PUC’s decision on the CBRE program.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Results for 2016 and 2015 did not trigger the earnings sharing mechanism for the Utilities. For 2014, the earnings sharing mechanism was triggered for Maui Electric, and Maui Electric credited $0.5 million to its customers for their portion of the earnings sharing during the period between June 2015 to May 2016. Earnings sharing credits are included in the annual decoupling filing for the following year.
Regulated returns.Actual and PUC-allowed (as of September 30, 2017) returns were as follows:
% Rate-making Return on rate base (RORB)* ROACE** Rate-making ROACE***
Twelve months ended September 30, 2017 Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric
Utility returns 6.77
 6.71
 6.83
 7.35
 6.54
 6.99
 7.99
 7.54
 7.96
PUC-allowed returns 8.11
 7.80
 7.34
 10.00
 9.50
 9.00
 10.00
 9.50
 9.00
Difference (1.34) (1.09) (0.51) (2.65) (2.96) (2.01) (2.01) (1.96) (1.04)
*      Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
**    Recorded net income divided by average common equity.
***  ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, the low RBA interest rate (currently a short-term debt rate rather than the actual cost of capital), O&M increases and return on capital additions since the last rate case in excess of indexed escalations, and the portion of the pension regulatory asset not earning a return due to pension contributions and pension costs in excess of the pension amount in rates.
Most recent rate proceedings.  Unless otherwise agreed or ordered, each electric utility is currently required by PUC order to initiate a rate proceeding every third year (on a staggered basis) to allow the PUC and the Consumer Advocate to regularly evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability and integrate more renewable energy. The PUC may grant an interim increase within 10 to 11 months following the filing of an application, but there is no guarantee of such an interim increase and interim amounts collected are refundable, with interest, to the extent they exceed the amount approved in the PUC’s final D&O. The timing and amount of any final increase is determined at the discretion of the PUC. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE and2019.


RORB) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O.
Test year
(dollars in millions)
 
Date
(filed/
implemented)
 Amount 
% over 
rates in 
effect
 
ROACE
(%)
 
RORB
(%)
 
Rate
 base
 
Common
equity
%
 
Stipulated 
agreement 
reached with
Consumer
Advocate
Hawaiian Electric    
  
  
  
  
  
  
2014                
Request 6/27/14              
2017    
  
  
  
  
  
  
Request 12/16/16 $106.4
 6.9
 10.60
 8.28
 $2,002
 57.36
  
Hawaii Electric Light    
  
  
  
  
  
  
2016                
Request 9/19/16 $19.3
 6.5
 10.60
 8.44
 $479
 57.12
 Yes
Interim increase 8/31/17 9.9
 3.4
 9.50
 7.80
 482
 56.69
  
Maui Electric    
  
  
  
  
  
  
2015 
                
Request 12/30/14              
2018 
                
Request 10/12/17 $30.1
 9.3
 10.60
 8.05
 $473
 56.94
  
Note:  The “Request” date reflects the application filing date for the rate proceeding. The “Interim increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.
See “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Performance-based regulation. In the Hawaii Electric Light 2016 test year rate case and the Hawaiian Electric 2017 test year rate case, the Utilities recommended that a separate investigatory docket be opened to evaluate PBR on a broader scale that can be implemented across the Utilities, and to fully develop a comprehensive PBR Framework.  PBR refers to different ways in which regulators have modified their regulatory approach in an attempt to strengthen financial incentives for Utilities to achieve desired outcomes.  In the its April 27, 2017 order in the Decoupling Investigative proceeding, the PUC stated that it would initiate a separate investigative docket to examine a full range of Performance Incentive Mechanism and PBR options.
Depreciation docket.  In December 2016, the Utilities filed an application with the PUC for approval of changes in the depreciation and amortization rates and amortization period for contributions in aid of construction (CIAC). The proposed depreciation rates are higher than the existing depreciation rates, based on a depreciation study which reviewed the average service lives, net salvage, retirement dispersion and retirement dates of the Utilities’ assets. The application requests that the effective date of implementation of the change in depreciation and amortization rates and revised CIAC amortization period, as recommended by the 2015 Book Depreciation Study, coincide with the effective date of interim base rates (that include the increased expenses resulting from the new depreciation and amortization rates and change in CIAC amortization period) to be established in each of the Utilities’ next general rate cases or the effective date of the decoupling RBA Rate Adjustment that incorporates the new depreciation and amortization rates for each utility, whichever is sooner.
Developments in renewable energy efforts.  Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:
New renewable PPAs.
In July 2015, the PUC approved the PPA for the 27.6 MW Waianae Solar project that was developed by Eurus Energy America. The project achieved commercial operations in January 2017 and is now the largest solar project in Hawaii.
In July 2015, Maui Electric signed two PPAs, with Kuia Solar and South Maui Renewable Resources (which subsequently assigned its PPA to SSA Solar of HI 2, LLC and SSA Solar of HI 3, LLC, respectively), each for a 2.87-MW solar facility. In February 2016, the PUC approved both PPAs, subject to certain conditions and modifications. The guaranteed commercial operations date for the facilities was December 31, 2016, however both projects are experiencing delays and are now expected to be completed by the end of the fourth quarter in 2017.   
In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 between Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM) for a proposed 24-MW wind farm on Oahu. In September 2016, Hawaiian Electric filed an Amended and Restated PPA, dated August 12, 2016, which reflects the completion of an interconnection requirements study. In October 2017, the PUC approved the construction of an


overhead 46 kV sub-transmission line to accommodate the interconnection of the NPM wind farm, which is expected to be placed into service by August 31, 2019.
Hawaiian Electric had PPAs to purchase solar energy with three affiliates of SunEdison. In February 2016, as a result of the project entities missing contract milestones, Hawaiian Electric terminated the original PPAs for the three projects. SunEdison filed Chapter 11 bankruptcy proceedings and during those proceedings, the three SunEdison affiliates were acquired by an affiliate of NRG Energy, Inc. (NRG). Hawaiian Electric then negotiated with NRG and its newly acquired affiliates and has entered into amended and restated PPAs for solar energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for 14.7 MW and Kawailoa Solar, LLC for 49.0 MW. On July 27, 2017, the PUC approved the three NRG PPAs, subject to modifications and conditions. The three projects are expected to be in service by the end of 2019.
Tariffed renewable resources.
As of September 30, 2017, there were approximately 330 MW, 77 MW and 88 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely NEM, Customer Grid Supply and Customer Self Supply. As of September 30, 2017, an estimated 27% of single family homes on the islands of Oahu, Hawaii, and Maui have installed private rooftop solar systems, and an estimated 29% of single family homes have installed, or have been approved to install, private rooftop solar systems. As of September 30, 2017, approximately 16% of the Utilities' total customers have solar systems.   
The Utilities began accepting energy from feed-in tariff projects in 2011. As of September 30, 2017, there were 30 MW, 3 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
In September 2015, the PUC approved Hawaiian Electric’s 2-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 3 million gallons of biodiesel at Campbell Industrial Park combustion turbine No. 1 (CIP CT-1) and the Honolulu International Airport Emergency Power Facility beginning in November 2015. The PBT contract is set to expire on November 2, 2018. PBT also has a spot buy contract with Hawaiian Electric to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was recently extended through June 2018. REG Marketing & Logistics Group, LLC has a contingency supply contract with Hawaiian Electric to also supply biodiesel to CIP CT-1 in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2018, and will continue with no volume purchase requirements.
On April 28, 2017 Hawaiian Electric issued a Biofuel Supply Request for Proposal for 3.1 million gallons of biofuel per year for three years, to commence as early as November 2018 to be used as fuel for power generation at Hawaiian Electric’s Schofield Generating Station, the Honolulu International Airport Emergency Power Facility and any other generating unit on Oahu, as necessary. Hawaiian Electric is in negotiations with a bidder.
Requests for renewable proposals, expressions of interest, and information.
In response to requests filed by the utilities, on October 6, 2017, the PUC opened a docket to receive filings, review approval requests, and resolve disputes, if necessary, related to the Utilities' plan to proceed with a competitive bidding process of dispatchable firm renewable generation on the island of Maui and variable renewable generation on the islands of Oahu, Hawaii, Maui, Molokai, and Lanai. The PUC also indicated that it will appoint an independent observer to monitor the competitive bidding process. On October 23, 2017, the Utilities filed draft requests for proposals for 220 megawatts (MW) of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 100 MW of renewable generation on Maui, including 40 MW of firm renewable generation (all resources to be in service by the end of 2022). With this filing, the Utilities also filed proposed model power purchase agreements and timelines for each proposed procurement. Maui Electric proposed to suspend its request to issue variable renewable dispatchable generation RFPs for Molokai and Lanai as Maui Electric is already in discussions on such islands regarding renewable generation.
On January 5, 2017, Hawaiian Electric issued an Onshore Wind Expression of Interest requesting expressions of interest from independent power producers that are capable of developing utility scale onshore wind projects that are eligible to capture the federal Investment Tax Credit for Large Wind on the island of Oahu. Responses have been accepted and Hawaiian Electric is in non-binding confidential discussions regarding such responses.
On December 12, 2016, the Utilities issued a request for information asking interested landowners to provide information about properties available for utility-scale renewable energy projects or for growing biofuel feedstock on


the islands of Oahu, Hawaii, Maui, Molokai and Lanai. Responses have been made available to developers interested in developing renewable energy projects in these five islands.
Adequacy of supply.
Hawaiian Electric. In January 2017, Hawaiian Electric filed its 2017 Adequacy of Supply (AOS) letter, which indicated that based on its October 2016 sales and peak forecast for the 2017 - 2021 time period, Hawaiian Electric's generation capacity will be sufficient to meet reasonably expected demands for service and provide reasonable reserves for emergencies through 2018, but may have shortfalls in meeting the Utilities’ generating system reliability guideline. The calculated reliability guideline shortfalls are relatively small and Hawaiian Electric can implement mitigation measures.
In accordance to its planning criteria, Hawaiian Electric deactivated two fossil fuel generating units from active service at its Honolulu Power Plant in January 2014 and anticipates deactivating two additional fossil fuel units at its Waiau Power Plant in the 2022 timeframe. Hawaiian Electric acquired new firm capacity with the commissioning of the State of Hawaii Department of Transportation’s emergency power facility in June 2017. Hawaiian Electric is proceeding with a future firm capacity addition with the U.S. Department of the Army for a utility owned and operated renewable, dispatchable, including black start capabilities, generation security project on federal lands, which is expected to be in service in the second quarter of 2018. Hawaiian Electric is continuing negotiations with firm capacity IPPs on Oahu. On August 31, 2017, Hawaiian Electric and Kalaeloa entered into an agreement that neither party will give written notice of termination of the Kalaeloa PPA prior to October 31, 2018. The PPA with AES Hawaii is scheduled to expire in 2022. 
Hawaii Electric Light. In January 2017, Hawaii Electric Light filed its 2017 AOS letter, which indicated that Hawaii Electric Light’s generation capacity through 2019 is sufficient to meet reasonably expected demands for service and provide for reasonable reserves for emergencies. Additional generation from other renewable resources could be added in the 2018-2025 timeframe.
Maui Electric. In January 2017, Maui Electric filed its 2017 AOS letter, which indicated that Maui Electric’s generation capacity for the islands of Lanai and Molokai for the next three years is sufficiently large to meet all reasonably expected demands for service and provide reasonable reserves for emergencies. The 2017 AOS letter also indicated that without the peak reduction benefits of demand response but with the equivalent firm capacity value of wind generation, Maui Electric expects to have a small reserve capacity shortfall from 2017 to 2022 on the island of Maui. Maui Electric is evaluating several measures to mitigate the anticipated reserve capacity shortfall.  Maui Electric anticipates needing a significant amount of additional firm capacity on Maui in the 2022 timeframe after the planned retirement of the Kahului Power Plant.
In February 2014, Maui Electric deactivated two fossil fuel generating units, with a combined rating of 11.4 MW-net, at its Kahului Power Plant. Due to various system conditions including lack of wind generation, approaching storms and scheduled and unscheduled outages of generating units, transmission lines and independent power producers, the two deactivated units at Kahului Power Plant were reactivated for several days in 2015 and 2016. Due to the frequency of reactivations of Kahului Units 1 and 2 to meet system requirements, these units were removed from deactivated status and designated as reactivated in September 2016. Considering the time needed to acquire replacement firm generating capacity, Maui Electric now anticipates the retirement of all generating units at the Kahului Power Plant, which have a combined rating of 32.3 MW, in the 2022 timeframe. A capacity planning analysis is in progress to better define generating needs and timing. Maui Electric plans to issue one or more RFPs for energy storage, demand response and firm generating capacity, and to make system improvements needed to ensure reliability and voltage support in this timeframe. In May 2016, Maui Electric requested that the PUC open a new docket for Maui Electric’s competitive bidding process for additional firm capacity resources. In September 2016, Maui Electric submitted an application to purchase and install three temporary mobile distributed generation diesel engines to address increasing reserve capacity shortfalls on the island of Maui; Maui Electric has since requested the PUC to suspend the proceeding until the end of 2017 to evaluate contingency measures and permanent solutions to minimize or eliminate the risk of near-term capacity shortfalls on the island of Maui.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. See “Recent tax developments” in Note 9 of the Condensed Consolidated Financial Statements. Also, 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.
Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the Federal Register the final regulations required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian


Electric submitted the final site specific studies to the DOH in December 2016 for the Honolulu and Waiau power plants and in September 2017 for the Kahe power plant. Hawaiian Electric will work with the DOH to identify the appropriate compliance methods for the 316(b) rule.
Mercury Air Toxics Standards. On February 16, 2012, the EPA published the final rule establishing the National Emission Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs) in the Federal Register. The final rule, known as the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power plants. MATS established the Maximum Achievable Control Technology standards for the control of hazardous air pollutants emissions from new and existing EGUs. Hawaiian Electric initially selected a MATS compliance strategy based on switching to lower emission fuels, but has since continued developing and refining its emission control strategy. Hawaiian Electric’s liquid oil-fired steam generating units that are subject to the MATS limits are able to comply with the new standards without a significant fuel switch in combination with a suite of operational changes.
Hawaiian Electric has proceeded with the implementation of its MATS Compliance Plan and has met all compliance requirements to date.
PUC Commissioner.  The Governor’s appointment of James Griffin as PUC Commissioner was confirmed by the State Senate on August 31, 2017. Mr. Griffin was a researcher and a faculty member at the Hawaii Natural Energy Institute at the University of Hawaii at Manoa. He also previously served as Chief of Policy and Research at the PUC. His term on the PUC ends June 30, 2022.
FINANCIAL CONDITION
Liquidity and capital resources.  Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures and investments and to cover debt, retirement benefits and other cash requirements in the foreseeable future.
Hawaiian Electric’s consolidated capital structure was as follows:
(dollars in millions) September 30, 2017 December 31, 2016
Short-term borrowings $6
 —% $—
 —%
Long-term debt, net 1,319
 41
 1,319
 42
Preferred stock 34
 1
 34
 1
Common stock equity 1,829
 58
 1,800
 57
  $3,188
 100% $3,153
 100%
Information about Hawaiian Electric’s short-term borrowings (other than from Hawaii Electric Light and Maui Electric) and Hawaiian Electric’s line of credit facility were as follows:
  Average balance Balance
(in millions) Nine months ended September 30, 2017 September 30, 2017 December 31, 2016
Short-term borrowings 1
  
  
  
Commercial paper $6
 $6
 $—
Line of credit draws —
 —
 —
Borrowings from HEI 2
 —
 —
Undrawn capacity under line of credit facility   200
 200
1   The maximum amount of external short-term borrowings by Hawaiian Electric during the first nine months of 2017 was $48 million. As of September 30, 2017, Hawaiian Electric had short-term borrowings from Hawaii Electric Light and Maui Electric of $6.6 million and $4.0 million, respectively. As of October 27, 2017, Hawaiian Electric had $2 million of outstanding commercial paper, no draws under its line of credit facility and no borrowings from HEI. Also, as of October 27, 2017, Hawaiian Electric had short-term borrowings from Hawaii Electric Light and Maui Electric of $13.1 million and $7.0 million, respectively, which intercompany borrowings are eliminated in consolidation.
Hawaiian Electric has a $200 million line of credit facility. See Note 5 of the Condensed Consolidated Financial Statements.


In May 2015, up to $80 million of SPRBs ($70 million for Hawaiian Electric, $2.5 million for Hawaii Electric Light and $7.5 million for Maui Electric) were authorized by the Hawaii legislature for issuance, with PUC approval, prior to June 30, 2020 to finance the Utilities’ capital improvement programs.
On January 26, 2017, Hawaiian Electric, Hawaii Electric Light and Maui Electric obtained PUC approval to issue, on or before December 31, 2017, unsecured obligations bearing taxable interest (Hawaiian Electric up to $100 million, Hawaii Electric Light up to $10 million and Maui Electric up to $30 million), with the proceeds expected to be used, as applicable, to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures and/or to reimburse funds used for payment of capital expenditures.
In March 2017 and amended in April 2017, the Utilities requested PUC approval to issue and sell each utility’s common stock through December 31, 2021 (Hawaiian Electric’s sale/s to HEI of up to $150 million and Hawaii Electric Light’s and Maui Electric’s sale/s to Hawaiian Electric of up to $10 million each) and the purchase of Hawaii Electric Light and Maui Electric common stock by Hawaiian Electric through December 31, 2021. On October 31, 2017, the PUC issued a D&O approving the issue and sale of each utility’s common stock as requested in the application.
In September 2017, the Utilities requested PUC approval to issue, over a four-year period from 2018 to December 31, 2021, unsecured obligations bearing taxable interest (Hawaiian Electric up to $280 million, Hawaii Electric Light up to $30 million and Maui Electric up to $10 million), with the proceeds expected to be used, as applicable, to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures and/or to reimburse funds used for payment of capital expenditures.
Cash flows. The following table reflects the changes in cash flows for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016:
 Nine months ended September 30,  
(in thousands)2017 2016 Change
Net cash provided by operating activities$229,902
 $275,271
 $(45,369)
Net cash used in investing activities(229,287) (226,036) (3,251)
Net cash used in financing activities(64,914) (50,707) (14,207)
Net cash provided by operating activities. Cash flows from operating activities generally relate to the amount and timing of cash received from customers and payments made to third parties. Using the indirect method of determining cash flows from operating activities, noncash expense items such as depreciation and amortization, as well as changes in certain assets and liabilities, are added to (or deducted from) net income.
The decrease in net cash provided by operating activities was impacted by the following:
Lower cash from an increase in accounts receivable due to timing and an increase in fuel prices.
Lower cash from a decrease in accounts payable due to timing on payments of invoices related to fuel and capital projects.
Lower cash from an increase in unbilled revenues due to higher fuel prices.
Lower cash due to refund of federal income taxes in 2016 based on bonus depreciation enacted in the fourth quarter of 2015 (similar treatment was not granted in the fourth quarter of 2016).
Net cash used in investing activities. The increase in net cash used in investing activities was driven primarily by an increase in capital expenditures related to construction activities, offset by higher contributions in aid of construction and capital good tax credits.
Net cash used in financing activities. Financing activities provide supplemental cash for both day-to-day operations and capital requirements as needed. The increase in net cash used in financing activities primarily reflects lower short-term borrowings.
2017 forecast capital expenditures. For 2017, the Utilities forecast $400 million of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures in 2017, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2017 forecast (such as increases in the costs or acceleration of capital projects or unanticipated capital expenditures that may be required by new environmental laws and regulations).


Bank
  Three months ended September 30 Increase  
(in millions) 2017 2016 (decrease) Primary reason(s)
Interest income $59
 $55
 $4
 The increase in interest income was the result of a higher average investment securities portfolio balance and an increase in yields on earning assets. ASB’s average loan portfolio balance for the three months ended September 30, 2017 decreased by $68 million compared to the same period in 2016 as increases in average consumer and home equity lines of credit balances of $54 million and $31 million, respectively, were more than offset by a decrease in commercial loan balances of $132 million. The decrease in the average commercial loan balance was primarily due to a decrease in the syndicated national credit loan portfolio and paydowns in the commercial loan portfolio. The yield on earning assets increased by 8 basis points due to the repricing of the adjustable rate loans with the increase in the interest rate environment and a shift in the mix of the loan portfolio with the growth in the consumer loan portfolio, which resulted in an increase in the loan portfolio yield of 20 basis points. The average investment securities portfolio balance increased by $378 million due to the use of excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 8 basis points as new investment purchase yields were higher due to the increase in short-term interest rates.
Noninterest income 15
 19
 (4) Noninterest income decreased for the three months ended September 30, 2017 compared to noninterest income for the three months ended September 30, 2016 due to lower mortgage banking income. Prior year’s noninterest income included a gain on sale of real estate with no similar sale in 2017.
Revenues 74
 74
 —
  
Interest expense 3
 3
 —
 Interest expense was flat for the three months ended September 30, 2017 compared to the same period in 2016 as higher interest expense from the growth in term certificates was offset by lower interest expense on other borrowings as a result of lower repurchase agreements and FHLB advances. Average deposit balances for the three months ended September 30, 2017 increased by $392 million compared to the same period in 2016 due to an increase in core deposits and term certificates of $303 million and $89 million, respectively. Other borrowings decreased by $105 million primarily due to a decrease in repurchase agreements and FHLB advances of $72 million and $33 million, respectively. The interest-bearing liability rate for the three months ended September 30, 2017 decreased by 5 basis points compared to the same period in 2016.
Provision for loan losses 1
 6
 (5) The provision for loan losses decreased by $5.3 million for the three months ended September 30, 2017 compared to the provision for loan losses for the three months ended September 30, 2016. The provision for loan losses for 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to loan paydowns and sales as the Bank strategically worked to improve commercial asset quality. The provision for loan losses for 2016 was primarily due to increased reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Delinquency rates have increased from 0.51% at September 30, 2016 to 0.60% at September 30, 2017. The annualized net charge-off ratio for the three months ended September 30, 2017 was 0.32% compared to an annualized net charge-off ratio of 0.20% for the same period in 2016. The increase in net charge-offs were due to an increase in consumer loan portfolio charge-offs as a result of ASB’s strategic expansion of its unsecured consumer loan product offering with risk-based pricing.
Noninterest expense 44
 42
 2
 The increase in noninterest expense for the three months ended September 30, 2017 compared to the same period in 2016 was primarily due to higher compensation and employee benefits expenses as a result of higher performance-based compensation costs and higher employee benefit costs.
Expenses 48
 51
 (3)  
Operating income 26
 23
 3
 Higher net interest income and lower provision for loan losses was partly offset by higher noninterest expenses and lower noninterest income.
Net income 18
 15
 3
  



  Nine months ended September 30 Increase  
(in millions) 2017 2016 (decrease) Primary reason(s)
Interest income $176
 $163
 $13
 The increase in interest income was the result of higher average earning asset balances and an increase in yields on earning assets. ASB’s average loan portfolio balance for the nine months ended September 30, 2017 increased by $17 million compared to the same period in 2016 as average consumer, commercial real estate and home equity lines of credit balances increased by $58 million, $48 million and $23 million, respectively. The growth in these loan portfolios was reflective of ASB’s portfolio mix target and loan growth strategy. The average commercial loan balance decreased by $103 million primarily due to a decrease in the syndicated national credit loan portfolio. The yield on earning assets increased by 7 basis points due to a shift in the mix of the loan portfolio with the growth in the commercial real estate and consumer loan portfolios and repricing of the adjustable rate loans with the increase in the interest rate environment, which resulted in an increase in loan portfolio yields of 17 basis points. The average investment securities portfolio balance increased by $358 million due to the use of excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 9 basis points as new investment purchase yields were higher due to the increase in short-term interest rates.
Noninterest income 47
 50
 (3) Noninterest income decreased slightly for the nine months ended September 30, 2017 compared to noninterest income for the nine months ended September 30, 2016 due to lower mortgage banking income. Prior year’s noninterest income included gains on sales of securities and a gain on sale of real estate with no similar sales in 2017.
Revenues 223
 213
 10
  
Interest expense 9
 10
 (1) Interest expense was lower for the nine months ended September 30, 2017 compared to the same period in 2016 as higher interest expense from the growth in term certificates was more than offset by lower interest expense on other borrowings as a result of lower repurchase agreements and FHLB advances. Average deposit balances for the nine months ended September 30, 2017 increased by $471 million compared to the same period in 2016 due to an increase in core deposits and term certificates of $334 million and $137 million, respectively. Other borrowings decreased by $102 million primarily due to a decrease in repurchase agreements. The interest-bearing liability rate for the nine months ended September 30, 2017 decreased by 3 basis points compared to the same period in 2016.
Provision for loan losses 7
 15
 (8) The provision for loan losses decreased by $8.0 million for the nine months ended September 30, 2017 compared to the provision for loan losses for the nine months ended September 30, 2016. The provision for loan losses for the first nine months of 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to lower outstanding balances and improved credit quality. The provision for loan losses for the first nine months of 2016 was primarily due to increased reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Delinquency rates have increased from 0.51% at September 30, 2016 to 0.60% at September 30, 2017. The annualized net charge-off ratio for the nine months ended September 30, 2017 was 0.27% compared to an annualized net charge-off ratio of 0.19% for the same period in 2016. The increase in net charge-offs for the first nine months of 2017 was due to an increase in consumer loan portfolio charge-offs as a result of ASB’s strategic expansion of its unsecured consumer loan product offering with risk-based pricing.
Noninterest expense 131
 126
 5
 The increase in noninterest expense for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to higher compensation and employee benefits expenses as a result of higher performance-based compensation costs and higher employee benefit costs. Prior year’s noninterest expense included costs related to the replacement and upgrade of the electronic banking platform.
Expenses 147
 151
 (4)  
Operating income 76
 62
 14
 Higher net interest income and lower provision for loan losses was partly offset by higher noninterest expenses and lower noninterest income.
Net income 50
 41
 9
  

See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.


ASB’s return on average assets, return on average equity and net interest margin were as follows:
  Three months ended September 30 Nine months ended September 30
(percent) 2017 2016 2017 2016
Return on average assets 1.07
 0.97
 1.02
 0.89
Return on average equity 11.64
 10.36
 11.24
 9.50
Net interest margin 3.69
 3.57
 3.68
 3.59
Average balance sheet and net interest margin.  The following tables provide a summary of average balances including major categories of interest-earning assets and interest-bearing liabilities:
  Three months ended September 30
  2017 2016
(dollars in thousands) Average
balance		 
Interest1 
income/
expense
 Yield/
rate (%)		 Average
balance		 
Interest1
 income/
expense
 Yield/
rate (%)
Assets:  
  
  
  
  
  
Interest-earning deposits $54,598
 $172
 1.23
 $97,885
 $124
 0.50
FHLB stock 10,401
 45
 1.70
 11,218
 54
 1.89
Available-for-sale investment securities            
Taxable 1,291,604
 6,521
 2.02
 928,698
 4,581
 1.97
Non-taxable 15,427
 171
 4.33
 —
 —
 —
Total available-for-sale investment securities 1,307,031
 6,692
 2.05
 928,698
 4,581
 1.97
Loans            
Residential 1-4 family 2,066,648
 21,383
 4.14
 2,077,135
 22,044
 4.24
Commercial real estate 880,304
 9,542
 4.26
 888,886
 9,113
 4.08
Home equity line of credit 895,224
 7,714
 3.42
 864,589
 7,204
 3.31
Residential land 16,340
 296
 7.26
 18,764
 282
 6.00
Commercial 618,708
 6,863
 4.39
 750,366
 7,327
 3.87
Consumer 213,619
 6,412
 11.91
 159,226
 4,474
 11.18
Total loans 2,3
 4,690,843
 52,210
 4.42
 4,758,966
 50,444
 4.22
Total interest-earning assets 2
 6,062,873
 59,119
 3.88
 5,796,767
 55,203
 3.80
Allowance for loan losses (55,881)  
  
 (55,480)  
  
Non-interest-earning assets 558,736
  
  
 514,120
  
  
Total assets $6,565,728
  
  
 $6,255,407
  
  
Liabilities and shareholder’s equity:  
  
  
  
  
  
Savings $2,292,341
 $400
 0.07
 $2,139,863
 $358
 0.07
Interest-bearing checking 901,645
 61
 0.03
 837,480
 43
 0.02
Money market 138,151
 41
 0.12
 161,149
 52
 0.13
Time certificates 686,638
 1,942
 1.12
 597,537
 1,418
 0.94
Total interest-bearing deposits 4,018,775
 2,444
 0.24
 3,736,029
 1,871
 0.20
Advances from Federal Home Loan Bank 66,848
 436
 2.59
 100,000
 792
 3.10
Securities sold under agreements to repurchase 90,011
 34
 0.15
 161,652
 672
 1.63
Total interest-bearing liabilities 4,175,634
 2,914
 0.28
 3,997,681
 3,335
 0.33
Non-interest bearing liabilities:  
  
  
  
  
  
Deposits 1,681,774
  
  
 1,572,821
  
  
Other 103,695
  
  
 101,759
  
  
Shareholder’s equity 604,625
  
  
 583,146
  
  
Total liabilities and shareholder’s equity $6,565,728
  
  
 $6,255,407
  
  
Net interest income  
 $56,205
  
  
 $51,868
  
Net interest margin (%) 4
  
  
 3.69
  
  
 3.57



  Nine months ended September 30
  2017 2016
(dollars in thousands) Average
balance		 
Interest1 
income/
expense
 Yield/
rate (%)		 Average
balance		 
Interest1
 income/
expense
 Yield/
rate (%)
Assets:  
  
  
  
  
  
Interest-earning deposits $64,426
 $479
 0.98
 $80,738
 $304
 0.50
FHLB stock 11,128
 150
 1.80
 11,094
 142
 1.71
Available-for-sale investment securities            
Taxable 1,235,029
 19,651
 2.12
 892,726
 13,773
 2.06
Non-taxable 15,427
 481
 4.11
 —
 —
 —
Total available-for-sale investment securities 1,250,456
 20,132
 2.15
 892,726
 13,773
 2.06
Loans            
Residential 1-4 family 2,070,150
 65,172
 4.20
 2,076,308
 66,565
 4.27
Commercial real estate 902,605
 28,676
 4.20
 854,977
 25,993
 4.04
Home equity line of credit 880,472
 22,078
 3.35
 857,652
 21,058
 3.28
Residential land 16,816
 791
 6.28
 18,577
 843
 6.05
Commercial 650,554
 21,108
 4.32
 753,783
 22,294
 3.93
Consumer 201,379
 17,444
 11.58
 143,514
 11,818
 11.00
Total loans 2,3
 4,721,976
 155,269
 4.38
 4,704,811
 148,571
 4.21
Total interest-earning assets 2
 6,047,986
 176,030
 3.88
 5,689,369
 162,790
 3.81
Allowance for loan losses (56,276)  
  
 (52,902)  
  
Non-interest-earning assets 537,894
  
  
 505,014
  
  
Total assets $6,529,604
  
  
 $6,141,481
  
  
Liabilities and shareholder’s equity:  
  
  
  
  
  
Savings $2,271,926
 $1,160
 0.07
 $2,095,975
 $1,034
 0.07
Interest-bearing checking 898,794
 175
 0.03
 831,412
 127
 0.02
Money market 146,864
 133
 0.12
 164,596
 157
 0.13
Time certificates 676,083
 5,390
 1.07
 539,314
 3,836
 0.95
Total interest-bearing deposits 3,993,667
 6,858
 0.23
 3,631,297
 5,154
 0.19
Advances from Federal Home Loan Bank 89,273
 1,999
 2.99
 101,232
 2,363
 3.07
Securities sold under agreements to repurchase 93,128
 111
 0.16
 182,671
 2,053
 1.48
Total interest-bearing liabilities 4,176,068
 8,968
 0.29
 3,915,200
 9,570
 0.32
Non-interest bearing liabilities:  
  
  
  
  
  
Deposits 1,658,238
  
  
 1,549,467
  
  
Other 100,499
  
  
 100,210
  
  
Shareholder’s equity 594,799
  
  
 576,604
  
  
Total liabilities and shareholder’s equity $6,529,604
  
  
 $6,141,481
  
  
Net interest income  
 $167,062
  
  
 $153,220
  
Net interest margin (%) 4
  
  
 3.68
  
  
 3.59
1
Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $0.06 million and nil for the three months ended September 30, 2017 and 2016, respectively and $0.2 million and nil for the nine months ended September 30, 2017 and 2016, respectively.
2 Includes loans held for sale, at lower of cost or fair value.
3
Includes recognition of deferred loan fees of $0.3 million and $0.6 million for the three months ended September 30, 2017 and 2016 and $1.4 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
4
Defined as net interest income as a percentage of average total interest-earning assets.
Earning assets, costing liabilities and other factors.  Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. These conditions have begun to moderate with the interest rate increases in the past year which resulted in an increase in ASB’s net interest income and net interest margin.
Loan originations and mortgage-related securities are ASB’s primary earning assets.


Loan portfolio.  ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. The composition of ASB’s loans receivable was as follows:
  September 30, 2017 December 31, 2016
(dollars in thousands) Balance % of total Balance % of total
Real estate:  
  
  
  
Residential 1-4 family $2,066,023
 44.2
 $2,048,051
 43.2
Commercial real estate 745,583
 15.9
 800,395
 16.9
Home equity line of credit 905,249
 19.4
 863,163
 18.2
Residential land 18,611
 0.4
 18,889
 0.4
Commercial construction 128,407
 2.7
 126,768
 2.7
Residential construction 13,031
 0.3
 16,080
 0.3
Total real estate 3,876,904
 82.9
 3,873,346
 81.7
Commercial 589,669
 12.6
 692,051
 14.6
Consumer 211,571
 4.5
 178,222
 3.7
  4,678,144
 100.0
 4,743,619
 100.0
Less: Deferred fees and discounts (1,863)  
 (4,926)  
Allowance for loan losses (53,047)  
 (55,533)  
Total loans, net $4,623,234
  
 $4,683,160
  
Home equity— key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached, or are starting to reach, the end of their 10-year, interest only payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of the HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the portfolio and are included in the amortizing balances identified in the loan portfolio table below.
  September 30, 2017 December 31, 2016
Outstanding balance of home equity loans (in thousands) $905,249
 $863,163
Percent of portfolio in first lien position 47.2 % 45.1%
Annualized net charge-off (recovery) ratio (0.04)% 0.01%
Delinquency ratio 0.38 % 0.35%
      End of draw period – interest only Current
September 30, 2017 Total Interest only 2017-2018 2019-2021 Thereafter amortizing
Outstanding balance (in thousands) $905,249
 $718,843
 $55,842
 $97,061
 $565,940
 $186,406
% of total 100% 79% 6% 11% 62% 21%
The HELOC portfolio comprised 19% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable rate term loan with a 20-year amortization period. This product type comprises 79% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed rate loan with level principal and interest payments. As of September 30, 2017, approximately 20% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements.  See Note 4 of the Condensed Consolidated Financial Statements.


Available-for-sale investment securities.  ASB’s investment portfolio was comprised as follows:
  September 30, 2017 December 31, 2016
(dollars in thousands) Balance % of total Balance % of total
U.S. Treasury and federal agency obligations $182,118
 14% $192,281
 18%
Mortgage-related securities — FNMA, FHLMC and GNMA 1,122,565
 85
 897,474
 81
Mortgage revenue bond 15,427
 1
 15,427
 1
Total available-for-sale investment securities $1,320,110
 100% $1,105,182
 100%
Principal and interest on mortgage-related securities issued by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) are guaranteed by the issuer and, in the case of GNMA, backed by the full faith and credit of the U.S. government.
Deposits and other borrowings.  Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines and securities sold under agreements to repurchase continue to be additional sources of funds. As of September 30, 2017 and December 31, 2016, ASB’s costing liabilities consisted of 97% deposits and 3% other borrowings. The weighted average cost of deposits for the first nine months of 2017 and 2016 was 0.16% and 0.13%, respectively.
Federal Home Loan Bank of Des Moines. As of September 30, 2017 and December 31, 2016, ASB had $50 million and $100 million of advances outstanding at the FHLB of Des Moines. The decrease in advances outstanding was due to the payoff of a maturing FHLB advance. As of September 30, 2017, the unused borrowing capacity with the FHLB of Des Moines was $1.9 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
Other factors.  Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.
As of September 30, 2017, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $5.5 million compared to an unrealized loss, net of taxes, of $7.9 million at December 31, 2016. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first nine months of 2017, ASB recorded a provision for loan losses of $7.2 million primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to lower outstanding balances and improved credit quality. During the first nine months of 2016, ASB recorded a provision for loan losses of $15.3 million primarily due to increased loss reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Financial stress on ASB’s customers may result in higher levels of delinquencies and losses.
  Nine months ended September 30 
Year ended
December 31,
(in thousands) 2017 2016 2016
Allowance for loan losses, January 1 $55,533
 $50,038
 $50,038
Provision for loan losses 7,231
 15,266
 16,763
Less: net charge-offs 9,717
 6,567
 11,268
Allowance for loan losses, end of period $53,047
 $58,737
 $55,533
Ratio of net charge-offs during the period to average loans outstanding (annualized) 0.27% 0.19% 0.24%
We maintain a reserve for credit losses that consists of two components, the allowance for loan losses and a reserve for unfunded loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in other noninterest expense. As of September 30, 2017 and December 31, 2016, the reserve for unfunded loan commitments was $1.7 million.
Legislation and regulation.  ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”


Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  Regulation of the financial services industry, including regulation of HEI, ASB Hawaii and ASB, has changed and will continue to change as a result of the enactment of the Dodd-Frank Act, which became law in July 2010. Importantly for HEI, ASB Hawaii and ASB, under the Dodd-Frank Act all of the functions of the Office of Thrift Supervision transferred on July 21, 2011 to the OCC, the FDIC, the FRB and the Consumer Financial Protection Bureau (Bureau). Supervision and regulation of HEI and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally chartered savings bank, moved to the OCC. While the laws and regulations applicable to HEI and ASB did not generally change, the applicable laws and regulations are being interpreted, and new and amended regulations may be adopted, by the FRB, the OCC and the Bureau. In addition, HEI will continue to be required to serve as a source of strength to ASB in the event of its financial distress. The Dodd-Frank Act also imposed new restrictions on the ability of a savings bank to pay dividends should it fail to remain a qualified thrift lender.
More stringent affiliate transaction rules now apply to ASB in the securities lending, repurchase agreement and derivatives areas. Standards were raised with respect to the ability of ASB to merge with or acquire another institution. In reviewing a potential merger or acquisition, the approving federal agency will need to consider the extent to which the proposed transaction will result in “greater or more concentrated risks to the stability of the U.S. banking or financial system.”
The Dodd-Frank Act established the Bureau. It has authority to prohibit practices it finds to be unfair, deceptive or abusive, and it may also issue rules requiring specified disclosures and the use of new model forms. On January 10, 2013, the Bureau issued the Ability-to-Repay rule which closed for comment on February 25, 2013. For mortgages, among other things, (i) potential borrowers have to supply financial information, and lenders must verify it, (ii) to qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan and (iii) lenders have to determine the consumer’s ability to repay both the principal and the interest over the long term - not just during an introductory period when the rate may be lower.
ASB may also be subject to new state regulation because of a provision in the Dodd-Frank Act that acknowledges that a federal savings bank may be subject to state regulation and allows federal law to preempt a state consumer financial law on a “case by case” basis only when (1) the state law would have a discriminatory effect on the bank compared to that on a bank chartered in that state, (2) the state law prevents or significantly interferes with a bank’s exercise of its power or (3) the state law is preempted by another federal law.
The Dodd-Frank Act also adopts a number of provisions that impact the mortgage industry, including the imposition of new specific duties on the part of mortgage originators (such as ASB) to act in the best interests of consumers and to take steps to ensure that consumers will have the capability to repay loans they may obtain, as well as provisions imposing new disclosure requirements and requiring appraisal reforms.
Also, the Dodd-Frank Act directs the Bureau to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. Consistent with this requirement, the Bureau amended Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements, the final rule provides extensive guidance regarding compliance with those requirements. This rule was effective October 3, 2015.
The “Durbin Amendment” to the Dodd-Frank Act required the FRB to issue rules to ensure that debit card interchange fees are “reasonable and proportional” to the processing costs incurred. In June 2011, the FRB issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. Under the final rule, effective October 1, 2011, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is 21-24 cents, depending on certain components. Financial institutions and their affiliates that have less than $10 billion in assets are exempt from this Amendment; however, on July 1, 2013, ASB became non-exempt as the consolidated assets of HEI exceeded $10 billion. The debit card interchange fees received by ASB have been lower as a result of the application of this Amendment.
Final Capital Rules.  On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding


companies and propose to apply the FRB’s capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.
Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and address shortcomings in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule are:
Minimum Capital Requirements
Effective dates 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019
Capital conservation buffer  
 0.625% 1.25% 1.875% 2.50%
Common equity Tier-1 ratio + conservation buffer 4.50% 5.125% 5.75% 6.375% 7.00%
Tier-1 capital ratio + conservation buffer 6.00% 6.625% 7.25% 7.875% 8.50%
Total capital ratio + conservation buffer 8.00% 8.625% 9.25% 9.875% 10.50%
Tier-1 leverage ratio 4.00% 4.00% 4.00% 4.00% 4.00%
Countercyclical capital buffer — not applicable to ASB  
 0.625% 1.25% 1.875% 2.50%
The final rule was effective January 1, 2015 for ASB. As of September 30, 2017, ASB met the new capital requirements with a Common equity Tier-1 ratio of 12.7%, a Tier-1 capital ratio of 12.7%, a Total capital ratio of 13.9% and a Tier-1 leverage ratio of 8.7%.
Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any.
Military Lending Act. The Department of Defense (DOD) amended its regulation that implements the Military Lending Act (MLA), which became effective on October 3, 2016. The DOD amended its regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products. It initially applied to three narrowly-defined “consumer credit” products: closed-end payday loans; closed-end auto title loans; and closed-end tax refund anticipation loans. The DOD revised the scope of the definition of ‘‘consumer credit’’ to be generally consistent with the credit products that have been subject to the requirements of the Regulation Z, namely: credit offered or extended to a covered borrower primarily for personal, family or household purposes and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.
Additionally, the DOD elected to exercise its discretion by generally requiring any fees for credit insurance products or for credit-related ancillary products to be included in the Military Annual Percentage Rate. The DOD also modified the disclosures that a creditor must provide to a covered borrower and implemented the enforcement provisions of the MLA. ASB has modified certain products, practices and associated training to conform to these changes.
Overtime Rules. The Secretary of Labor updated the overtime regulations of the Fair Labor Standards Act to simplify and modernize them. The Department of Labor issued final rules that will raise the salary threshold indicating eligibility from $455/week to $913/week ($47,476 per year), and update automatically the salary threshold every three years, based on wage growth over time, increasing predictability. The final rule was to become effective on December 1, 2016. In late-November 2016 however, the U.S. District Court in the Eastern District of Texas granted a nationwide preliminary injunction that blocked the final rule, saying the Department of Labor's rule exceeds the authority the agency was delegated by Congress. Despite this block, ASB modified its salaries in the fourth quarter of 2016 such that it is in voluntary compliance with the final rule. On July 26, 2017, the Department of Labor published a Request for Information Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. On August 31, 2017, U.S. District Court in the Eastern District of Texas


granted summary judgment against the Department of Labor in consolidated cases challenging the final rule published on May 23, 2016. The court held that the final rule’s salary level exceeded the Department of Labor’s authority and concluded that the final rule was invalid.
Arbitration Agreements. Pursuant to section 1028(b) of the Dodd-Frank Act, on July 19, 2017, the Bureau issued a final rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The compliance date for this regulation is March 19, 2018. Under the Congressional Review Act, the U.S. House of Representatives voted to overturn the final rule on July 25, 2017, and the U.S. Senate did the same on October 24, 2017. On November 1, 2017, the President signed the repeal of the final rule. ASB is currently evaluating the impact of these events on its affected agreements.
FINANCIAL CONDITION
Liquidity and capital resources.  As a result of the Tax Cut and Jobs Act, utility property is no longer eligible for bonus depreciation, but further guidance is required in order to finally determine the timing of the application of the new law. However, note that recent clarification in the tax law indicates that certain assets with longer construction periods that were placed in service after the effective date may be grandfathered and qualify for the old 50% bonus depreciation if subject to binding contracts entered into before such effective date. The Utilities are currently evaluating its larger projects placed into service after September 27, 2017 for applicability. Nevertheless, the initial cash requirement for future utility capital projects will generally increase because of the loss of the immediate tax benefit from bonus depreciation. The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements for the foreseeable future.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
(dollars in millions) June 30, 2018 December 31, 2017
Short-term borrowings—other than bank $203
 5% $118
 3%
Long-term debt, net—other than bank 1,783
 43
 1,684
 43
Preferred stock of subsidiaries 34
 1
 34
 1
Common stock equity 2,103
 51
 2,097
 53
  $4,123
 100% $3,933
 100%
HEI’s commercial paper borrowings and line of credit facility were as follows:
  Average balance Balance
(in millions)  Six months ended June 30, 2018 June 30, 2018 December 31, 2017
Commercial paper $49
 $61
 $63
Line of credit draws —
 —
 —
Undrawn capacity under HEI’s line of credit facility   150
 150
Note: This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s external short-term borrowings during the first six months of 2018 was $68 million.
HEI has a $150 million line of credit facility with no amounts outstanding at June 30, 2018. See Note 5 of the Condensed Consolidated Financial Statements.


The Company has the ability to satisfy the share purchase requirements for the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP and ASB 401(k) Plan either through the issuance of new shares, which provides new capital, or through open market purchases of its common stock. From December 7, 2016 to date, HEI satisfied the share purchase requirements for these plans through open market purchases of its common stock rather than through new issuances.
For the first six months of 2018, net cash provided by operating activities of HEI consolidated was $108 million. Net cash used by investing activities for the same period was $391 million, primarily due to Hawaiian Electric’s consolidated capital expenditures and ASB’s net increase in loans held for investment and purchases of investment securities, partly offset by ASB’s receipt of repayments from investment securities and Hawaiian Electric’s receipt of contributions in aid of construction. Net cash provided by financing activities during this period was $276 million as a result of several factors, including increases in short-term borrowings and ASB’s deposit liabilities, proceeds from other bank borrowings and long-term debt and net increases in ASB’s retail purchase agreements, partly offset by the payment of common stock dividends and repayments of other bank borrowings. Other than capital contributions from their parent company, intercompany services (and related intercompany payables and receivables), Hawaiian Electric’s periodic short-term borrowings from HEI (and related interest) and the payment of dividends to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank segments’ discussions of their cash flows in their respective “Financial condition—Liquidity and capital resources” sections below.) During the first six months of 2018, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $52 million and $22 million, respectively.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company’s results of operations and financial condition can be affected by numerous factors, many of which are beyond the Company’s control and could cause future results of operations to differ materially from historical results. For information about certain of these factors, see pages 49, 63 to 65, and 75 to 77 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2017 Form 10-K.
Additional factors that may affect future results and financial condition are described on pages iv and v under “Cautionary Note Regarding Forward-Looking Statements.”
MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments.
For information about these material estimates and critical accounting policies, see pages 50 to 51, 65, and 77 to 80 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2017 Form 10-K.


Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
Electric utility
RESULTS OF OPERATIONS
Three months ended June 30 Increase  
2018 2017 (decrease) (dollars in millions, except per barrel amounts)
$608
 $557
 $51
   
Revenues. Net increase largely due to:
      $27
 
higher fuel oil prices1
      19
 
higher purchased power energy costs2
      12
 higher RAM revenue
      10
 higher rate relief
      8
 higher KWH generated
      (3) lower PPAC revenues
      (8) lower KWH purchased
      (13) Tax reform adjustment
172
 141
 31
   
Fuel oil expense. Increase due to higher fuel oil prices and higher KWH generated
161
 153
 8
   
Purchased power expense. Increase due to higher fuel oil prices
      18
 higher purchased power energy price
      (1) lower AES Hawaii capacity charges
      (1) lower PGV capacity charges
      (7) lower KWH purchased
113
 105
 8
   
Operation and maintenance expenses. Net increase due to:
      7
 reset of pension costs as part of rate case interim decisions
      1
 Big Island lava eruption response costs
      1
 higher vegetation management costs
      (2) higher overhaul costs related to Waiau and Kahe plants in 2017
108
 101
 7
   
Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2017
55
 56
 (1)   
Operating income.  Decrease due to higher operation and maintenance and other expenses offset by higher revenue
31
 26
 5
   
Net income for common stock. Increase due to higher RAM and rate relief, offset by higher expenses
         
2,128
 2,150
 (22)   
Kilowatthour sales (millions)3
$81.84
 $69.86
 $11.98
   
Average fuel oil cost per barrel1



Six months ended June 30 Increase  
2018 2017 (decrease) (dollars in millions, except per barrel amounts)
$1,179
 $1,075
 $104
   
Revenues. Net increase largely due to:
      $61
 
higher fuel oil prices1
      28
 higher RAM revenues
      23
 
higher purchased power energy costs2
      17
 higher rate relief
      (3) lower KWH generated
      (21) Tax reform adjustment
339
 286
 53
   
Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower KWH generated
301
 280
 21
   
Purchased power expense. Increase due to higher fuel oil prices
      21
 higher purchased power energy price
      2
 higher AES Hawaii capacity charges
      (3) lower KWH purchased
220
 204
 16
   
Operation and maintenance expenses. Net increase due to:
      10
 reset of pension costs as part of rate case interim decisions
      2
 write-off of smart grid costs
      1
 higher ERP costs related to outside consultants
      1
 one-time rent expense adjustment for existing substation land
      1
 Big Island lava eruption response costs
      1
 higher vegetation management costs
212
 199
 13
   
Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2017
107
 107
 —
   
Operating income.  Higher revenue from RAM and rate relief offset by higher operation and maintenance and other expenses
59
 47
 12
   
Net income for common stock. Increase due to higher RAM and rate relief, offset by higher expenses
         
4,140
 4,188
 (48)   
Kilowatthour sales (millions)3
$81.26
 $67.78
 $13.48
   
Average fuel oil cost per barrel1
462,547
 460,858
 1,689
   Customer accounts (end of period)
1The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in purchase power expenses (except purchased energy costs) are passed on to customers.
3KWH sales were lower when compared to the same quarter in the prior year due largely to continued energy efficiency and conservation efforts by customers and increasing levels of private customer-sited renewable generation.
The Utilities’ effective tax rates for the second quarters of 2018 and 2017 were 22% and 36%, respectively. The Utilities’ effective tax rates for the first six months of 2018 and 2017 were 23% and 36%, respectively. The effective tax rates were lower in the three and six months ended June 30, 2018 compared to the same periods in 2017 due primarily to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%. The lower tax rate was partially offset by other Tax Act changes (the non-deductibility of excess executive compensation and various fringe benefit costs). Although the Utilities’ effective income tax rate decreased, the net benefits of the Tax Act, including the lower effective tax rate, are being returned to customers through rates.
Hawaiian Electric’s consolidated ROACE was 7.2% for the twelve months ended June 30, 2018, and 7.2% for the twelve months ended June 30, 2017.


The Utilities’ consolidated KWH sales have declined each year since 2007. Based on expectations of additional customer renewable self-generation and energy-efficiency installations, the Utilities’ full year 2018 KWH sales are expected to be below the 2017 level. However, due to the decoupling model implemented in 2011, revenues are not tied to KWH sales and include annual rate adjustments to revenues. See “Decoupling” in the “Regulatory proceedings” section of Note 3 of the condensed consolidated financial statements for additional information.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 2018 amounted to $4 billion, of which approximately 30% related to generation PPE, 61% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 10% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission. See “Adequacy of supply” below.
See “Economic conditions” in the “HEI Consolidated” section above.
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources (such as private rooftop solar), demand response and grid-scale resources to achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are committed to partnering with the State of Hawaii in achieving its Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law requires electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045, respectively. The Utilities have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal. The Utilities' RPS for 2017 was about 27% and on its way to achieving the 2020 RPS goal of 30%. (See "Developments in renewable energy efforts” below).
In April 2014, the PUC issued orders that collectively address certain key policy, resource planning and operational issues for the Utilities. The April 2014 regulatory orders were to address: (1) Integrated Resource Planning and Power Supply Improvement Plans (PSIPs), (2) Reliability Standards Working Group, and (3) Policy Statement and Order Regarding Demand Response Programs, which are described below. The PUC also provided its inclinations on the future of Hawaii’s electric utilities in one of the orders. The PUC provided its perspectives on the vision, business strategies and regulatory policy changes required to align the Utilities' business model with customers’ interests and the state’s public policy goals.
Integrated Resource Planning and Power Supply Improvement Plans. In August 2014, the Utilities filed proposed Power Supply Improvement Plans (PSIPs) with the PUC , and subsequently filed updated PSIPs in April 2016 and December 2016 in response to PUC orders.
In the December 2016 PSIP Update Report, the updated plans describe greater and faster expansion of the Utilities’ renewable energy portfolio than in the plans filed in April 2016. The plans include the continued growth of private rooftop solar and describe the grid and generation modernization work needed to reliably integrate an estimated total of 165,000 private systems by 2030, and additional grid-scale renewable energy resources. The Utilities already have the highest percentage of customers using private rooftop solar of any utility in the U.S. and customer-sited resources are seen as a key contributor to the growth of the renewable portfolio on every island. In addition, the plans forecast the addition of 360 MW of grid-scale solar and 157 MW of grid-scale wind, with 8 MW derived from the first phase of the community-based renewable energy (CBRE) program. The plans also include 115 MW from Demand Response (DR) programs, which can shift customer use of electricity to times when more renewable energy is available, potentially making room to add even more renewable resources. The Utilities’ priority is to continue replacing fossil fuel generation with renewables over the next few years as federal tax incentives for renewables begin to phase out. The December 2016 Update Report emphasizes work that is in progress or planned through 2021 on each of the five islands the Utilities serve.
On July 14, 2017, the PUC accepted the Utilities’ PSIP December 2016 Update Report and closed the proceeding. In its order, the PUC provided guidance regarding the implementation of the Utilities’ near-term action plan and future planning activities, and required the Utilities to file a report that details an updated resource planning approach and schedule.
On March 1, 2018, the Utilities filed its Integrated Grid Planning (IGP) Report that provides an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy pathways that are rooted in customer and stakeholder input. The Utilities’ IGP fully integrates resource, transmission, and distribution planning and incorporates solutions sourcing into the planning process. This will enable optimization and coordination of the solutions, thereby resulting in actionable near-term plans that maximize value to customers.
Reliability standards working group. In April 2014, the PUC ordered the Utilities to take timely actions intended to lower energy costs, improve system reliability and address emerging challenges to integrate additional renewable energy. In addition


to the PSIPs mentioned above, the PUC ordered certain filing requirements, including a Distributed Generation Interconnection Plan, which the Utilities filed in August 2014.
The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and policy issues associated with distributed energy resources (DER) and (3) the Hawaii electricity reliability administrator, which is a third-party position that the legislature has authorized the PUC to create by contract to provide support for the PUC in developing and periodically updating local grid reliability standards and procedures and interconnection requirements and overseeing grid access and operation. The PUC has not yet opened new dockets to address the first and third topics above. To address DER, the second topic, the PUC opened an investigative proceeding on August 21, 2014 (see “DER investigative proceeding” below).
Policy statement and order regarding demand response programs. The PUC provided guidance concerning the objectives and goals for DR programs, and ordered the Utilities to develop an integrated DR Portfolio Plan that will enhance system operations and reduce costs to customers. The Utilities’ DR Portfolio will create the economic and technical means by which customers can use their own equipment and behavior to have a role in the management of the electricity grid. Participating customers will be empowered with increasing opportunities to simultaneously install DER enabling active participation in the grid and its associated economics. These opportunities will take the form of either rates and incentive-based programs that will compensate customers for their participation, or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.
The Utilities filed their DR Portfolio Plan in July 2014 and an updated Plan in February 2017. In July 2015, the PUC issued an order appointing a special adviser to guide, monitor and review the Utilities’ Plan design and implementation. In December 2015, the Utilities filed an application with the PUC for approval of their proposed DR Portfolio Tariff Structure, Reporting Schedule and Cost Recovery of Program Costs. On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio, and ordered the Utilities to complete contracting by June 2018 and initiate first implementation by the third quarter of 2018. The Companies have selected the aggregators and commenced negotiations in July 2018 with a target to meet the goal of initiating implementation by the third quarter of 2018.
In October 2017, the PUC approved the Utilities request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of AFUDC, through the Renewable Energy Infrastructure Program Surcharge. The Utilities completed the first milestone of Blueprinting and will move onto the realization phase in the third quarter of 2018. The Utilities are still on schedule for the DR Management System to be in service by first quarter of 2019.
DER investigative proceeding. In March 2015, the PUC issued an order to address DER issues.
In June 2015, the Utilities submitted their final Statement of Position in the DER proceeding, which included new pricing provisions for future private rooftop PV systems, technical standards for advanced inverters, new options for customers including battery-equipped private rooftop PV systems, a pilot time-of-use rate, an improved method of calculating the amount of private rooftop PV that can be safely installed, and a streamlined and standardized PV application process.
In October 2015, the PUC issued a D&O establishing DER reforms that: (1) promote rapid adoption of the next generation of solar PV and other distributed energy technologies; (2) encourage more competitive pricing of distributed energy resource systems; (3) lower overall energy supply costs for all customers; and (4) help to manage DER in terms of each island’s limited grid capacity. The D&O capped the Utilities’ Net Energy Metering (NEM) programs at “existing” levels (i.e., for existing NEM customers and customers who already applied and were waiting for approval), closed the NEM programs to new participants, and approved new interim options for customers to interconnect DER to the utility electric grids, including Self Supply and Grid Supply tariff options and modified interconnection standards. The PUC placed caps on the availability of the Grid Supply program. The Self Supply Program is designed for customers who do not export to the grid.
In October 2017, the PUC issued a D&O which further revises interconnection requirements, creates a Smart Export program, modifies the customer-grid supply program (Controllable Customer Grid Supply), clarifies that non-export customer systems can be added to the existing NEM program, and provides guidance and reporting requirements regarding hosting capacity analyses. The Smart Export program is designed for PV systems with battery storage and features zero compensation during mid-day, but enhanced compensation at other times of the day to reflect the value of the energy to the grid at different times of the day. The Controllable Customer Grid Supply program allows PV systems without battery storage to deliver energy to the grid on an as-available basis except when system-wide technical conditions require reduction of output. The D&O specified island-specific pricing and program caps for the Smart Export and Controllable Customer Grid Supply programs. Customers currently under the customer-grid supply program are grandfathered under existing rates for the next five years. The


D&O also authorizes activation of new advanced inverter functions in PV and storage systems, which will provide support to the electric grid during different types of grid disturbances.
In February 2018, the PUC issued an order which approved, with certain modifications, new tariffs proposed by the Utilities, which will implement the Smart Export and Controllable Customer Grid Supply programs in manners consistent with the PUC’s October 2017 D&O, and approved, with certain modifications, revisions to existing tariffs also proposed by the Utilities. The February 2018 order denied the Utilities’ proposal to allow NEM customers to add non-export energy storage systems, but on June 29, 2018, the PUC issued an order which approved, with certain modifications, the Utilities’ revised proposal to allow NEM customers to add non-export energy storage systems.
Grid modernization. After launching a smart grid customer engagement plan during the second quarter of 2014, Hawaiian Electric replaced approximately 5,200 residential and commercial meters with smart meters, 160 direct load control switches, fault circuit indicators and remote controlled switches in selected areas across Oahu as part of the Smart Grid Initial Phase implementation. Also under the Initial Phase a grid efficiency measure called Volt/Var Optimization (or Conservation Voltage Reduction) was enabled, customer energy portals were launched and are available for customer use and a PrePay Application was launched. The Initial Phase implementation was completed in 2015. The smart grid provides benefits such as customer tools to manage their electric bills, potentially shortening outages and enabling the Utilities to integrate more low-cost renewable energy, like wind and solar, which will reduce Hawaii’s dependence on imported oil.
In March 2016, the Utilities sought PUC approval to commit funds for an expansion of the smart grid project. The proposed smart grid project was estimated to cost $340 million and to be implemented over 5 years. On January 4, 2017, the PUC issued an order dismissing the application without prejudice and directing the Utilities to submit a Grid Modernization Strategy.
The PUC indicated that the overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. On June 30, 2017, the Utilities filed an initial draft of the Grid Modernization Strategy describing how new technology will help triple private rooftop solar and make use of rapidly evolving products including storage and advanced inverters. The cost of the first segment of the modernization is estimated at about $205 million over six years. The Utilities filed their final Grid Modernization Strategy on August 29, 2017. On February 7, 2018, the PUC issued an order setting forth next steps and directives for the Utilities to implement the Grid Modernization Strategy. The Utilities have begun work to implement the Grid Modernization Strategy by issuing solicitations for advanced meters, a meter data management system, and a communications network. Also, the Utilities have filed their first application with the PUC on June 21, 2018, for the first implementation phase. Additional applications will be filed later to implement subsequent phases of the strategy.
Community-Based Renewable Energy. On October 1, 2015, the Utilities filed a proposed CBRE program and tariff with the PUC that would allow customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. In December 2017, the PUC adopted a CBRE program framework, the Utilities provided comments and filed relevant materials for review and on June 29, 2018, the PUC issued an order approving the Utilities’ tariffs. The tariffs became effective on July 11, 2018 for each island and phase 1 of the CBRE program commenced.
The first phase will total 8 MW of solar PV only with one credit rate for each island. The Utilities' role will be limited to administrative only during the first phase. The second phase will commence after review of the first full year of the first phase. The second phase is contemplated to be a larger capacity and include multiple credit rates (e.g., time of day) and various technologies. The Utilities will have the opportunity to develop self-build projects; however 50% of utility capacity will be reserved for low to moderate income customers.
Microgrid services tariff proceeding. On July 10, 2018, the PUC issued an order instituting a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 (July 10, 2018 Act). The PUC will issue subsequent order(s) establishing a statement of issues to be addressed in the order, and issue a procedural schedule to govern this proceeding, after the deadline for the filing of motions to intervene or participate.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2017, 2016 and 2015 did not trigger the earnings sharing mechanism for the Utilities.


Regulated returns.Actual and PUC-allowed (as of June 30, 2018) returns were as follows:
% Rate-making Return on rate base (RORB)* ROACE** Rate-making ROACE***
Twelve months ended June 30, 2018 Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric
Utility returns 6.32
 6.92
 5.96
 7.21
 7.51
 6.78
 7.65
 8.18
 6.96
PUC-allowed returns 7.57
 7.80
 7.34
 9.50
 9.50
 9.00
 9.50
 9.50
 9.00
Difference (1.25) (0.88) (1.38) (2.29) (1.99) (2.22) (1.85) (1.32) (2.04)
*      Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
**    Recorded net income divided by average common equity.
***  ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, the low RBA interest rate (currently a short-term debt rate rather than the actual cost of capital), O&M increases and return on capital additions since the last rate case in excess of indexed escalations, and the portion of the pension regulatory asset not earning a return due to pension contributions and pension costs in excess of the pension amount in rates. In 2017, the utility ROACEs actually achieved reflect negative impacts of the Tax Act on deferred tax assets.
Most recent rate proceedings.  Unless otherwise agreed or ordered, each electric utility is currently required by PUC order to initiate a rate proceeding every third year (on a staggered basis) to allow the PUC and the Consumer Advocate to regularly evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability and integrate more renewable energy. The PUC may grant an interim increase within 10 to 11 months following the filing of an application, but there is no guarantee of such an interim increase and interim amounts collected are refundable, with interest, to the extent they exceed the amount approved in the PUC’s final D&O. The timing and amount of any final increase is determined at the discretion of the PUC. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE and RORB) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O.
The effects of the Tax Act on Utilities’ regulated operations accrued to the benefit of customers from the effective date of January 1, 2018. Generally, the lower corporate income tax rate lowers the Utilities’ revenue requirements through lower income tax expense and through the amortization of a regulatory liability for excess accumulated deferred income taxes (ADIT) resulting from the recording of ADIT in prior years at the higher income tax rate. The revenues collected in the first and a portion of the second quarters reflected income taxes at the old 35% rate and consequently, the Utilities reduced revenues to the extent the income taxes collected in 2018 revenue exceeded the taxes accrued at the new 21% rate. This reduction was recorded to a regulatory liability and electric rates have been adjusted in the second quarter to initiate the pass back of the 2018 excess to customers over various amortization periods. In addition, rates have been adjusted to begin passing back the excess ADIT that was accumulated as of December 31, 2017. The Tax Act also excludes essentially all of the Utilities’ plant from qualifying for bonus depreciation, which will partially offset the aforementioned impacts by lowering ADIT and thereby increasing rate base and the associated revenue requirement for new plant going forward.


Test year
(dollars in millions)
 
Date
(filed/
implemented)
 Amount 
% over 
rates in 
effect
 
ROACE
(%)
 
RORB
(%)
 
Rate
 base
 
Common
equity
%
 
Stipulated agreement 
reached with
Consumer Advocate
Hawaiian Electric    
  
  
  
  
  
  
2017 1
    
  
  
  
  
  
  
Request 12/16/16 $106.4
 6.9
 10.60
 8.28
 $2,002
 57.36
 Yes
Interim increase 2/16/18 36.0
 2.3
 9.50
 7.57
 1,980
 57.10
  
Interim increase with Tax Act 4/13/18 (0.6) —
 9.50
 7.57
 1,993
 57.10
  
Final increase   (0.6) —
 9.50
 7.57
 1,993
 57.10
  
Hawaii Electric Light    
  
  
  
  
  
  
2016 2 
                
Request 9/19/16 $19.3
 6.5
 10.60
 8.44
 $479
 57.12
 Yes
Interim increase 8/31/17 9.9
 3.4
 9.50
 7.80
 482
 56.69
  
Interim increase with Tax Act 5/1/18 1.5
 0.5
 9.50
 7.80
 481
 56.69
  
Final increase   —
 —
 9.50
 7.80
 481
 56.69
  
Maui Electric    
  
  
  
  
  
  
2018                
Request 10/12/17 $30.1
 9.3
 10.60
 8.05
 $473
 56.94
 Yes
Joint Statement of Probable    
  
  
  
  
  
  
Entitlement (which will be
                
superceded by any PUC interim D&O)                
At old depreciation rates 7/6/18 6.4
 1.95
 9.50
 7.43
 465
 57.02
  
At new depreciation rates 7/6/18 12.5
 3.82
 9.50
 7.43
 462
 57.02
  
Note:  The “Request date” reflects the application filing date for the rate proceeding. The “Interim increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.
1On June 22, 2018, the PUC issued a final decision and order approving the final increase amounts in the table above for Hawaiian Electric. The effective date of this final increase is subject to PUC-approval of Hawaiian Electric’s revised rate schedules and tariffs.
2 On June 29, 2018, the PUC issued a final decision and order approving the final increase amounts in the table above for Hawaii Electric Light. The effective date of this final increase is subject to PUC-approval of Hawaii Electric Light’s revised rate schedules and tariffs.
See “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Performance-based regulation. See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Condensed Consolidated Financial Statements.
Depreciation docket.  In December 2016, the Utilities filed an application with the PUC for approval of changes in the depreciation and amortization rates and amortization period for CIAC, based on a 2015 Book Depreciation Study. In July 2018, the PUC approved the stipulated agreement between the Utilities and the Consumer Advocate, which among other things:
Authorized the use of consolidated depreciation and amortization rates rather than separate depreciation and amortization rates for the three utilities
Established revised depreciation and amortization rates for the three utilities
Approved the implementation of the new depreciation and amortization rates and other changes to coincide with the effective date of the interim or final base rates approved in the subsequent rate case for each utility, beginning with Maui Electric’s ongoing 2018 test year
Developments in renewable energy efforts.  Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:
New renewable PPAs.
In July 2015, Maui Electric signed two PPAs, with Kuia Solar and South Maui Renewable Resources (which subsequently assigned its PPA to SSA Solar of HI 2, LLC and SSA Solar of HI 3, LLC, respectively), each for a 2.87-MW solar facility. In February 2016, the PUC approved both PPAs, subject to certain conditions and modifications. The guaranteed commercial operations date for the facilities was December 31, 2016, however both projects experienced delays. South Maui Renewable Resources reached commercial operations on May 5, 2018, and Kuia Solar is now expected to be in commercial operations by the end of the third quarter of 2018.


In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 between Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM) for a proposed 24-MW wind farm on Oahu. The NPM wind farm is expected to be placed into service by August 31, 2019.
Hawaiian Electric terminated PPAs to purchase solar energy with three affiliates of SunEdison, which affiliates were acquired by an affiliate of NRG Energy, Inc. (NRG) during SunEdison’s Chapter 11 bankruptcy proceedings. Hawaiian Electric then negotiated with NRG and its newly acquired affiliates and entered into amended and restated PPAs for solar energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for 14.7 MW and Kawailoa Solar, LLC for 49.0 MW. In July 2017, the PUC approved the three NRG PPAs, subject to modifications and conditions. The three projects are expected to be in service by the end of 2019.
In February 2018, NRG and GIP III Zephyr Acquisition Partners, a subsidiary of Global Infrastructure Partners (GIP), entered into an agreement where GIP has agreed to purchase substantially all of NRG’s renewable platform, including NRG’s renewable operations, maintenance and development businesses.  Kawailoa Solar, LLC, Lanikuhana Solar, LLC, and Waipio PV, LLC, along with NRG Renew LLC, are included in the sale transaction.  NRG Renew has confirmed that this transaction will not in any way affect the completion or success of the three PV Projects.
In July 2018, the PUC approved the Maui Electric’s PPA with Molokai New Energy Partners to purchase solar energy from a PV plus battery storage project. The 4.9 MW project will deliver no more than 2.64 MW at any time to the Molokai system and is expected to be in service by end of 2019.
Tariffed renewable resources.
As of June 30, 2018, there were approximately 449 MW, 91 MW and 101 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely Standard Interconnection Agreement (SIA), NEM, Customer Grid Supply, Customer Self Supply, Grid Supply Plus and Smart Export. As of June 30, 2018, an estimated 28% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 17% of the Utilities' total customers have solar systems.   
The Utilities began accepting energy from feed-in tariff projects in 2011. As of June 30, 2018, there were 31 MW, 3 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
In September 2015, the PUC approved Hawaiian Electric’s 2-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 3 million gallons of biodiesel at Campbell Industrial Park combustion turbine No. 1 (CIP CT-1) and the Honolulu International Airport Emergency Power Facility beginning in November 2015. The PBT contract is set to expire on November 2, 2018. PBT also has a spot buy contract with Hawaiian Electric to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was recently extended through June 2019. REG Marketing & Logistics Group, LLC has a contingency supply contract with Hawaiian Electric to also supply biodiesel to CIP CT-1 in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2019, and will continue with no volume purchase requirements.
On October 27, 2017, Hawaiian Electric entered into a new biodiesel supply contract with PBT, subject to PUC approval, to supply 2 million to 4 million gallons of biodiesel per year for three years. The new PBT contract is expected to commence as early as November 2018 to be used as fuel for power generation at Hawaiian Electric’s Schofield Generating Station, the Honolulu International Airport Emergency Power Facility and any other generating unit on Oahu, as necessary.
Requests for renewable proposals, expressions of interest, and information.
In response to requests filed by the Utilities, on October 6, 2017, the PUC opened a docket to receive filings, review approval requests, and resolve disputes, if necessary, related to the Utilities' plan to proceed with a competitive bidding process for dispatchable firm renewable generation and variable renewable generation. On October 23, 2017, the Utilities filed draft requests for proposals for 220 MW of renewable generation on Oahu (Oahu Variable RFP), 50 MW of renewable generation on Hawaii Island (Hawaii Variable RFP), and 100 MW of renewable generation on Maui, including 40 MW of firm renewable generation, comprising the Maui Variable RFP and Maui Firm RFP (all resources to be in service by the end of 2022). With this filing, the Utilities also filed proposed model power purchase agreements and timelines for each proposed procurement. In January 2018, the PUC issued an order appointing Independent Observers for the RFPs and directed the Utilities to move forward with the three Variable RFPs. On February 20, 2018, the PUC approved, with minor modification, the proposed Variable RFPs and directed the Utilities to issue the RFPs, as modified. On February 27, 2018, the Utilities opened the RFPs to receive proposals, with an April


30, 2018 deadline for such proposals. The Utilities are currently evaluating responses to the RFPs and plan to select a final award group by September 17, 2018 and file PPAs with the selected projects by the end of 2018. The Utilities are currently working with the independent observer for the Maui Firm RFP to update and revise the draft Maui Firm RFP for filing with the PUC for approval.
On January 5, 2017, Hawaiian Electric issued requests for Onshore Wind Expression of Interest to developers that are capable of developing utility scale onshore wind projects that are eligible to capture the federal Investment Tax Credit for Large Wind on the island of Oahu. Hawaiian Electric is in non-binding confidential negotiations with a developer that responded.
On December 12, 2016, the Utilities issued a request for information asking interested landowners to provide information about properties available for utility-scale renewable energy projects or for growing biofuel feedstock on the islands of Oahu, Hawaii, Maui, Molokai and Lanai. Responses have been made available to developers interested in developing renewable energy projects on these five islands.
Adequacy of supply.
Hawaiian Electric. In January 2018, Hawaiian Electric filed its 2018 Adequacy of Supply (AOS) letter, which indicated that based on its June 2017 sales and peak forecast for the 2018 - 2023 time period, Hawaiian Electric's generation capacity will be sufficient to meet reasonably expected demands for service and provide reasonable reserves for emergencies through 2021, but may have shortfalls in meeting the Utilities’ generating system reliability guideline. The calculated reliability guideline shortfalls are relatively small and Hawaiian Electric can implement mitigation measures.
In accordance with its planning criteria, Hawaiian Electric deactivated two fossil fuel generating units from active service at its Honolulu Power Plant in January 2014. Hawaiian Electric acquired new firm capacity of 8 MW with the commissioning of the State of Hawaii Department of Transportation’s emergency power facility in June 2017. Hawaiian Electric is continuing negotiations with firm capacity IPPs on Oahu. On August 31, 2017, Hawaiian Electric and Kalaeloa entered into an agreement that neither party will give written notice of termination of the Kalaeloa PPA prior to October 31, 2018. The PPA with AES Hawaii is scheduled to expire in 2022. On June 7, 2018, Hawaiian Electric’s Schofield Generating Station was placed into service, providing approximately 50 MW of additional generating capability on Oahu.
Hawaii Electric Light. In January 2018, Hawaii Electric Light filed its 2018 AOS letter, which indicated that Hawaii Electric Light’s generation capacity through 2020 is sufficient to meet reasonably expected demands for service and provide for reasonable reserves for emergencies. Hawaii Electric Light is anticipating the addition of the firm dispatchable Hu Honua facility to be online by the end of 2018. Since May 2018, the Puna Geothermal Venture facility has been offline due to the ongoing lava flow on Hawaii Island. Hawaii Electric Light expects to have sufficient generation capacity despite the shutdown of Puna Geothermal Venture.
Maui Electric. In January 2018, Maui Electric filed its 2018 AOS letter, which indicated that Maui Electric’s generation capacity for the islands of Lanai and Molokai for the next three years is sufficiently large to meet all reasonably expected demands for service and provide reasonable reserves for emergencies. The 2018 AOS letter also indicated that without the peak reduction benefits of demand response but with the equivalent firm capacity value of wind generation, Maui Electric expects to have a reserve capacity shortfall from 2018 to 2020 on the island of Maui. Maui Electric is evaluating several measures to mitigate the anticipated reserve capacity shortfall.  Maui Electric anticipates needing a significant amount of additional firm capacity on Maui in the 2022 timeframe after the planned retirement of the Kahului Power Plant.
In May 2016, Maui Electric requested that the PUC open a new docket for Maui Electric’s competitive bidding process for additional firm capacity resources. In October 2017, Maui Electric filed a draft RFP and supporting documents as requested by the PUC. In January 2018, the PUC issued an order appointing an Independent Observer of the RFP process that reports to the PUC for Maui Firm RFP. However, the PUC stated Maui Electric should focus on its variable RFP and noted that it would provide further guidance on the Firm RFP.
In September 2016, Maui Electric submitted an application to purchase and install three temporary mobile distributed generation diesel engines to address increasing reserve capacity shortfalls on the island of Maui; Maui Electric has since requested the PUC to suspend the proceeding to evaluate contingency measures and permanent solutions to minimize or eliminate the risk of near-term capacity shortfalls on the island of Maui.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.
Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the Federal Register the final regulations required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing


power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian Electric submitted the final site specific studies to the DOH in December 2016 for the Honolulu and Waiau power plants and in September 2017 for the Kahe power plant. Hawaiian Electric will work with the DOH to identify the appropriate compliance methods for the 316(b) rule.
Performance-based ratemaking legislation. See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Condensed Consolidated Financial Statements.
Potential impact of lava flows. In May 2018, a lava eruption occurred within the Leilani Estates subdivision, located along the lower East Rift Zone of Kilauea Volcano in the Puna district on the island of Hawaii. Since the time of the initial event, over 20 fissures have erupted lava and gas in the area covering approximately 12.8 square miles or 8,000 acres of land.  Approximately 3,000 of the 86,000 Hawaii Electric Light customers reside in that area and over 1,000 customers have evacuated their homes, some permanently. The lava flow is currently concentrated to fissure #8, located within Leilani Estates, which is active and feeding a perched lava channel leading northeastward from the vent toward the Kapoho region. The flow has damaged some of Hawaii Electric Light’s property in the affected area and has also resulted in the shutdown of independent power producer PGV’s facilities. PGV has retained all of its employees despite the current shutdown and will evaluate the future availability of that plant. Hawaii Electric Light continues to serve the load of Hawaii Island without capacity from PGV, and the Utilities expect to meet its 2020 RPS goals without the return of PGV to service. Although the lava eruption continues and is unpredictable, the financial impact to Hawaii Electric Light to date has not been material.
PUC Commissioner.  Jennifer Potter began her term as PUC Commissioner, effective July 1, 2018, replacing outgoing commissioner Lorraine Akiba, whose term expired on June 30, 2018. Ms. Potter was an assistant specialist at Hawaii Natural Energy Institute, and previously worked at Lawrence Berkley National Lab as a senior scientific engineering associate, as well as at the Sacramento Municipal Utility District in various positions.
FINANCIAL CONDITION
Liquidity and capital resources.  As a result of the Tax Cut and Jobs Act, utility property is no longer eligible for bonus depreciation, but further guidance is required in order to finally determine the timing of the application of the new law. However, note that recent clarification in the tax law indicates that certain assets with longer construction periods that were placed in service after the effective date may be grandfathered and qualify for the old 50% bonus depreciation if subject to binding contracts entered into before such effective date. The Utilities are currently evaluating its larger projects placed into service after September 27, 2017 for applicability. Nevertheless, the initial cash requirement for future capital projects will generally increase because of the loss of the immediate tax benefit from bonus depreciation. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures, investments, debt repayments, retirement benefit plan contributions and other cash requirements in the foreseeable future.
Hawaiian Electric’s consolidated capital structure was as follows:
(dollars in millions) June 30, 2018 December 31, 2017
Short-term borrowings $92
 3% $5
 —%
Long-term debt, net 1,468
 42
 1,369
 42
Preferred stock 34
 1
 34
 1
Common stock equity 1,852
 54
 1,845
 57
  $3,446
 100% $3,253
 100%


Information about Hawaiian Electric’s short-term borrowings (other than from Hawaii Electric Light and Maui Electric) and Hawaiian Electric’s line of credit facility were as follows:
  Average balance Balance
(in millions) Six months ended June 30, 2018 June 30, 2018 December 31, 2017
Short-term borrowings 1
  
  
  
Commercial paper $88
 $92
 $5
Line of credit draws —
 —
 —
Borrowings from HEI —
 —
 —
Undrawn capacity under line of credit facility —
 200
 200
1   The maximum amount of external short-term borrowings by Hawaiian Electric during the first six months of 2018 was $157 million. As of June 30, 2018, Hawaiian Electric had short-term borrowings from Hawaii Electric Light of $1 million and Maui Electric had short-term borrowings from Hawaiian Electric of $5.6 million.
Hawaiian Electric has a $200 million line of credit facility with no amounts outstanding at June 30, 2018. See Note 5 of the Condensed Consolidated Financial Statements.
Upon PUC approval received in April 2018 (April 2018 Approval), on May 30, 2018, Hawaiian Electric, Hawaii Electric Light and Maui Electric issued through a private placement, $75 million, $15 million and $10 million, respectively, of unsecured senior notes bearing taxable interest. The April 2018 Approval also authorized the use of the expedited approval procedure to request for the remaining additional taxable debt to be issued during 2019 through 2021, with certain conditions, for up to $205 million and $15 million for Hawaiian Electric and Hawaii Electric Light, respectively. Maui Electric does not have authorization to issue additional taxable debt beyond 2018. See Note 5 of the Condensed Consolidated Financial Statements.
On July 12, 2018, the Utilities requested PUC approval to issue the remaining authorized amounts under the April 2018 Approval in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures prior to maturity. In addition, the Utilities requested approval to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt authorized to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Cash flows. The following table reflects the changes in cash flows for the six months ended June 30, 2018 compared to the six months ended June 30, 2017:
 Six months ended June 30,  
(in thousands)2018 2017 Change
Net cash provided by operating activities$69,836
 $138,755
 $(68,919)
Net cash used in investing activities(195,346) (166,338) (29,008)
Net cash provided by (used in) financing activities133,853
 (4,121) 137,974
Net cash provided by operating activities. Cash flows from operating activities generally relate to the amount and timing of cash received from customers and payments made to third parties. Using the indirect method of determining cash flows from operating activities, noncash expense items such as depreciation and amortization, as well as changes in certain assets and liabilities, are added to (or deducted from) net income. The decrease in net cash provided by operating activities was primarily driven by lower cash from an increase in accounts receivable due to timing and increase in customer bills as a result of higher fuel prices and purchased power costs included in rates, and a decrease in accounts payable due to timing on payments of invoices related to fuel and capital projects, partially offset by lower income taxes paid due to the lower federal income tax rate from the Tax Act.
Net cash used in investing activities. The increase in net cash used in investing activities was primarily driven by an increase in capital expenditures related to construction activities, and a decrease in contributions received in aid of construction.
Net cash provided by financing activities. Financing activities provide supplemental cash for both day-to-day operations and capital requirements as needed. The increase in net cash provided by financing activities primarily reflected higher proceeds from long-term and short-term borrowings.


Forecast capital expenditures. For the five-year period 2018 through 2022, the Utilities forecast up to $2.2 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2018 to 2022 forecast (such as increases in the costs or acceleration of capital projects or unanticipated capital expenditures that may be required by new environmental laws and regulations).
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.


Bank
  Three months ended June 30 Increase  
(in millions) 2018 2017 (decrease) Primary reason(s)
Interest income $63
 $59
 $4
 The increase in interest income was the result of increases in balances and yields on earning assets. ASB’s average investment securities portfolio balance for the three months ended June 30, 2018 increased by $218 million compared to the same period in 2017 as ASB used excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 15 basis points as new investment purchase yields were higher due to the rising interest rate environment. ASB’s average loan portfolio balance for the three months ended June 30, 2018 increased by $28 million compared to the same period in 2017 as the average residential, home equity line of credit and consumer loan portfolios for the three months ended June 30, 2018 increased by $49 million, $55 million and $31 million, respectively, compared to the same period in 2017. The growth in these loan portfolios aligned with ASB’s portfolio mix target and loan growth strategy. The average commercial and commercial real estate balances decreased by $70 million and $37 million, respectively. The decrease in these loan portfolios was reflective of ASB’s strategic decision to reduce the balances in certain commercial and national loan portfolios to improve the credit quality of those portfolios. The yield on loans benefited from the rising interest rate environment, which resulted in an increase in yield of 17 basis points.
Noninterest income 14
 16
 (2) Noninterest income decreased for the three months ended June 30, 2018 compared to noninterest income for the three months ended June 30, 2017 primarily due to lower fees from other financial services in 2018 as a result of debit card interchange expenses being netted against income beginning in 2018. Prior year’s debit card interchange expenses were recorded in other noninterest expense. This change was in accordance with the new revenue recognition accounting standard. See Note 7 of the Condensed Consolidated Financial Statements for additional information on the new revenue recognition standard.
Revenues 77
 75
 2
  
Interest expense 3
 3
 —
 Interest expense was flat for the three months ended June 30, 2018 compared to the same period in 2017 as higher interest expense from the growth in time certificates was partly offset by lower interest expense on other borrowings as a result of lower FHLB advances. Average deposit balances for the three months ended June 30, 2018 increased by $363 million compared to the same period in 2017 due to an increase in core deposits and time certificates of $277 million and $86 million, respectively. Average other borrowings for the three months ended June 30, 2018 decreased by $69 million compared to the same period in 2017 due to a decrease in the average FHLB advances and repurchase agreements of $49 million and $20 million, respectively. The interest-bearing liability rate for the three months ended June 30, 2018 increased by 4 basis points compared to the same period in 2017.
Provision for loan losses 3
 3
 —
 The provision for loan losses was flat for the three months ended June 30, 2018 compared to the provision for loan losses for the three months ended June 30, 2017. The provision for loan losses for 2018 was primarily due to increased reserves for growth in the loan portfolio and additional loan loss reserves for the consumer and residential loan portfolios, partly offset by the release of reserves for the home equity line of credit, commercial and commercial real estate loan portfolios as result of improved credit quality in those loan portfolios. The provision for loan losses for 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio. Delinquency rates have increased from 0.44% at June 30, 2017 to 0.54% at June 30, 2018. The annualized net charge-off ratio for the three months ended June 30, 2018 was 0.32% compared to an annualized net charge-off ratio of 0.21% for the same period in 2017.
Noninterest expense 44
 45
 (1) The decrease in noninterest expense for the three months ended June 30, 2018 compared to the same period in 2017 was primarily due to the reclassification of debit card interchange expenses to noninterest income in accordance with the new revenue recognition accounting standard that became effective on January 1, 2018.
Expenses 50
 51
 (1)  
Operating income 27
 24
 3
 The increase in operating income for the three months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher interest income and lower noninterest expense, partly offset by lower noninterest income.
Net income 21
 17
 4
 The increase in net income for the three months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher operating income and lower income tax expense as a result of the lower corporate rate from the Tax Act.



  Six months ended June 30 Increase  
(in millions) 2018 2017 (decrease) Primary reason(s)
Interest income $125
 $117
 $8
 The increase in interest income was primarily the result of an increase in yields on earning assets and higher investment securities portfolio balances. ASB’s average investment securities portfolio balance for the six months ended June 30, 2018 increased by $271 million compared to the same period in 2017 as ASB used excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 12 basis points as new investment purchase yields were higher due to the rising interest rate environment. ASB’s average loan portfolio balance for the six months ended June 30, 2018 increased by $6 million compared to the same period in 2017 as increases in the average residential, home equity line of credit and consumer loan portfolios for the six months ended June 30, 2018 of $52 million, $54 million and $37 million, respectively, were largely offset by decreases in the the average commercial and commercial real estate balances of $90 million and $47 million, respectively. The growth in residential, home equity line of credit and consumer loan portfolios aligned with ASB’s portfolio mix target and loan growth strategy. The decrease in commercial and commercial real estate loan portfolios was reflective of ASB’s strategic decision to reduce the balances in certain commercial and national loan portfolios to improve the credit quality of those portfolios. The yield on loans benefited from the rising interest rate environment, which resulted in an increase in yields of 18 basis points.
Noninterest income 27
 31
 (4) Noninterest income decreased for the six months ended June 30, 2018 compared to noninterest income for the six months ended June 30, 2017 primarily due to lower fees from other financial services in 2018 as a result of debit card interchange expenses being netted against income beginning in 2018. Prior year’s debit card interchange expenses were recorded in other noninterest expense. This change was in accordance with the new revenue recognition accounting standard. See Note 7 of the Condensed Consolidated Financial Statements for additional information on the new revenue recognition standard.
Revenues 152
 148
 4
  
Interest expense 7
 6
 1
 Interest expense increased slightly for the six months ended June 30, 2018 compared to the same period in 2017 due to higher interest expense from the growth in time certificates, but was partially offset by lower interest expense on other borrowings as a result of lower FHLB advances. Average deposit balances for the six months ended June 30, 2018 increased by $331 million compared to the same period in 2017 due to an increase in core deposits and time certificates of $222 million and $109 million, respectively. Average other borrowings for the six months ended June 30, 2018 decreased by $29 million compared to the same period in 2017 due to a decrease in FHLB advances, partly offset by an increase in repurchase agreements. The interest-bearing liability rate for the six months ended June 30, 2018 increased by 4 basis points compared to the same period in 2017.
Provision for loan losses 6
 7
 (1) The provision for loan losses decreased slightly for the six months ended June 30, 2018 compared to the provision for loan losses for the six months ended June 30, 2017. The provision for loan losses for 2018 was primarily due to increased reserves for growth in the loan portfolio and additional loan loss reserves for the consumer loan portfolio, partly offset by the release of reserves for the commercial loan portfolio due to a recovery on a previously charged-off commercial loan and improved credit quality of the commercial loan portfolio. The provision for loan losses for 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio and additional loan loss reserves for the commercial real estate loan portfolio due to the downgrade of a specific commercial real estate relationship. Delinquency rates have increased from 0.44% at June 30, 2017 to 0.54% at June 30, 2018. The annualized net charge-off ratio for the six months ended June 30, 2018 was 0.30% compared to an annualized net charge-off ratio of 0.25% for the same period in 2017.
Noninterest expense 87
 86
 1
 The increase in noninterest expense for the six months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher compensation and employee benefits expenses as a result of an increase in the minimum pay rate for employees, higher performance-based incentives and annual merit increases, and higher service expenses, partly offset by the reclassification of debit card interchange expenses in accordance with the new revenue recognition accounting standard.
Expenses 100
 99
 1
  
Operating income 52
 49
 3
 The increase in operating income for the six months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher interest income, partly offset by lower noninterest income and higher noninterest expenses.
Net income 40
 33
 7
 The increase in net income for the six months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher operating income and lower income tax expense as a result of the lower corporate rate from the Tax Act.



See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
ASB’s return on average assets, return on average equity and net interest margin were as follows:
  Three months ended June 30 Six months ended June 30
(%) 2018 2017 2018 2017
Return on average assets 1.20
 1.02
 1.16
 1.00
Return on average equity 13.56
 11.25
 13.07
 11.04
Net interest margin 3.76
 3.68
 3.76
 3.68
  Three months ended June 30
  2018 2017
(dollars in thousands) Average
balance		 
Interest1 
income/
expense
 Yield/
rate (%)		 Average
balance		 
Interest1
 income/
expense
 Yield/
rate (%)
Assets:  
  
  
  
  
  
Interest-earning deposits $53,677
 $240
 1.77
 $46,507
 $121
 1.03
FHLB stock 10,245
 77
 2.99
 11,759
 57
 1.96
Investment securities            
Taxable 1,485,780
 8,182
 2.20
 1,267,945
 6,481
 2.04
Non-taxable 15,427
 162
 4.16
 15,427
 160
 4.11
Total investment securities 1,501,207
 8,344
 2.22
 1,283,372
 6,641
 2.07
Loans            
Residential 1-4 family 2,119,594
 21,581
 4.07
 2,070,450
 22,163
 4.28
Commercial real estate 879,748
 9,959
 4.49
 917,019
 9,722
 4.21
Home equity line of credit 932,828
 8,354
 3.59
 877,462
 7,248
 3.31
Residential land 16,525
 223
 5.41
 16,111
 217
 5.38
Commercial 592,780
 6,814
 4.59
 663,200
 7,090
 4.27
Consumer 234,178
 7,702
 13.19
 202,914
 5,877
 11.62
Total loans 2,3
 4,775,653
 54,633
 4.57
 4,747,156
 52,317
 4.40
Total interest-earning assets 2
 6,340,782
 63,294
 3.99
 6,088,794
 59,136
 3.88
Allowance for loan losses (54,191)  
  
 (56,715)  
  
Non-interest-earning assets 590,493
  
  
 534,581
  
  
Total assets $6,877,084
  
  
 $6,566,660
  
  
Liabilities and shareholder’s equity:  
  
  
  
  
  
Savings $2,343,928
 $411
 0.07
 $2,274,832
 $386
 0.07
Interest-bearing checking 1,030,309
 208
 0.08
 908,864
 59
 0.03
Money market 125,961
 73
 0.23
 146,962
 45
 0.12
Time certificates 766,148
 2,592
 1.36
 679,866
 1,821
 1.07
Total interest-bearing deposits 4,266,346
 3,284
 0.31
 4,010,524
 2,311
 0.23
Advances from Federal Home Loan Bank 52,176
 254
 1.95
 101,335
 788
 3.08
Securities sold under agreements to repurchase 75,687
 139
 0.74
 95,740
 36
 0.15
Total interest-bearing liabilities 4,394,209
 3,677
 0.34
 4,207,599
 3,135
 0.30
Non-interest bearing liabilities:  
  
  
  
  
  
Deposits 1,772,173
  
   1,664,592
  
  
Other 103,991
  
   99,710
  
  
Shareholder’s equity 606,711
  
   594,759
  
  
Total liabilities and shareholder’s equity $6,877,084
  
   $6,566,660
  
  
Net interest income  
 $59,617
    
 $56,001
  
Net interest margin (%) 4
  
  
 3.76
  
  
 3.68



  Six months ended June 30
  2018 2017
(dollars in thousands) Average
balance		 
Interest1 
income/
expense
 Yield/
rate (%)		 Average
balance		 
Interest1
 income/
expense
 Yield/
rate (%)
Assets:  
  
  
  
  
  
Interest-earning deposits $55,078
 $456
 1.65
 $69,421
 $307
 0.88
FHLB stock 10,009
 154
 3.09
 11,498
 105
 1.85
Investment securities            
Taxable 1,477,468
 16,973
 2.30
 1,206,272
 13,130
 2.18
Non-taxable 15,427
 312
 4.02
 15,427
 310
 4.00
Total investment securities 1,492,895
 17,285
 2.32
 1,221,699
 13,440
 2.20
Loans            
Residential 1-4 family 2,124,429
 43,428
 4.09
 2,071,931
 43,789
 4.23
Commercial real estate 866,689
 19,210
 4.42
 913,940
 19,134
 4.18
Home equity line of credit 926,951
 16,342
 3.56
 872,973
 14,364
 3.32
Residential land 16,485
 446
 5.41
 17,057
 495
 5.80
Commercial 576,743
 12,993
 4.53
 666,741
 14,245
 4.30
Consumer 232,519
 15,014
 13.02
 195,158
 11,032
 11.40
Total loans 2,3
 4,743,816
 107,433
 4.54
 4,737,800
 103,059
 4.36
Total interest-earning assets 2
 6,301,798
 125,328
 3.99
 6,040,418
 116,911
 3.88
Allowance for loan losses (53,881)  
  
 (56,477)  
  
Non-interest-earning assets 582,346
  
  
 527,302
  
  
Total assets $6,830,263
  
  
 $6,511,243
  
  
Liabilities and shareholder’s equity:  
  
  
  
  
  
Savings $2,327,596
 $812
 0.07
 $2,261,549
 $760
 0.07
Interest-bearing checking 982,096
 282
 0.06
 897,346
 114
 0.03
Money market 119,830
 99
 0.17
 151,293
 92
 0.12
Time certificates 779,796
 5,048
 1.31
 670,717
 3,448
 1.04
Total interest-bearing deposits 4,209,318
 6,241
 0.30
 3,980,905
 4,414
 0.22
Advances from Federal Home Loan Bank 51,647
 499
 1.95
 100,671
 1,563
 3.09
Securities sold under agreements to repurchase 114,997
 390
 0.68
 94,713
 77
 0.16
Total interest-bearing liabilities 4,375,962
 7,130
 0.33
 4,176,289
 6,054
 0.29
Non-interest bearing liabilities:  
  
  
  
  
  
Deposits 1,748,695
  
  
 1,646,275
  
  
Other 100,892
  
  
 98,875
  
  
Shareholder’s equity 604,714
  
  
 589,804
  
  
Total liabilities and shareholder’s equity $6,830,263
  
  
 $6,511,243
  
  
Net interest income  
 $118,198
  
  
 $110,857
  
Net interest margin (%) 4
  
  
 3.76
  
  
 3.68
1
Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 21% and 35%, of $0.03 million and $0.06 million for the three months ended June 30, 2018 and 2017, respectively and $0.07 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively.
2 Includes loans held for sale, at lower of cost or fair value.
3
Includes recognition of net deferred loan fees of $0.1 million and $0.6 million for the three months ended June 30, 2018 and 2017 and $0.1 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
4
Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities and other factors.  Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. These conditions have begun to moderate with the interest rate increases in the past year, resulting in an increase in ASB’s net interest income and net interest margin.
Loan originations and mortgage-related securities are ASB’s primary earning assets.


Loan portfolio.  ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.
Home equity— key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest only payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below.
  June 30, 2018 December 31, 2017
Outstanding balance of home equity loans (in thousands) $938,902
 $913,052
Percent of portfolio in first lien position 48.4% 48.0 %
Annualized net charge-off (recovery) ratio 0.03% (0.03)%
Delinquency ratio 0.52% 0.28 %
      End of draw period – interest only Current
June 30, 2018 Total Interest only 2018-2019 2020-2022 Thereafter amortizing
Outstanding balance (in thousands) $938,902
 $720,008
 $39,223
 $105,070
 $575,715
 $218,894
% of total 100% 77% 4% 11% 62% 23%
The HELOC portfolio makes up 20% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable rate term loan with a 20-year amortization period. This product type comprises 78% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed rate loan with level principal and interest payments. As of June 30, 2018, approximately 21% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements.  See Note 4 of the Condensed Consolidated Financial Statements.
Investment securities.  ASB’s investment portfolio was comprised as follows:
  June 30, 2018 December 31, 2017
(dollars in thousands) Balance % of total Balance % of total
U.S. Treasury and federal agency obligations $175,933
 12% $184,298
 13%
Mortgage-related securities — FNMA, FHLMC and GNMA 1,240,462
 84
 1,245,988
 86
Corporate bonds 40,336
 3
 —
 —
Mortgage revenue bond 15,427
 1
 15,427
 1
Total investment securities $1,472,158
 100% $1,445,713
 100%
Principal and interest on mortgage-related securities issued by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) are guaranteed by the issuer and, in the case of GNMA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government.
Deposits and other borrowings.  Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines and securities sold under agreements to repurchase continue to be additional sources of funds. As of June 30, 2018, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings compared to 97% deposits and 3% other borrowings as of December 31, 2017. During the first six months of 2018, ASB developed new deposit products that enabled approximately $102 million of retail repurchase agreements to be transferred to deposits. The weighted average cost of deposits for the first six months of 2018 and 2017 was 0.21% and 0.16%, respectively.


Federal Home Loan Bank of Des Moines. As of June 30, 2018 and December 31, 2017, ASB had $50 million of advances outstanding at the FHLB of Des Moines. As of June 30, 2018, the unused borrowing capacity with the FHLB of Des Moines was $2.0 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
Other factors.  Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.
As of June 30, 2018, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $32.6 million compared to an unrealized loss, net of taxes, of $15.0 million as of December 31, 2017. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first six months of 2018, ASB recorded a provision for loan losses of $6.3 million primarily due to increased reserves for growth in the loan portfolio and additional loan loss reserves for the consumer loan portfolio, partly offset by the release of reserves for the commercial loan portfolio due to a recovery on a previously charged-off commercial loan and improved credit quality. During the first six months of 2017, ASB recorded a provision for loan losses of $6.7 million primarily due to increased loss reserves for the consumer loan portfolio and additional loss reserves for the commercial real estate loan portfolio due to the downgrade of a commercial real estate relationship. Financial stress on ASB’s customers may result in higher levels of delinquencies and losses.
  Six months ended June 30 
Year ended
December 31,
(in thousands) 2018 2017 2017
Allowance for loan losses, January 1 $53,637
 $55,533
 $55,533
Provision for loan losses 6,304
 6,741
 10,901
Less: net charge-offs 7,138
 5,918
 12,797
Allowance for loan losses, end of period $52,803
 $56,356
 $53,637
Ratio of net charge-offs during the period to average loans outstanding (annualized) 0.30% 0.25% 0.27%
ASB maintains a reserve for credit losses that consists of two components, the allowance for loan losses and a reserve for unfunded loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in other noninterest expense. As of June 30, 2018 and December 31, 2017, the reserve for unfunded loan commitments was $1.7 million.
Legislation and regulation.  ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”
Final Capital Rules.  On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding companies and propose to apply the FRB’s capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.
Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation


buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and addresses shortcomings in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule are:
Minimum Capital Requirements
Effective dates 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019
Capital conservation buffer  
 0.625% 1.25% 1.875% 2.50%
Common equity Tier-1 ratio + conservation buffer 4.50% 5.125% 5.75% 6.375% 7.00%
Tier-1 capital ratio + conservation buffer 6.00% 6.625% 7.25% 7.875% 8.50%
Total capital ratio + conservation buffer 8.00% 8.625% 9.25% 9.875% 10.50%
Tier-1 leverage ratio 4.00% 4.00% 4.00% 4.00% 4.00%
Countercyclical capital buffer — not applicable to ASB  
 0.625% 1.25% 1.875% 2.50%
The final rule was effective January 1, 2015 for ASB and as of June 30, 2018, ASB met the new capital requirements (see “Financial Condition” for a summary of ASB’s capital ratios).
Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any.
Overtime Rules. The Secretary of Labor updated the overtime regulations of the Fair Labor Standards Act to simplify and modernize them. The Department of Labor issued final rules that will raise the salary threshold indicating eligibility from $455/week to $913/week ($47,476 per year), and update automatically the salary threshold every three years, based on wage growth over time, increasing predictability. The final rule was to become effective on December 1, 2016. In late-November 2016 however, the U.S. District Court in the Eastern District of Texas granted a nationwide preliminary injunction that blocked the final rule, saying the Department of Labor's rule exceeds the authority the agency was delegated by Congress. Despite this block, ASB modified its salaries in the fourth quarter of 2016 such that it is in voluntary compliance with the final rule. On July 26, 2017, the Department of Labor published a Request for Information Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. On August 31, 2017, U.S. District Court in the Eastern District of Texas granted summary judgment against the Department of Labor in consolidated cases challenging the final rule published on May 23, 2016. The court held that the final rule’s salary level exceeded the Department of Labor’s authority and concluded that the final rule was invalid. The Department of Labor is undertaking rulemaking to revise the regulation.
Arbitration Agreements. Pursuant to section 1028(b) of the Dodd-Frank Act, on July 19, 2017, the Bureau issued a final rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The compliance date for this regulation was March 19, 2018. Under the Congressional Review Act, the U.S. House of Representatives voted to overturn the final rule on July 25, 2017, and the U.S. Senate did the same on October 24, 2017. On November 1, 2017, the President signed the repeal of the final rule. In light of these developments, ASB did not modify its existing agreements.
Expedited Funds Availability Act of 1987 (EFA Act) and the Check Clearing for the 21st Century Act of 2003 (Check 21 Act). The Board of Governors of the Federal Reserve System amended Regulation CC, Availability of Funds and Collection of Checks, which implements EFA Act and Check 21 Act effective July 1, 2018. The Board of Governors modified the current check collection and returns requirement to reflect the virtually all-electronic check collection and return environment and to encourage all depository banks to receive, and paying banks to send, returned checks electronically. The Board of Governors applied Regulation CC’s existing check warranties to checks that are collected electronically, and adopted new warranties and indemnities related to checks collected and returned electronically and to electronically-created items.
Potential impact of lava flows. In May 2018, a lava eruption occurred within the Leilani Estates subdivision, located along the lower East Rift Zone of Kilauea Volcano in the Puna district on the island of Hawaii. ASB has been monitoring its loan exposure


on properties most likely to be impacted by the path of the lava flow. None of the bank’s branches have been damaged by the lava flow and the bank has limited exposure to residential loan losses due to its decision in 2014 to cease originations in the designated lava zone areas. The bank has one commercial real estate loan and four commercial loans with businesses located in Pahoa, near the Puna district, but outside of the current risk area. Although the lava eruption continues and is unpredictable, the financial impact to the bank, to date, has not been material.

FINANCIAL CONDITION
Liquidity and capital resources.
(dollars in millions) September 30, 2017 December 31, 2016 % change June 30, 2018 December 31, 2017 % change
Total assets $6,619
 $6,421
 3
 $6,984
 $6,799
 3
Available-for-sale investment securities 1,320
 1,105
 19
Loans receivable held for investment, net 4,623
 4,683
 (1)
Investment securities 1,416
 1,446
 (2)
Loans held for investment, net 4,722
 4,617
 2
Deposit liabilities 5,752
 5,549
 4
 6,116
 5,891
 4
Other bank borrowings 154
 193
 (20) 127
 191
 (34)
As of SeptemberJune 30, 2017,2018, ASB was one of Hawaii’s largest financial institutions based on assets of $6.6$7.0 billion and deposits of $5.8$6.1 billion.
As of SeptemberJune 30, 20172018, ASB’s unused FHLB borrowing capacity was approximately $1.9$2.0 billion. As of SeptemberJune 30, 20172018, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.8 billion. Asbillion, of September 30, 2017, the Company did not havewhich commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings.restructurings were $0.01 million. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
For the ninesix months ended SeptemberJune 30, 2017,2018, net cash provided by ASB’s operating activities was $80$45 million. Net cash used during the same period by ASB’s investing activities was $211$190 million, primarily due to purchases of available-for-sale investment securities of $134 million, a net increase in loans of $112 million, additions to premises and equipment of $40 million, and purchases of held-to-maturity investment securities of $20 million, partly offset by receipt of repayments from available-for-sale investment securities of $108 million, and proceeds from the sale of commercial loans of $7 million. Net cash provided by financing activities during this period was $140 million, primarily due to increases in deposit liabilities of $123 million, proceeds from FHLB advances of $177 million, and a net increase in retail repurchase agreements of $38 million, partly offset by principal payments on FHLB advances of $177 million, and $22 million in common stock dividends to HEI (through ASB Hawaii).
For the six months ended June 30, 2017, net cash provided by ASB’s operating activities was $46 million. Net cash used during the same period by ASB’s investing activities was $221 million, primarily due to purchases of investment securities of $369$296 million, a net increase in loans receivable of $20 million and additions to premises and equipment of $36 million, and contributions to low-income housing investments of $8$20 million, partly offset by receipt of repayments from investment securities of $155$100 million, proceeds from the sale of commercial loans of $31 million, a net decrease in loans receivable of $13 million and a decrease in restricted cash of $2 million. Net cash provided by financing activities during this period was $131$152 million, primarily due to increases in deposit liabilities of $203 million, proceeds from FHLB advances of $60$175 million and a net increase in retail repurchase agreements of $24$9 million, partly offset by principal payments on FHLB advances of $110 million, repayments of securities sold under agreements to repurchase of $14 million a net decrease in mortgage escrow deposits of $5 million and $28 million in common stock dividends to HEI (through ASB Hawaii).
For the nine months ended September 30, 2016, net cash provided by ASB’s operating activities was $42 million. Net cash used during the same period by ASB’s investing activities was $310 million, primarily due to purchases of investment securities of $354 million, a net increase in loans receivable of $175 million and additions to premises and equipment of $8 million, partly offset by receipt of repayments and calls of investment securities of $173 million, proceeds from the sale of investment securities of $16 million and proceeds from the sale of commercial loans of $38 million. Net cash provided by financing activities during this period was $260 million, primarily due to increases in deposit liabilities of $355 million, partly offset by a net decrease in retail repurchase agreements of $21 million, maturities of securities sold under agreements to repurchase of $42 million, a net decrease in escrow deposits of $5 million and $27$19 million in common stock dividends to HEI (through ASB Hawaii).
ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of SeptemberJune 30, 20172018, ASB was well-capitalized (minimum ratio requirements noted in parentheses)


with a Common equity Tier-1 ratio of 12.7% (6.5%), a Tier-1 capital ratio of 12.7% (8.0%), a Total capital ratio of 13.9% (10.0%) and a Tier-1 leverage ratio of 8.7%8.6% (5.0%). As of December 31, 2016,2017, ASB was well-capitalized with a common equity Tier-1 ratio of 12.2%13.0%, Tier-1 capital ratio of 12.2%13.0%, a Total capital ratio of 13.4%14.2% and a Tier-1 leverage ratio of 8.6%. All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii).


Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company considers interest-rate risk (a non-trading market risk) to be a very significant market risk for ASB as it could potentially have a significant effect on the Company’s results of operations, financial condition and liquidity. For additional quantitative and qualitative information about the Company’s market risks, see HEI’s and Hawaiian Electric’s Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of HEI’s 20162017 Form 10-K (pages 7980 to 81)82).
ASB’s interest-rate risk sensitivity measures as of SeptemberJune 30, 20172018 and December 31, 20162017 constitute “forward-looking statements” and were as follows:
Change in interest rates 
Change in NII
(gradual change in interest rates)
 
Change in EVE
(instantaneous change in interest rates)
 
Change in NII
(gradual change in interest rates)
 
Change in EVE
(instantaneous change in interest rates)
(basis points) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017 June 30, 2018 December 31, 2017
+300 3.4% 1.9% (6.0)% (8.0)% 2.2% 3.0% (8.9)% (8.0)%
+200 2.5
 0.8
 (2.7) (4.6) 1.7
 2.4
 (5.3) (4.0)
+100 1.4
 —
 —
 (1.6) 1.1
 1.6
 (1.9) (0.6)
-100 (2.6) (0.5) (6.1) (1.6) (2.6) (2.7) (2.5) (6.0)
Management believes that ASB’s interest rate risk position as of September 30, 2017 represents a reasonable level of risk. The NII profile under the rising interest rate risk scenarios was moreless asset sensitive for all rate increases as of SeptemberJune 30, 20172018 compared to December 31, 2016. Interest income increased due to2017. NII asset sensitivity has been slowly decreasing as rising rates have slowed prepayment expectations, reducing the growthamount of the fixed-rate mortgage and mortgage-backed investment portfolio and higher income from the commercial and HELOC loan portfolios dueavailable to an increasereprice in the short-term LIBOR and prime rates.rising rate scenarios. In addition, the repricing assumptionsfixed-rate portion of certain commercial loans were updated, which resultedthe HELOC portfolio grew, further reducing the amount available to reprice in a net increase in NII.rising rate scenarios.
ASB’s base EVE increased to $1.15$1.22 billion as of SeptemberJune 30, 2017,2018, compared to $1.09$1.18 billion as of December 31, 2016,2017, due to the growth and mix of the balance sheet. The growth of the investment portfolio wasand loan portfolios were funded with the increase in core deposits. The upward shift in short term rates resulted in the market valuation of assets exceeding the valuation of liabilities.
EVE sensitivity to rising rates declinedincreased as of SeptemberJune 30, 20172018 compared to December 31, 2016.2017. During the first ninesix months of the year, market rates increased, slowing prepayments and extending duration in the purchase of intermediate-termed durationresidential loan and mortgage-backed investment securities was funded by longer duration core deposits, resulting in a net decrease in EVE sensitivity. In addition, during the third quarter, the implementation of a new balance sheet management system along with some modeling improvements further decreased sensitivity.portfolios.
The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indicative of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet and management’s responses to the changes in interest rates.


Item 4. Controls and Procedures
HEI:
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the thirdsecond quarter of 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Hawaiian Electric:
Disclosure Controls and Procedures
Hawaiian Electric maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by Hawaiian Electric in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to Hawaiian Electric’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of Hawaiian Electric’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Hawaiian Electric’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including Hawaiian Electric’s Chief Executive Officer and Chief Financial Officer, concluded that Hawaiian Electric’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the thirdsecond quarter of 20172018 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting.
PART II - OTHER INFORMATION

Item 1. Legal Proceedings
The descriptions of legal proceedings (including judicial proceedings and proceedings before the PUC and environmental and other administrative agencies) in HEI’s and Hawaiian Electric’s 20162017 Form 10-K (see “Part I. Item 3. Legal Proceedings” and proceedings referred to therein) and this Form 10-Q (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 3 and 4 of the Condensed Consolidated Financial Statements) are incorporated by reference in this Item 1. With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts typically maintained in confidence unless and until a resolution is achieved. Certain HEI subsidiaries (including Hawaiian Electric and its subsidiaries, ASB and ASB)Pacific Current and its subsidiaries) may also be involved in ordinary routine PUC proceedings, environmental proceedings and litigation incidental to their respective businesses.
Item 1A. Risk Factors
For information about Risk Factors, see pages 2526 to 3537 of HEI’s and Hawaiian Electric’s 20162017 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative


Disclosures about Market Risk” and the Condensed Consolidated Financial Statements herein. Also, see “Cautionary Note Regarding Forward-Looking Statements” on pages iv and v herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of HEI common shares were made on the open market during the thirdsecond quarter of 2018 to satisfy the requirements of certain plans as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Period* 

Total Number of Shares Purchased **
 
 
Average
Price Paid
per Share **
  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 to 31, 2017 33,787
 $32.51 — NA
August 1 to 31, 2017 25,972
 $33.23 — NA
September 1 to 30, 2017 181,072
 $34.33 — NA
Period* 

Total Number of Shares Purchased **
 
 
Average
Price Paid
per Share **
  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 to 30, 2018 25,870 $34.64 — NA
May 1 to 31, 2018 28,287 $33.91 — NA
June 1 to 30, 2018 198,215 $33.01 — NA
NA Not applicable.
* Trades (total number of shares purchased) are reflected in the month in which the order is placed.
** The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the DRIP, the HEIRSP and the ASB 401(k) Plan. Of the “Total number of shares purchased,” 32,817 of the 33,787 shares, all of the 25,97225,870 shares, 24,187 of the 28,287 shares and 163,512171,915 of the 181,072198,215 shares were purchased for the DRIP; none of the 33,78725,870 shares, none4,100 of the 25,97228,287 shares and 13,70023,100 of the 181,072198,215 shares were purchased for the HEIRSP; and the remainder was purchased for the ASB 401(k) Plan. The repurchased shares were issued for the accounts of the participants under registration statements registering the shares issued under these plans.

Item 5. Other Information
A.           Ratio of earnings to fixed charges.
 Nine months ended September 30 Years ended December 31 Six months ended June 30 Years ended December 31
 2017 2016 2016 2015 2014 2013 2012 2018 2017 2017 2016 2015 2014 2013
HEI and Subsidiaries  
  
  
  
  
  
  
  
  
  
  
  
  
  
Excluding interest on ASB deposits 3.92
 5.34
 5.05
 3.68
 3.80
 3.55
 3.30
 3.18
 3.31
 3.93
 5.05
 3.68
 3.80
 3.55
Including interest on ASB deposits 3.66
 5.04
 4.75
 3.54
 3.65
 3.42
 3.15
 2.94
 3.11
 3.65
 4.75
 3.54
 3.65
 3.42
Hawaiian Electric and Subsidiaries 3.58
 4.18
 4.11
 3.97
 4.04
 3.72
 3.37
 2.88
 2.90
 3.64
 4.11
 3.97
 4.04
 3.72
 
See HEI Exhibit 12.1 and Hawaiian Electric Exhibit 12.2.


Item 6. Exhibits
 
HEI Exhibit 4
 LetterThird Amendment effective August 15, 2017July 1, 2018 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust CompanyCompany.
HEI Exhibit 10
Amended and Restated Severance Pay Plan for Management Employees of Hawaiian Electric Industries, Inc. and Executive Employees of Affiliates, effective as of April 2, 2018.
   
HEI Exhibit 12.1
 
Hawaiian Electric Industries, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, ninesix months ended SeptemberJune 30, 20172018 and 20162017 and years ended December 31, 2017, 2016, 2015, 2014 2013 and 20122013
   
HEI Exhibit 31.1
 Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer)
   
HEI Exhibit 31.2
 Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer)
   
HEI Exhibit 32.1
 HEI Certification Pursuant to 18 U.S.C. Section 1350
   
HEI Exhibit 101.INS XBRL Instance Document
   
HEI Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
   
HEI Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
HEI Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
HEI Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
HEI Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
   
Hawaiian Electric Exhibit 12.2
 
Hawaiian Electric Company, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, ninesix months ended SeptemberJune 30, 20172018 and 20162017 and years ended December 31, 2017, 2016, 2015, 2014 2013 and 20122013
   
Hawaiian Electric Exhibit 31.3
 Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Alan M. Oshima (Hawaiian Electric Chief Executive Officer)
   
Hawaiian Electric Exhibit 31.4
 Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer)
   
Hawaiian Electric Exhibit 32.2
 Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.
 
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
   
   
By/s/ Constance H. Lau By/s/ Alan M. Oshima
 Constance H. Lau  Alan M. Oshima
 President and Chief Executive Officer  President and Chief Executive Officer
 (Principal Executive Officer of HEI)  (Principal Executive Officer of Hawaiian Electric)
   
   
By/s/ Gregory C. Hazelton By/s/ Tayne S. Y. Sekimura
 Gregory C. Hazelton  Tayne S. Y. Sekimura
 Executive Vice President and  Senior Vice President
 Chief Financial Officer  and Chief Financial Officer
 (Principal Financial and AccountingOfficer of HEI)  (Principal Financial Officer of Hawaiian Electric)
 Officer of HEI)

  
   
Date: November 2, 2017August 3, 2018 Date: November 2, 2017August 3, 2018


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