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HAWAIIAN ELECTRIC INDUSTRIES INC - Quarter Report: 2017 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
 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 October 27, 2017
Hawaiian Electric Industries, Inc. (Without Par Value)
 
108,785,978 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)
 
16,019,785 Shares (not publicly traded)
Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.
This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.


Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended September 30, 2017
 
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended September 30, 2017
GLOSSARY OF TERMS
Terms
 
Definitions
AES Hawaii
 
AES Hawaii, Inc.
AFUDC
 
Allowance for funds used during construction
AOCI
 
Accumulated other comprehensive income/(loss)
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
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 2015 and wound up in 2017); The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.); and Pacific Current, LLC and its subsidiary, Hamakua Holdings, LLC and its subsidiary, Hamakua Energy, LLC
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
DG
 
Distributed generation
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOH
 
Department of Health of the State of Hawaii
DRIP
 
HEI Dividend Reinvestment and Stock Purchase Plan
DSM
 
Demand-side management
ECAC
 
Energy cost adjustment clause
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.
HEP
 
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)
LNG
 
Liquefied natural gas
LTIP
 
Long-term incentive plan
Maui Electric
 
Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Merger
 
As 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 Agreement
 
Agreement 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
MW
 
Megawatt/s (as applicable)
NEE
 
NextEra 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
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-Off
 
The previously planned distribution to HEI shareholders of all of the common stock of ASB Hawaii immediately prior to the Merger, which was terminated
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—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; 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 and 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, 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 in April 2014, 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 impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;


iv


•
the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;
•
the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities' electric systems and as customers reduce their energy usage;
•
the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);
•
the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;
•
the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements;
•
new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors;
•
new technological developments, such as the commercial development of energy storage and microgrids, that could affect the operations of the Utilities;
•
cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASB and the Utilities (including at ASB branches and electric utility plants) and incidents at data processing centers they use, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general information technology controls;
•
federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), the regulation of greenhouse gas emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);
•
developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies;
•
discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight;
•
decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);
•
decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS);
•
potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);
•
the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;
•
the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);
•
changes in accounting principles applicable to HEI, the Utilities and ASB, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting and the effects of potentially required consolidation of variable interest entities (VIEs) or required capital lease accounting for PPAs with IPPs;
•
changes by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and the results of financing efforts;
•
faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage-servicing assets of ASB;
•
changes in ASB’s loan portfolio credit profile and asset quality which may increase or decrease the required level of provision for loan losses, allowance for loan losses and charge-offs;
•
changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;
•
the final outcome of tax positions taken by HEI, the Utilities and ASB;
•
the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits); and
•
other risks or uncertainties described elsewhere in this report and in other reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or Hawaiian Electric with the Securities and Exchange Commission (SEC).
Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, Hawaiian Electric, ASB and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise.

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
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Revenues
 
 

 
 

 
 

 
 

Electric utility
 
$
598,769

 
$
572,253

 
$
1,674,255

 
$
1,549,700

Bank
 
74,289

 
73,708

 
222,474

 
213,297

Other
 
127

 
94

 
299

 
262

Total revenues
 
673,185

 
646,055

 
1,897,028

 
1,763,259

Expenses
 
 

 
 

 
 

 
 

Electric utility
 
511,693

 
482,441

 
1,483,194

 
1,333,876

Bank
 
47,525

 
50,981

 
146,754

 
150,752

Other
 
4,422

 
7,191

 
13,777

 
18,883

Total expenses
 
563,640

 
540,613

 
1,643,725

 
1,503,511

Operating income (loss)
 
 

 
 

 
 

 
 

Electric utility
 
87,076

 
89,812

 
191,061

 
215,824

Bank
 
26,764

 
22,727

 
75,720

 
62,545

Other
 
(4,295
)
 
(7,097
)
 
(13,478
)
 
(18,621
)
Total operating income
 
109,545

 
105,442

 
253,303

 
259,748

Merger termination fee
 
—

 
90,000

 
—

 
90,000

Interest expense, net—other than on deposit liabilities and other bank borrowings
 
(19,227
)
 
(19,365
)
 
(59,235
)
 
(56,792
)
Allowance for borrowed funds used during construction
 
1,339

 
854

 
3,371

 
2,276

Allowance for equity funds used during construction
 
3,482

 
2,274

 
8,908

 
6,010

Income before income taxes
 
95,139

 
179,205

 
206,347

 
301,242

Income taxes
 
34,595

 
51,592

 
72,003

 
96,203

Net income
 
60,544

 
127,613

 
134,344

 
205,039

Preferred stock dividends of subsidiaries
 
471

 
471

 
1,417

 
1,417

Net income for common stock
 
$
60,073

 
$
127,142

 
$
132,927

 
$
203,622

Basic earnings per common share
 
$
0.55

 
$
1.17

 
$
1.22

 
$
1.89

Diluted earnings per common share
 
$
0.55

 
$
1.17

 
$
1.22

 
$
1.88

Dividends declared per common share
 
$
0.31

 
$
0.31

 
$
0.93

 
$
0.93

Weighted-average number of common shares outstanding
 
108,786

 
108,268

 
108,737

 
107,951

Net effect of potentially dilutive shares
 
79

 
204

 
172

 
220

Weighted-average shares assuming dilution
 
108,865

 
108,472

 
108,909

 
108,171

 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.


1


Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Net income for common stock
 
$
60,073

 
$
127,142

 
$
132,927

 
$
203,622

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
)
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
)
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
)
Other comprehensive income (loss), net of taxes
 
554

 
(1,669
)
 
3,909

 
9,239

Comprehensive income attributable to Hawaiian Electric Industries, Inc.
 
$
60,627

 
$
125,473

 
$
136,836

 
$
212,861

 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.


2


Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) 
(dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Assets
 
 

 
 

Cash and cash equivalents
 
$
202,173

 
$
278,452

Accounts receivable and unbilled revenues, net
 
264,426

 
237,950

Available-for-sale investment securities, at fair value
 
1,320,110

 
1,105,182

Stock in Federal Home Loan Bank, at cost
 
9,706

 
11,218

Loans receivable held for investment, net
 
4,623,234

 
4,683,160

Loans held for sale, at lower of cost or fair value
 
15,728

 
18,817

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

Regulatory assets
 
936,964

 
957,451

Other
 
474,444

 
447,621

Goodwill
 
82,190

 
82,190

Total assets
 
$
12,742,850

 
$
12,425,506

Liabilities and shareholders’ equity
 
 

 
 

Liabilities
 
 

 
 

Accounts payable
 
$
160,897

 
$
143,279

Interest and dividends payable
 
26,484

 
25,225

Deposit liabilities
 
5,752,326

 
5,548,929

Short-term borrowings—other than bank
 
24,498

 
—

Other bank borrowings
 
153,552

 
192,618

Long-term debt, net—other than bank
 
1,618,446

 
1,619,019

Deferred income taxes
 
756,814

 
728,806

Regulatory liabilities
 
466,216

 
410,693

Contributions in aid of construction
 
565,118

 
543,525

Defined benefit pension and other postretirement benefit plans liability
 
620,788

 
638,854

Other
 
460,396

 
473,512

Total liabilities
 
10,605,535

 
10,324,460

Preferred stock of subsidiaries - not subject to mandatory redemption
 
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

Retained earnings
 
470,750

 
438,972

Accumulated other comprehensive loss, net of tax benefits
 
(29,220
)
 
(33,129
)
Total shareholders’ equity
 
2,103,022

 
2,066,753

Total liabilities and shareholders’ equity
 
$
12,742,850

 
$
12,425,506

 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.


3

Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 
 
 
Common stock
 
Retained
 
Accumulated
other
comprehensive
 
 
(in thousands)
 
Shares
 
Amount
 
Earnings
 
income (loss)
 
Total
Balance, December 31, 2016
 
108,583

 
$
1,660,910

 
$
438,972

 
$
(33,129
)
 
$
2,066,753

Net income for common stock
 
—

 
—

 
132,927

 
—

 
132,927

Other comprehensive income, net of taxes
 
—

 
—

 
—

 
3,909

 
3,909

Issuance of common stock, net of expenses
 
203

 
582

 
—

 
—

 
582

Common stock dividends
 
—

 
—

 
(101,149
)
 
—

 
(101,149
)
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

 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.


4


Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
 
Nine months ended September 30
(in thousands)
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net income
 
$
134,344

 
$
205,039

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

 
 

Depreciation of property, plant and equipment
 
150,123

 
145,684

Other amortization
 
15,362

 
7,368

Provision for loan losses
 
7,231

 
15,266

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

Deferred income taxes
 
21,397

 
30,667

Share-based compensation expense
 
4,383

 
3,581

Allowance for equity funds used during construction
 
(8,908
)
 
(6,010
)
Other
 
(1,350
)
 
3,234

Changes in assets and liabilities
 
 

 
 

Increase in accounts receivable and unbilled revenues, net
 
(26,250
)
 
(12,104
)
Decrease in fuel oil stock
 
6,177

 
6,736

Decrease (increase) in regulatory assets
 
3,922

 
(2,251
)
Increase (decrease) in accounts, interest and dividends payable
 
(10,390
)
 
3,399

Change in prepaid and accrued income taxes, tax credits and utility revenue taxes
 
2,828

 
52,558

Increase in defined benefit pension and other postretirement benefit plans liability
 
670

 
150

Change in other assets and liabilities
 
(22,311
)
 
(39,850
)
Net cash provided by operating activities
 
291,143

 
409,300

Cash flows from investing activities
 
 

 
 

Available-for-sale investment securities purchased
 
(369,467
)
 
(354,165
)
Principal repayments on available-for-sale investment securities
 
155,026

 
172,829

Proceeds from sale of available-for-sale investment securities
 
—

 
16,423

Purchase of stock from Federal Home Loan Bank
 
(2,868
)
 
(2,773
)
Redemption of stock from Federal Home Loan Bank
 
4,380

 
2,233

Net decrease (increase) in loans held for investment
 
13,188

 
(175,303
)
Proceeds from sale of commercial loans
 
31,427

 
37,946

Proceeds from sale of real estate acquired in settlement of loans
 
411

 
829

Proceeds from sale of real estate held-for-sale
 
—

 
1,764

Capital expenditures
 
(314,404
)
 
(259,207
)
Contributions in aid of construction
 
40,603

 
23,568

Other
 
1,345

 
112

Net cash used in investing activities
 
(440,359
)
 
(535,744
)
Cash flows from financing activities
 
 

 
 

Net increase in deposit liabilities
 
203,397

 
355,467

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
)
Proceeds from other bank borrowings
 
59,500

 
55,835

Repayments of other bank borrowings
 
(123,034
)
 
(97,902
)
Proceeds from issuance of long-term debt
 
265,000

 
75,000

Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds
 
(265,000
)
 
(75,000
)
Withheld shares for employee taxes on vested share-based compensation
 
(3,796
)
 
(2,398
)
Net proceeds from issuance of common stock
 
—

 
10,901

Common stock dividends
 
(101,149
)
 
(83,620
)
Preferred stock dividends of subsidiaries
 
(1,417
)
 
(1,417
)
Other
 
(9,531
)
 
(2,361
)
Net cash provided by financing activities
 
72,937

 
110,321

Net decrease in cash and cash equivalents
 
(76,279
)
 
(16,123
)
Cash and cash equivalents, beginning of period
 
278,452

 
300,478

Cash and cash equivalents, end of period
 
$
202,173

 
$
284,355


This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.

5


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
598,769

 
$
572,253

 
$
1,674,255

 
$
1,549,700

Expenses
 
 

 
 

 
 

 
 

Fuel oil
 
146,258

 
128,624

 
431,787

 
334,263

Purchased power
 
160,347

 
157,750

 
440,538

 
412,667

Other operation and maintenance
 
100,102

 
94,789

 
306,716

 
298,260

Depreciation
 
48,206

 
46,759

 
144,578

 
140,300

Taxes, other than income taxes
 
56,780

 
54,519

 
159,575

 
148,386

Total expenses
 
511,693

 
482,441

 
1,483,194

 
1,333,876

Operating income
 
87,076

 
89,812

 
191,061

 
215,824

Allowance for equity funds used during construction
 
3,482

 
2,274

 
8,908

 
6,010

Interest expense and other charges, net
 
(16,907
)
 
(17,323
)
 
(52,625
)
 
(49,734
)
Allowance for borrowed funds used during construction
 
1,339

 
854

 
3,371

 
2,276

Income before income taxes
 
74,990

 
75,617

 
150,715

 
174,376

Income taxes
 
27,005

 
28,145

 
54,623

 
64,682

Net income
 
47,985

 
47,472

 
96,092

 
109,694

Preferred stock dividends of subsidiaries
 
228

 
228

 
686

 
686

Net income attributable to Hawaiian Electric
 
47,757

 
47,244

 
95,406

 
109,008

Preferred stock dividends of Hawaiian Electric
 
270

 
270

 
810

 
810

Net income for common stock
 
$
47,487

 
$
46,974

 
$
94,596

 
$
108,198

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 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
(in thousands)
 
2017
 
2016
 
2017
 
2016
Net income for common stock
 
$
47,487

 
$
46,974

 
$
94,596

 
$
108,198

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
)
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
)
Other comprehensive income, net of taxes
 
22

 
151

 
521

 
412

Comprehensive income attributable to Hawaiian Electric Company, Inc.
 
$
47,509

 
$
47,125

 
$
95,117

 
$
108,610

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.

6


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value)
 
September 30, 2017

 
December 31, 2016

Assets
 
 

 
 

Property, plant and equipment
 
 
 
 
Utility property, plant and equipment
 
 

 
 

Land
 
$
53,913

 
$
53,153

Plant and equipment
 
6,778,254

 
6,605,732

Less accumulated depreciation
 
(2,460,429
)
 
(2,369,282
)
Construction in progress
 
307,492

 
211,742

Utility property, plant and equipment, net
 
4,679,230

 
4,501,345

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

Total property, plant and equipment, net
 
4,686,639

 
4,508,752

Current assets
 
 

 
 

Cash and cash equivalents
 
9,987

 
74,286

Customer accounts receivable, net
 
133,135

 
123,688

Accrued unbilled revenues, net
 
109,707

 
91,693

Other accounts receivable, net
 
4,097

 
5,233

Fuel oil stock, at average cost
 
60,253

 
66,430

Materials and supplies, at average cost
 
55,959

 
53,679

Prepayments and other
 
29,871

 
23,100

Regulatory assets
 
72,773

 
66,032

Total current assets
 
475,782

 
504,141

Other long-term assets
 
 

 
 

Regulatory assets
 
864,191

 
891,419

Unamortized debt expense
 
661

 
208

Other
 
80,228

 
70,908

Total other long-term assets
 
945,080

 
962,535

Total assets
 
$
6,107,501

 
$
5,975,428

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

Premium on capital stock
 
601,487

 
601,491

Retained earnings
 
1,120,571

 
1,091,800

Accumulated other comprehensive income (loss), net of taxes
 
199

 
(322
)
Common stock equity
 
1,829,075

 
1,799,787

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

 
34,293

Long-term debt, net
 
1,318,623

 
1,319,260

Total capitalization
 
3,181,991

 
3,153,340

Commitments and contingencies (Note 3)
 


 


Current liabilities
 
 

 
 

Short-term borrowings from non-affiliates
 
6,000

 
—

Accounts payable
 
124,240

 
117,814

Interest and preferred dividends payable
 
25,261

 
22,838

Taxes accrued
 
183,365

 
172,730

Regulatory liabilities
 
3,399

 
3,762

Other
 
59,611

 
55,221

Total current liabilities
 
401,876

 
372,365

Deferred credits and other liabilities
 
 

 
 

Deferred income taxes
 
767,611

 
733,659

Regulatory liabilities
 
462,817

 
406,931

Unamortized tax credits
 
88,827

 
88,961

Defined benefit pension and other postretirement benefit plans liability
 
581,713

 
599,726

Other
 
57,548

 
76,921

Total deferred credits and other liabilities
 
1,958,516

 
1,906,198

Contributions in aid of construction
 
565,118

 
543,525

Total capitalization and liabilities
 
$
6,107,501

 
$
5,975,428

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.

7


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
 
 
(in thousands)
 
Shares
 
Amount
 
stock
 
earnings
 
income (loss)
 
Total
Balance, December 31, 2016
 
16,020

 
$
106,818

 
$
601,491

 
$
1,091,800

 
$
(322
)
 
$
1,799,787

Net income for common stock
 
—

 
—

 
—

 
94,596

 
—

 
94,596

Other comprehensive income, net of taxes
 
—

 
—

 
—

 
—

 
521

 
521

Common stock dividends
 
—

 
—

 
—

 
(65,825
)
 
—

 
(65,825
)
Common stock issuance expenses
 
—

 
—

 
(4
)
 
—

 
—

 
(4
)
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

 
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.



8


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) 
 
 
Nine months ended September 30
(in thousands)
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net income
 
$
96,092


$
109,694

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


 

Depreciation of property, plant and equipment
 
144,578


140,300

Other amortization
 
6,118


5,380

Deferred income taxes
 
29,537


55,648

Allowance for equity funds used during construction
 
(8,908
)

(6,010
)
Other
 
526

 
3,234

Changes in assets and liabilities
 
 


 

Increase in accounts receivable
 
(8,087
)

(655
)
Increase in accrued unbilled revenues
 
(18,014
)

(10,658
)
Decrease in fuel oil stock
 
6,177


6,736

Increase in materials and supplies
 
(2,280
)

(2,927
)
Decrease (increase) in regulatory assets
 
3,922


(2,251
)
Decrease in accounts payable
 
(22,841
)

(676
)
Change in prepaid and accrued income taxes, tax credits and revenue taxes
 
5,291


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


360

Change in other assets and liabilities
 
(2,662
)

(13,309
)
Net cash provided by operating activities
 
229,902


275,271

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(278,004
)
 
(250,704
)
Contributions in aid of construction
 
40,603

 
23,568

Other
 
8,114

 
1,100

Net cash used in investing activities
 
(229,287
)
 
(226,036
)
Cash flows from financing activities
 
 

 
 

Common stock dividends
 
(65,825
)
 
(70,199
)
Preferred stock dividends of Hawaiian Electric and subsidiaries
 
(1,496
)
 
(1,496
)
Proceeds from issuance of special purpose revenue bonds
 
265,000

 
—

Funds transferred for redemption of special purpose revenue bonds
 
(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

Other
 
(3,593
)
 
(12
)
Net cash used in financing activities
 
(64,914
)
 
(50,707
)
Net decrease in cash and cash equivalents
 
(64,299
)
 
(1,472
)
Cash and cash equivalents, beginning of period
 
74,286

 
24,449

Cash and cash equivalents, end of period
 
$
9,987

 
$
22,977


This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2016 Form 10-K.



9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



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, 2016.
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 September 30, 2017 and December 31, 2016, the results of their operations for the three and nine months ended September 30, 2017 and 2016 and their cash flows for the nine months ended September 30, 2017 and 2016. 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 FASB issued 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 material impact on the timing or pattern of revenue recognition upon adoption of ASU No. 2014-09, but do expect to provide expanded disclosures around the amount, timing, nature 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.
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 adopt ASU No. 2016-01 in the first quarter of 2018 and expects changes to disclosures, but otherwise believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Cash Flows. 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 adopt ASU No. 2016-15 in the first quarter of 2018 using a retrospective transition method and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
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 adopt ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
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 adopt ASU No. 2017-07 in the first quarter of 2018 and has not yet determined the impact of adoption. HEI and ASB do not capitalize pension and OPEB costs. The Utilities are seeking recovery of their defined benefit costs as reflected under 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.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


The Hawaii Electric Light 2016 test year and the Hawaiian Electric consolidated 2014 and 2017 test year revenue requirements were based on their current accounting for retirement benefits, and reflect the capitalization of a portion of the total pension and OPEB costs and the amortization of the pension and OPEB regulatory assets or liabilities (based 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 its 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.
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 determined the method or impact of adoption.
Credit Losses. 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 2020 and has not yet determined the impact of adoption.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


2 · Segment financial information
(in thousands) 
 
Electric utility
 
Bank
 
Other
 
Total
Three months ended September 30, 2017
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
598,756

 
$
74,289

 
$
140

 
$
673,185

Intersegment revenues (eliminations)
 
13

 
—

 
(13
)
 
—

Revenues
 
$
598,769

 
$
74,289

 
$
127

 
$
673,185

Income (loss) before income taxes
 
$
74,990

 
$
26,764

 
$
(6,615
)
 
$
95,139

Income taxes (benefit)
 
27,005

 
9,172

 
(1,582
)
 
34,595

Net income (loss)
 
47,985

 
17,592

 
(5,033
)
 
60,544

Preferred stock dividends of subsidiaries
 
498

 
—

 
(27
)
 
471

Net income (loss) for common stock
 
$
47,487

 
$
17,592

 
$
(5,006
)
 
$
60,073

Nine months ended September 30, 2017
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
1,674,158

 
$
222,474

 
$
396

 
$
1,897,028

Intersegment revenues (eliminations)
 
97

 
—

 
(97
)
 
—

Revenues
 
$
1,674,255

 
$
222,474

 
$
299

 
$
1,897,028

Income (loss) before income taxes
 
$
150,715

 
$
75,720

 
$
(20,088
)
 
$
206,347

Income taxes (benefit)
 
54,623

 
25,582

 
(8,202
)
 
72,003

Net income (loss)
 
96,092

 
50,138

 
(11,886
)
 
134,344

Preferred stock dividends of subsidiaries
 
1,496

 
—

 
(79
)
 
1,417

Net income (loss) for common stock
 
$
94,596

 
$
50,138

 
$
(11,807
)
 
$
132,927

Total assets (at September 30, 2017)
 
$
6,107,501

 
$
6,618,907

 
$
16,442

 
$
12,742,850

Three months ended September 30, 2016
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
572,208

 
$
73,708

 
$
139

 
$
646,055

Intersegment revenues (eliminations)
 
45

 
—

 
(45
)
 
—

Revenues
 
$
572,253

 
$
73,708

 
$
94

 
$
646,055

Income 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

Preferred stock dividends of subsidiaries
 
498

 
—

 
(27
)
 
471

Net income for common stock
 
$
46,974

 
$
15,104

 
$
65,064

 
$
127,142

Nine months ended September 30, 2016
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
1,549,602

 
$
213,297

 
$
360

 
$
1,763,259

Intersegment revenues (eliminations)
 
98

 
—

 
(98
)
 
—

Revenues
 
$
1,549,700

 
$
213,297

 
$
262

 
$
1,763,259

Income 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

Preferred stock dividends of subsidiaries
 
1,496

 
—

 
(79
)
 
1,417

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

 
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 acquisition of Hamakua power plant. In September 2017, HEI formed new 100% owned subsidiaries--Pacific Current, LLC and its subsidiary Hamakua Holdings, LLC and its subsidiary, 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.
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. However, the Utilities’ revenue tax payments to the taxing authorities in the period are based on the prior year’s billed revenues (in the case of public service company taxes and PUC fees) or on the current year’s cash collections from electric sales (in the case of franchise taxes). The Utilities included in the third quarters of 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.
Unconsolidated variable interest entities.
HECO Capital Trust III.  HECO Capital Trust III (Trust III) was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal amount of $31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million, (iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto. The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034, which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric. Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not absorb the majority of the variability of Trust III, Hawaiian Electric is not the primary beneficiary and does not consolidate Trust III in accordance with accounting rules on the consolidation of VIEs. Trust III’s balance sheets as of September 30, 2017 and December 31, 2016 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for the nine months ended September 30, 2017 consisted of $2.5 million of interest income received from the 2004 Debentures; $2.4 million of distributions to holders of the Trust Preferred Securities; and $75,000 of common dividends on the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004 Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.
Power purchase agreements.  As of September 30, 2017, the Utilities had five PPAs for firm capacity and other PPAs with independent power producers (IPPs) and Schedule Q providers (e.g., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which is currently required to be consolidated as VIEs.
Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and HEP by reason of the provisions of the PPAs 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 HEP 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 HEP in its unaudited condensed consolidated financial statements.
For the other 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 obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPPs were either 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.
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
(in millions)
 
2017
 
2016
 
2017
 
2016
Kalaeloa
 
$
48

 
$
44

 
$
136

 
$
109

AES Hawaii
 
39

 
38

 
103

 
112

HPOWER
 
18

 
19

 
51

 
52

Puna Geothermal Venture
 
10

 
7

 
28

 
19

HEP
 
8

 
8

 
25

 
23

Other IPPs 1
 
38

 
42

 
98

 
98

Total IPPs
 
$
161

 
$
158

 
$
441

 
$
413

 
1 
Includes wind power, solar power, feed-in tariff projects and other PPAs.
Kalaeloa Partners, L.P.  In October 1988, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved by the PUC, which provided that Hawaiian Electric would purchase 180 megawatts (MW) of firm capacity for a period of 25 years beginning in May 1991. In October 2004, Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that Hawaiian Electric makes to Kalaeloa include: (1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil, (2) a fuel additives cost component and (3) a non-fuel component, with an adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to Kalaeloa are fixed in accordance with the PPA. Kalaeloa also has a steam delivery cogeneration contract with another customer, the term of which coincides with the PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.
Hawaiian Electric and Kalaeloa are in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith, 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.
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 Agreement to stay the arbitration proceeding. The Settlement 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 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.
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. Per 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, 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 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. On August 11, 2016, the PUC approved the Utilities’ request to commence the ERP/EAM 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 savings associated with the system over its 12-year service life. The decision and order (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. Monthly reports on the status and costs of the project continue to be filed.
The ERP/EAM Implementation Project is on schedule. The project is expected to go live by October 1, 2018. As of September 30, 2017, the Project incurred costs of $23.6 million of which $4.6 million were charged to other operation and maintenance (O&M) expense, $1.4 million relate to capital costs and $17.6 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 year site lease from the U.S. Army. Construction of the facility began in October 2016, and the facility is expected to be placed in service in the second quarter of 2018. A request to recover the costs of the project and related operations and maintenance expense through the newly-established Major Project Interim Recovery (MPIR) adjustment mechanism is pending PUC approval. (See “Decoupling” section below for MPIR guidelines and capital cost recovery discussion.) Project costs incurred as of September 30, 2017 amounted to $105.7 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 with the Department of the Navy at a Navy/Air Force joint base. 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 amounted to $0.7 million.
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. 
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 settlement negotiations. 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 settlement negotiations. Maui Electric has not yet commenced any legal action to recover the delinquent amounts. The Utilities and Hawaiian Telcom have entered into a non-binding memorandum of understanding to endeavor to negotiate agreements, subject to PUC approval, for purchase by the Utilities of Hawaiian Telcom’s interest in all the joint poles, with payment of the purchase price of such interest in the poles to be offset in part by the receivables owed by Hawaiian Telcom to the Utilities. As of September 30, 2017, total receivables under the joint pole agreement, including interest, from Hawaiian Telcom are $22.2 million ($14.9 million at Hawaiian Electric, $6.0 million at Hawaii Electric Light, and $1.3 million at Maui Electric). Management expects to prevail on these claims but has reserved for the accrued interest of $4.9 million on the receivables.
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 million as of September 30, 2017, 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.
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.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


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. The extent of the onshore contamination, the appropriate remedial measures to address it and any associated costs have not yet been determined.
As of September 30, 2017, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.9 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 completed 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. 
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 delinks revenues from sales and includes annual rate adjustments. The decoupling mechanism has three components: (1) a sales decoupling component via a revenue balancing account (RBA), (2) a revenue escalation component via a rate adjustment mechanism (RAM) and (3) 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.
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 order. 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, 2016 and 2017.
•
Maui Electric's RAM revenues were limited to the RAM Cap in 2015 and 2016; however, the 2017 RAM revenues were below the RAM Cap.
•
Hawaii Electric Light’s RAM revenues were below the RAM Cap in 2015, 2016 and 2017.
2017 decoupling order. On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order) that requires the establishment of specific performance incentive mechanisms and provides guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
In May 2017, the Utilities filed their proposed initial tariffs to implement conventional stand-alone performance incentive mechanisms, namely for:
•
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

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


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 approximately $6 million penalty for both 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 approximately $1.2 million penalty or incentive in total for the three utilities).
The 2017 Decoupling Order also established guidelines for MPIR. 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 $2.5 million), including but not restricted to renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for net costs of approved eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism shall be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects which are not recovered through the MPIR would be included in the RAM and be subject to the RAM cap, until the next rate case when the utilities would request recovery in base rates.
In the 2017 Decoupling Order, the PUC indicated that in pending and subsequent rate cases, the PUC intends to require all fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment mechanism rather than through base rates, and will consider adopting processes to periodically reset fuel efficiency measures embedded in the energy cost adjustment mechanism to account for changes in the generating system.
Annual decoupling filings. On March 31, 2017, the Utilities submitted to the PUC, their annual decoupling filings. Maui Electric amended its annual decoupling filing on May 22, 2017, to update and revise certain cost information. On May 31, 2017, the PUC approved the annual decoupling filings for tariffed rates that will be effective from June 1, 2017 through May 31, 2018. The net annual incremental amounts to be collected (refunded) are as follows:
($ 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

Most recent rate proceedings.
Hawaiian Electric consolidated 2014 test year abbreviated and 2017 test year rate cases. On December 16, 2016, Hawaiian 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 performance in the areas 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.
On December 23, 2016, the PUC issued an order consolidating the Hawaiian Electric filings for the 2014 test year abbreviated rate case and the 2017 test year rate case. The order also found and concluded 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, adjustment mechanisms, and practices that would have been subject 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.”

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


On January 4, 2017, Hawaiian Electric filed a motion for clarification and/or partial reconsideration of the PUC’s order. On March 14, 2017, the PUC issued an order to address Hawaiian Electric’s motion, stating that the PUC is not initiating an investigation/enforcement proceeding against Hawaiian Electric regarding its compliance with the decoupling order, and the transfer and consolidation of Hawaiian Electric’s 2014 abbreviated rate case with the 2017 rate case is intended to ensure that ratepayers receive the attendant benefits of Hawaiian Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2014 test year. As directed, on April 12, 2017, Hawaiian Electric filed a supplement to its 2017 rate case filing, addressing the items raised in the order and explaining why Hawaiian Electric’s forgoing of 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 designating the filing date of Hawaiian Electric’s completed rate case application to be May 31, 2017 (the date that supplemental pension-related information described above was filed) rather than December 16, 2016, (the date of the filing of the rate case application). On July 28, 2017, the PUC issued a procedural schedule that includes Hawaiian Electric and the Consumer Advocate submitting statements 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.
Maui Electric consolidated 2015 test year abbreviated and 2018 test year rate cases. On June 9, 2017, Maui Electric filed a notice of intent with the PUC to file a general rate case application by December 30, 2017 for a 2018 test year. On 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.”
On 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, Maui Electric requested that if a decision 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’s 2018 test year revenue requirement, the requested revenue increase would be $46.6 million (14.3%) over revenues at current effective rates. Maui Electric filed an exhibit with information responding to the PUC’s consolidation order. Similar to Hawaiian Electric’s response, Maui Electric explained why its forgoing of a general rate increase in the 2015 test year should not result in any further adjustments to Maui Electric’s revenue requirement in the 2018 test year.
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.

20

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 whether the stipulated ROACE should be reduced from 9.75% (by up to 25 basis points) based solely on the impact of decoupling, considering current circumstances and relevant precedents. On August 21, 2017, the PUC issued an order granting an interim rate increase of $9.9 million, based on the Stipulated Settlement 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.
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.

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended September 30, 2017
(in thousands)
 
Hawaiian Electric
 
Hawaii Electric Light
 
Maui Electric
 
Other subsidiaries
 
Consolidating adjustments
 
Hawaiian Electric
Consolidated
Revenues
 
$
429,267

 
84,334

 
85,198

 
—

 
(30
)
 
$
598,769

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Fuel oil
 
103,959

 
15,754

 
26,545

 
—

 
—

 
146,258

Purchased power
 
123,893

 
21,332

 
15,122

 
—

 
—

 
160,347

Other operation and maintenance
 
66,221

 
16,593

 
17,288

 
—

 
—

 
100,102

Depreciation
 
32,722

 
9,685

 
5,799

 
—

 
—

 
48,206

Taxes, other than income taxes
 
40,824

 
7,928

 
8,028

 
—

 
—

 
56,780

   Total expenses
 
367,619

 
71,292

 
72,782

 
—

 
—

 
511,693

Operating income
 
61,648

 
13,042

 
12,416

 
—

 
(30
)
 
87,076

Allowance for equity funds used during construction
 
3,108

 
167

 
207

 
—

 
—

 
3,482

Equity in earnings of subsidiaries
 
12,767

 
—

 
—

 
—

 
(12,767
)
 
—

Interest expense and other charges, net
 
(11,786
)
 
(2,899
)
 
(2,252
)
 
—

 
30

 
(16,907
)
Allowance for borrowed funds used during construction
 
1,173

 
72

 
94

 
—

 
—

 
1,339

Income before income taxes
 
66,910

 
10,382

 
10,465

 
—

 
(12,767
)
 
74,990

Income taxes
 
19,153

 
3,815

 
4,037

 
—

 
—

 
27,005

Net income
 
47,757

 
6,567

 
6,428

 
—

 
(12,767
)
 
47,985

Preferred stock dividends of subsidiaries
 
—

 
133

 
95

 
—

 
—

 
228

Net income attributable to Hawaiian Electric
 
47,757

 
6,434

 
6,333

 
—

 
(12,767
)
 
47,757

Preferred stock dividends of Hawaiian Electric
 
270

 
—

 
—

 
—

 
—

 
270

Net income for common stock
 
$
47,487

 
6,434

 
6,333

 
—

 
(12,767
)
 
$
47,487


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three 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
 
$
47,487

 
6,434

 
6,333

 
—

 
(12,767
)
 
$
47,487

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

Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
 
(3,596
)
 
(476
)
 
(404
)
 
—

 
880

 
(3,596
)
Other comprehensive income, net of taxes
 
22

 
—

 
—

 
—

 
—

 
22

Comprehensive income attributable to common shareholder
 
$
47,509

 
6,434

 
6,333

 
—

 
(12,767
)
 
$
47,509


22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended September 30, 2016

(in thousands)
 
Hawaiian Electric
 
Hawaii Electric Light
 
Maui Electric
 
Other subsidiaries
 
Consolidating adjustments
 
Hawaiian Electric
Consolidated
Revenues
 
$
404,352

 
83,105

 
84,831

 
—

 
(35
)
 
$
572,253

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Fuel oil
 
88,676

 
14,603

 
25,345

 
—

 
—

 
128,624

Purchased power
 
118,751

 
22,728

 
16,271

 
—

 
—

 
157,750

Other operation and maintenance
 
64,683

 
15,017

 
15,089

 
—

 
—

 
94,789

Depreciation
 
31,520

 
9,449

 
5,790

 
—

 
—

 
46,759

Taxes, other than income taxes
 
38,666

 
7,836

 
8,017

 
—

 
—

 
54,519

   Total expenses
 
342,296

 
69,633

 
70,512

 
—

 
—

 
482,441

Operating income
 
62,056

 
13,472

 
14,319

 
—

 
(35
)
 
89,812

Allowance for equity funds used during construction
 
1,806

 
238

 
230

 
—

 
—

 
2,274

Equity in earnings of subsidiaries
 
14,729

 
—

 
—

 
—

 
(14,729
)
 
—

Interest expense and other charges, net
 
(11,903
)
 
(2,972
)
 
(2,483
)
 
—

 
35

 
(17,323
)
Allowance for borrowed funds used during construction
 
669

 
91

 
94

 
—

 
—

 
854

Income before income taxes
 
67,357

 
10,829

 
12,160

 
—

 
(14,729
)
 
75,617

Income taxes
 
20,113

 
3,392

 
4,640

 
—

 
—

 
28,145

Net income
 
47,244

 
7,437

 
7,520

 
—

 
(14,729
)
 
47,472

Preferred stock dividends of subsidiaries
 
—

 
133

 
95

 
—

 
—

 
228

Net income attributable to Hawaiian Electric
 
47,244

 
7,304

 
7,425

 
—

 
(14,729
)
 
47,244

Preferred stock dividends of Hawaiian Electric
 
270

 
—

 
—

 
—

 
—

 
270

Net income for common stock
 
$
46,974

 
7,304

 
7,425

 
—

 
(14,729
)
 
$
46,974


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three 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 September 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


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
September 30, 2017
(in thousands)
 
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

Plant and equipment
 
4,368,428

 
1,278,884

 
1,130,942

 
—

 
—

 
6,778,254

Less accumulated depreciation
 
(1,441,963
)
 
(524,759
)
 
(493,707
)
 
—

 
—

 
(2,460,429
)
Construction in progress
 
262,098

 
16,459

 
28,935

 
—

 
—

 
307,492

Utility property, plant and equipment, net
 
3,233,269

 
776,775

 
669,186

 
—

 
—

 
4,679,230

Nonutility property, plant and equipment, less accumulated depreciation
 
5,762

 
115

 
1,532

 
—

 
—

 
7,409

Total property, plant and equipment, net
 
3,239,031

 
776,890

 
670,718

 
—

 
—

 
4,686,639

Investment in wholly owned subsidiaries, at equity
 
559,671

 
—

 
—

 
—

 
(559,671
)
 
—

Current assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
3,454

 
4,714

 
1,718

 
101

 
—

 
9,987

Advances to affiliates
 
—

 
6,600

 
4,000

 
—

 
(10,600
)
 
—

Customer accounts receivable, net
 
92,961

 
20,830

 
19,344

 
—

 
—

 
133,135

Accrued unbilled revenues, net
 
80,644

 
15,145

 
13,918

 
—

 
—

 
109,707

Other accounts receivable, net
 
7,402

 
2,797

 
1,244

 
—

 
(7,346
)
 
4,097

Fuel oil stock, at average cost
 
40,460

 
8,034

 
11,759

 
—

 
—

 
60,253

Materials and supplies, at average cost
 
28,865

 
8,960

 
18,134

 
—

 
—

 
55,959

Prepayments and other
 
22,197

 
4,183

 
3,647

 
—

 
(156
)
 
29,871

Regulatory assets
 
63,608

 
4,341

 
4,824

 
—

 
—

 
72,773

Total current assets
 
339,591

 
75,604

 
78,588

 
101

 
(18,102
)
 
475,782

Other long-term assets
 
 

 
 

 
 

 
 

 
 

 
 

Regulatory assets
 
639,689

 
118,655

 
105,847

 
—

 
—

 
864,191

Unamortized debt expense
 
472

 
83

 
106

 
—

 
—

 
661

Other
 
50,424

 
14,981

 
14,823

 
—

 
—

 
80,228

Total other long-term assets
 
690,585

 
133,719

 
120,776

 
—

 
—

 
945,080

Total assets
 
$
4,828,878

 
986,213

 
870,082

 
101

 
(577,773
)
 
$
6,107,501

Capitalization and liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Capitalization
 
 

 
 

 
 

 
 

 
 

 
 

Common stock equity
 
$
1,829,075

 
294,319

 
265,251

 
101

 
(559,671
)
 
$
1,829,075

Cumulative preferred stock—not subject to mandatory redemption
 
22,293

 
7,000

 
5,000

 
—

 
—

 
34,293

Long-term debt, net
 
915,097

 
213,658

 
189,868

 
—

 
—

 
1,318,623

Total capitalization
 
2,766,465

 
514,977

 
460,119

 
101

 
(559,671
)
 
3,181,991

Current liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Short-term borrowings from non-affiliates
 
6,000

 
—

 
—

 
—

 
—

 
6,000

Short-term borrowings from affiliate
 
10,600

 
—

 
—

 
—

 
(10,600
)
 
—

Accounts payable
 
94,618

 
15,291

 
14,331

 
—

 
—

 
124,240

Interest and preferred dividends payable
 
17,870

 
3,973

 
3,429

 
—

 
(11
)
 
25,261

Taxes accrued
 
134,935

 
27,571

 
25,919

 
—

 
(5,060
)
 
183,365

Regulatory liabilities
 
576

 
1,029

 
1,794

 
—

 
—

 
3,399

Other
 
45,662

 
8,173

 
13,111

 
—

 
(7,335
)
 
59,611

Total current liabilities
 
310,261

 
56,037

 
58,584

 
—

 
(23,006
)
 
401,876

Deferred credits and other liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Deferred income taxes
 
540,857

 
113,277

 
108,573

 
—

 
4,904

 
767,611

Regulatory liabilities
 
328,530

 
100,973

 
33,314

 
—

 
—

 
462,817

Unamortized tax credits
 
57,577

 
16,048

 
15,202

 
—

 
—

 
88,827

Defined benefit pension and other postretirement benefit plans liability
 
431,191

 
72,366

 
78,156

 
—

 
—

 
581,713

Other
 
27,097

 
14,383

 
16,068

 
—

 
—

 
57,548

Total deferred credits and other liabilities
 
1,385,252

 
317,047

 
251,313

 
—

 
4,904

 
1,958,516

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


26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2016
(in thousands)
 
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

Plant and equipment
 
4,241,060

 
1,255,185

 
1,109,487

 
—

 
—

 
6,605,732

Less accumulated depreciation
 
(1,382,972
)
 
(507,666
)
 
(478,644
)
 
—

 
—

 
(2,369,282
)
Construction in progress
 
180,194

 
12,510

 
19,038

 
—

 
—

 
211,742

Utility property, plant and equipment, net
 
3,082,238

 
766,210

 
652,897

 
—

 
—

 
4,501,345

Nonutility property, plant and equipment, less accumulated depreciation
 
5,760

 
115

 
1,532

 
—

 
—

 
7,407

Total property, plant and equipment, net
 
3,087,998

 
766,325

 
654,429

 
—

 
—

 
4,508,752

Investment in wholly owned subsidiaries, at equity
 
550,946

 
—

 
—

 
—

 
(550,946
)
 
—

Current assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
61,388

 
10,749

 
2,048

 
101

 
—

 
74,286

Advances to affiliates
 
—

 
3,500

 
10,000

 
—

 
(13,500
)
 
—

Customer accounts receivable, net
 
86,373

 
20,055

 
17,260

 
—

 
—

 
123,688

Accrued unbilled revenues, net
 
65,821

 
13,564

 
12,308

 
—

 
—

 
91,693

Other accounts receivable, net
 
7,652

 
2,445

 
1,416

 
—

 
(6,280
)
 
5,233

Fuel oil stock, at average cost
 
47,239

 
8,229

 
10,962

 
—

 
—

 
66,430

Materials and supplies, at average cost
 
29,928

 
7,380

 
16,371

 
—

 
—

 
53,679

Prepayments and other
 
16,502

 
5,352

 
2,179

 
—

 
(933
)
 
23,100

Regulatory assets
 
60,185

 
3,483

 
2,364

 
—

 
—

 
66,032

Total current assets
 
375,088

 
74,757

 
74,908

 
101

 
(20,713
)
 
504,141

Other long-term assets
 
 

 
 

 
 

 
 

 
 

 
 

Regulatory assets
 
662,232

 
120,863

 
108,324

 
—

 
—

 
891,419

Unamortized debt expense
 
151

 
23

 
34

 
—

 
—

 
208

Other
 
43,743

 
13,573

 
13,592

 
—

 
—

 
70,908

Total other long-term assets
 
706,126

 
134,459

 
121,950

 
—

 
—

 
962,535

Total assets
 
$
4,720,158

 
975,541

 
851,287

 
101

 
(571,659
)
 
$
5,975,428

Capitalization and liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Capitalization
 
 

 
 

 
 

 
 

 
 

 
 

Common stock equity
 
$
1,799,787

 
291,291

 
259,554

 
101

 
(550,946
)
 
$
1,799,787

Cumulative preferred stock—not subject to mandatory redemption
 
22,293

 
7,000

 
5,000

 
—

 
—

 
34,293

Long-term debt, net
 
915,437

 
213,703

 
190,120

 
—

 
—

 
1,319,260

Total capitalization
 
2,737,517

 
511,994

 
454,674

 
101

 
(550,946
)
 
3,153,340

Current liabilities
 
 

 
 

 
 

 
 

 
 

 
 
Short-term borrowings from affiliate
 
13,500

 
—

 
—

 
—

 
(13,500
)
 
—

Accounts payable
 
86,369

 
18,126

 
13,319

 
—

 
—

 
117,814

Interest and preferred dividends payable
 
15,761

 
4,206

 
2,882

 
—

 
(11
)
 
22,838

Taxes accrued
 
120,176

 
28,100

 
25,387

 
—

 
(933
)
 
172,730

Regulatory liabilities
 
—

 
2,219

 
1,543

 
—

 
—

 
3,762

Other
 
41,352

 
7,637

 
12,501

 
—

 
(6,269
)
 
55,221

Total current liabilities
 
277,158

 
60,288

 
55,632

 
—

 
(20,713
)
 
372,365

Deferred credits and other liabilities
 
 

 
 

 
 

 
 

 
 

 
 
Deferred income taxes
 
524,433

 
108,052

 
100,911

 
—

 
263

 
733,659

Regulatory liabilities
 
281,112

 
93,974

 
31,845

 
—

 
—

 
406,931

Unamortized tax credits
 
57,844

 
15,994

 
15,123

 
—

 
—

 
88,961

Defined benefit pension and other postretirement benefit plans liability
 
444,458

 
75,005

 
80,263

 
—

 
—

 
599,726

Other
 
49,191

 
13,024

 
14,969

 
—

 
(263
)
 
76,921

Total deferred credits and other liabilities
 
1,357,038

 
306,049

 
243,111

 
—

 
—

 
1,906,198

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


27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Nine months ended September 30, 2017
(in thousands)
 
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

Net income for common stock
 
94,596

 
14,650

 
14,656

 
—

 
(29,306
)
 
94,596

Other comprehensive income, net of taxes
 
521

 
1

 
—

 
—

 
(1
)
 
521

Common stock dividends
 
(65,825
)
 
(11,622
)
 
(8,959
)
 
—

 
20,581

 
(65,825
)
Common stock issuance expenses
 
(4
)
 
(1
)
 
—

 
—

 
1

 
(4
)
Balance, September 30, 2017
 
$
1,829,075

 
294,319

 
265,251

 
101

 
(559,671
)
 
$
1,829,075

 
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Nine months ended September 30, 2016  
(in thousands)
 
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

Net income for common stock
 
108,198

 
16,486

 
17,055

 
—

 
(33,541
)
 
108,198

Other comprehensive income (loss), net of taxes
 
412

 
(1
)
 
(4
)
 
—

 
5

 
412

Common stock dividends
 
(70,199
)
 
(9,906
)
 
(9,795
)
 
—

 
19,701

 
(70,199
)
Common stock issuance expenses
 
(9
)
 
(5
)
 
—

 
—

 
5

 
(9
)
Balance, September 30, 2016
 
$
1,766,727

 
299,276

 
270,981

 
101

 
(570,358
)
 
$
1,766,727


28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2017
(in thousands)
 
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

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

 
 

 
 

 
 

 
 

 
 
Equity in earnings of subsidiaries
 
(29,381
)
 
—

 
—

 
—

 
29,306

 
(75
)
Common stock dividends received from subsidiaries
 
20,656

 
—

 
—

 
—

 
(20,581
)
 
75

Depreciation of property, plant and equipment
 
98,167

 
29,056

 
17,355

 
—

 
—

 
144,578

Other amortization
 
2,168

 
1,718

 
2,232

 
—

 
—

 
6,118

Deferred income taxes
 
12,166

 
5,237

 
7,493

 
—

 
4,641

 
29,537

Allowance for equity funds used during construction
 
(7,823
)
 
(416
)
 
(669
)
 
—

 
—

 
(8,908
)
Other
 
216

 
566

 
(256
)
 
—

 
—

 
526

Changes in assets and liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Increase in accounts receivable
 
(6,114
)
 
(1,127
)
 
(1,912
)
 
—

 
1,066

 
(8,087
)
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
)
Change in prepaid and accrued income taxes, tax credits and revenue taxes
 
10,920

 
(758
)
 
210

 
—

 
(5,081
)
 
5,291

Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
 
532

 
39

 
(118
)
 
—

 
—

 
453

Change in other assets and liabilities
 
(2,709
)
 
1,059

 
54

 
—

 
(1,066
)
 
(2,662
)
Net cash provided by operating activities
 
174,470

 
41,568

 
34,885

 
—

 
(21,021
)
 
229,902

Cash flows from investing activities
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
(207,493
)
 
(36,405
)
 
(34,106
)
 
—

 
—

 
(278,004
)
Contributions in aid of construction
 
34,787

 
3,460

 
2,356

 
—

 
—

 
40,603

Other
 
6,089

 
871

 
714

 
—

 
440

 
8,114

Advances from affiliates
 
—

 
(3,100
)
 
6,000

 
—

 
(2,900
)
 
—

Net cash used in investing activities
 
(166,617
)
 
(35,174
)
 
(25,036
)
 
—

 
(2,460
)
 
(229,287
)
Cash flows from financing activities
 
 

 
 

 
 

 
 

 
 

 
 

Common stock dividends
 
(65,825
)
 
(11,622
)
 
(8,959
)
 
—

 
20,581

 
(65,825
)
Preferred stock dividends of Hawaiian Electric and subsidiaries
 
(810
)
 
(400
)
 
(286
)
 
—

 
—

 
(1,496
)
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
 
3,100

 
—

 
—

 
—

 
2,900

 
6,000

Other
 
(2,252
)
 
(407
)
 
(934
)
 
—

 
—

 
(3,593
)
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
)
Cash and cash equivalents, beginning of period
 
61,388

 
10,749

 
2,048

 
101

 
—

 
74,286

Cash and cash equivalents, end of period
 
$
3,454

 
4,714

 
1,718

 
101

 
—

 
$
9,987


29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2016
(in thousands)
 
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

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

 
 

 
 

 
 

 
 

 
 

Equity in earnings of subsidiaries
 
(33,616
)
 
—

 
—

 
—

 
33,541

 
(75
)
Common stock dividends received from subsidiaries
 
19,776

 
—

 
—

 
—

 
(19,701
)
 
75

Depreciation of property, plant and equipment
 
94,564

 
28,347

 
17,389

 
—

 
—

 
140,300

Other amortization
 
2,462

 
1,366

 
1,552

 
—

 
—

 
5,380

Deferred income taxes
 
41,005

 
4,529

 
10,085

 
—

 
29

 
55,648

Allowance for equity funds used during construction
 
(4,771
)
 
(571
)
 
(668
)
 
—

 
—

 
(6,010
)
Other
 
2,925

 
162

 
147

 
—

 
—

 
3,234

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Decrease (increase) in accounts receivable
 
328

 
(2,716
)
 
(1,313
)
 
—

 
3,046

 
(655
)
Increase in accrued unbilled revenues
 
(9,673
)
 
(373
)
 
(612
)
 
—

 
—

 
(10,658
)
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 regulatory assets
 
(2,474
)
 
(150
)
 
373

 
—

 
—

 
(2,251
)
Increase (decrease) in accounts payable
 
(2,628
)
 
143

 
1,809

 
—

 
—

 
(676
)
Change in prepaid and accrued income taxes, tax credits and revenue taxes
 
(7,324
)
 
2,230

 
(4,472
)
 
—

 
(29
)
 
(9,595
)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
 
449

 
40

 
(129
)
 
—

 
—

 
360

Change in other assets and liabilities
 
(10,548
)
 
2,856

 
(2,571
)
 
—

 
(3,046
)
 
(13,309
)
Net cash provided by operating activities
 
201,885

 
52,615

 
40,472

 
—

 
(19,701
)
 
275,271

Cash flows from investing activities
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
(188,415
)
 
(37,835
)
 
(24,454
)
 
—

 
—

 
(250,704
)
Contributions in aid of construction
 
18,181

 
2,691

 
2,696

 
—

 
—

 
23,568

Other
 
901

 
169

 
30

 
—

 
—

 
1,100

Advances from affiliates
 
—

 
(3,000
)
 
(8,000
)
 
—

 
11,000

 
—

Net cash used in investing activities
 
(169,333
)
 
(37,975
)
 
(29,728
)
 
—

 
11,000

 
(226,036
)
Cash flows from financing activities
 
 

 
 

 
 

 
 

 
 

 
 
Common stock dividends
 
(70,199
)
 
(9,906
)
 
(9,795
)
 
—

 
19,701

 
(70,199
)
Preferred stock dividends of Hawaiian Electric and subsidiaries
 
(810
)
 
(400
)
 
(286
)
 
—

 
—

 
(1,496
)
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

Other
 
(3
)
 
(8
)
 
(1
)
 
—

 
—

 
(12
)
Net cash used in financing activities
 
(39,012
)
 
(10,314
)
 
(10,082
)
 
—

 
8,701

 
(50,707
)
Net increase (decrease) in cash and cash equivalents
 
(6,460
)
 
4,326

 
662

 
—

 
—

 
(1,472
)
Cash and cash equivalents, beginning of period
 
16,281

 
2,682

 
5,385

 
101

 
—

 
24,449

Cash and cash equivalents, end of period
 
$
9,821

 
7,008

 
6,047

 
101

 
—

 
$
22,977




30

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


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
(in thousands)
 
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 

 
 

 
 

 
 

Interest and fees on loans
 
$
52,210

 
$
50,444

 
$
155,269

 
$
148,571

Interest and dividends on investment securities
 
6,850

 
4,759

 
20,593

 
14,219

Total interest and dividend income
 
59,060

 
55,203

 
175,862

 
162,790

Interest expense
 
 

 
 

 
 

 
 

Interest on deposit liabilities
 
2,444

 
1,871

 
6,858

 
5,154

Interest on other borrowings
 
470

 
1,464

 
2,110

 
4,416

Total interest expense
 
2,914

 
3,335

 
8,968

 
9,570

Net interest income
 
56,146

 
51,868

 
166,894

 
153,220

Provision for loan losses
 
490

 
5,747

 
7,231

 
15,266

Net interest income after provision for loan losses
 
55,656

 
46,121

 
159,663

 
137,954

Noninterest income
 
 

 
 

 
 

 
 

Fees from other financial services
 
5,635

 
5,599

 
17,055

 
16,799

Fee income on deposit liabilities
 
5,533

 
5,627

 
16,526

 
16,045

Fee income on other financial products
 
1,904

 
2,151

 
5,741

 
6,563

Bank-owned life insurance
 
1,257

 
1,616

 
4,165

 
3,620

Mortgage banking income
 
520

 
2,347

 
1,896

 
5,096

Gains on sale of investment securities, net
 
—

 
—

 
—

 
598

Other income, net
 
380

 
1,165

 
1,229

 
1,786

Total noninterest income
 
15,229

 
18,505

 
46,612

 
50,507

Noninterest expense
 
 

 
 

 
 

 
 

Compensation and employee benefits
 
23,724

 
22,844

 
71,703

 
67,197

Occupancy
 
4,284

 
3,991

 
12,623

 
12,244

Data processing
 
3,262

 
3,150

 
9,749

 
9,599

Services
 
2,863

 
2,427

 
7,989

 
8,093

Equipment
 
1,814

 
1,759

 
5,333

 
5,193

Office supplies, printing and postage
 
1,444

 
1,483

 
4,506

 
4,431

Marketing
 
934

 
747

 
2,290

 
2,507

FDIC insurance
 
746

 
907

 
2,296

 
2,704

Other expense
 
5,050

 
4,591

 
14,066

 
13,948

Total noninterest expense
 
44,121

 
41,899

 
130,555

 
125,916

Income before income taxes
 
26,764

 
22,727

 
75,720

 
62,545

Income taxes
 
9,172

 
7,623

 
25,582

 
21,483

Net income
 
$
17,592

 
$
15,104

 
$
50,138

 
$
41,062



31

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


American Savings Bank, F.S.B.
Statements of Comprehensive Income Data
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
17,592

 
$
15,104

 
$
50,138

 
$
41,062

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
)
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

Other comprehensive income (loss), net of taxes
 
417

 
(1,928
)
 
3,475

 
8,475

Comprehensive income
 
$
18,009

 
$
13,176

 
$
53,613

 
$
49,537


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
Assets
 
 

 
 

 
 

 
 

Cash and due from banks
 
 

 
$
120,492

 
 

 
$
137,083

Interest-bearing deposits
 
 
 
69,223

 
 
 
52,128

Restricted cash
 
 
 
—

 
 
 
1,764

Available-for-sale investment securities, at fair value
 
 

 
1,320,110

 
 

 
1,105,182

Stock in Federal Home Loan Bank, at cost
 
 

 
9,706

 
 

 
11,218

Loans receivable held for investment
 
 

 
4,676,281

 
 

 
4,738,693

Allowance for loan losses
 
 

 
(53,047
)
 
 

 
(55,533
)
Net loans
 
 

 
4,623,234

 
 

 
4,683,160

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

 
15,728

 
 

 
18,817

Other
 
 

 
378,224

 
 

 
329,815

Goodwill
 
 

 
82,190

 
 

 
82,190

Total assets
 
 

 
$
6,618,907

 
 

 
$
6,421,357

 
 
 
 
 
 
 
 
 
Liabilities and shareholder’s equity
 
 

 
 

 
 

 
 

Deposit liabilities—noninterest-bearing
 
 

 
$
1,710,698

 
 

 
$
1,639,051

Deposit liabilities—interest-bearing
 
 

 
4,041,628

 
 

 
3,909,878

Other borrowings
 
 

 
153,552

 
 

 
192,618

Other
 
 

 
107,558

 
 

 
101,635

Total liabilities
 
 

 
6,013,436

 
 

 
5,843,182

Commitments and contingencies
 
 

 


 
 

 


Common stock
 
 

 
1

 
 

 
1

Additional paid in capital
 
 
 
344,512

 
 
 
342,704

Retained earnings
 
 

 
279,956

 
 

 
257,943

Accumulated other comprehensive loss, net of tax benefits
 
 

 
 

 
 

 
 

Net unrealized losses on securities
 
$
(5,479
)
 
 

 
$
(7,931
)
 
 

Retirement benefit plans
 
(13,519
)
 
(18,998
)
 
(14,542
)
 
(22,473
)
Total shareholder’s equity
 
 

 
605,471

 
 

 
578,175

Total liabilities and shareholder’s equity
 
 

 
$
6,618,907

 
 

 
$
6,421,357

 
 
 
 
 
 
 
 
 
Other assets
 
 

 
 

 
 

 
 

Bank-owned life insurance
 
 

 
$
147,391

 
 

 
$
143,197

Premises and equipment, net
 
 

 
123,326

 
 

 
90,570

Prepaid expenses
 
 

 
5,356

 
 

 
3,348

Accrued interest receivable
 
 

 
17,488

 
 

 
16,824

Mortgage-servicing rights
 
 

 
9,070

 
 

 
9,373

Low-income housing equity investments
 
 
 
54,515

 
 
 
47,081

Real estate acquired in settlement of loans, net
 
 

 
1,183

 
 

 
1,189

Other
 
 

 
19,895

 
 

 
18,233

 
 
 

 
$
378,224

 
 

 
$
329,815

Other liabilities
 
 

 
 

 
 

 
 

Accrued expenses
 
 

 
$
41,698

 
 

 
$
36,754

Federal and state income taxes payable
 
 

 
6,829

 
 

 
4,728

Cashier’s checks
 
 

 
27,448

 
 

 
24,156

Advance payments by borrowers
 
 

 
4,867

 
 

 
10,335

Other
 
 

 
26,716

 
 

 
25,662

 
 
 

 
$
107,558

 
 

 
$
101,635

    

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 $104 million and $50 million, respectively, as of September 30, 2017 and $93 million and $100 million, respectively, as of December 31, 2016.
Available-for-sale investment securities.  The major components of investment securities were as follows:
 
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair
value
 
Gross unrealized losses
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
(dollars in thousands)
 
 
 
 
 
Number of issues
 
Fair 
value
 
Amount
 
Number of issues
 
Fair 
value
 
Amount
September 30, 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
)
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
)
Mortgage revenue bond
 
15,427

 
—

 
—

 
15,427

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
1,329,207

 
$
3,009

 
$
(12,106
)
 
$
1,320,110

 
99

 
$
777,389

 
$
(8,773
)
 
31

 
$
151,123

 
$
(3,333
)
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
)
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
)
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
)
ASB does not believe that the investment securities that were in an unrealized loss position at September 30, 2017, 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. 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 periods ended September 30, 2017 and 2016.
U.S. Treasury, federal agency obligations, 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)


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 nine months ended September 30, 2017 and 2016, respectively. Gross realized gains were nil for both the three month periods ended September 30, 2017 and 2016, and nil and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. Gross realized losses were nil or not material for all periods presented.
Loans receivable. The components of loans receivable were summarized as follows:
 
September 30, 2017
 
December 31, 2016
(in thousands)
 

 
 

Real estate:
 

 
 

Residential 1-4 family
$
2,066,023

 
$
2,048,051

Commercial real estate
745,583

 
800,395

Home equity line of credit
905,249

 
863,163

Residential land
18,611

 
18,889

Commercial construction
128,407

 
126,768

Residential construction
13,031

 
16,080

Total real estate
3,876,904

 
3,873,346

Commercial
589,669

 
692,051

Consumer
211,571

 
178,222

Total loans
4,678,144

 
4,743,619

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

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 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
Three months ended September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
3,130

 
$
18,840

 
$
5,527

 
$
1,264

 
$
4,706

 
$
9

 
$
14,552

 
$
8,328

 
$
—

 
$
56,356

Charge-offs
 
(522
)
 
—

 
—

 
—

 
—

 
—

 
(1,215
)
 
(3,160
)
 
—

 
(4,897
)
Recoveries
 
33

 
—

 
164

 
259

 
—

 
—

 
326

 
316

 
—

 
1,098

Provision
 
347

 
(2,800
)
 
(36
)
 
(141
)
 
370

 
2

 
(595
)
 
3,343

 
—

 
490

Ending balance
 
$
2,988

 
$
16,040

 
$
5,655

 
$
1,382

 
$
5,076

 
$
11

 
$
13,068

 
$
8,827

 
$
—

 
$
53,047

Three months ended September 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
4,384

 
$
13,561

 
$
7,836

 
$
1,689

 
$
6,993

 
$
12

 
$
17,085

 
$
3,771

 
$
—

 
$
55,331

Charge-offs
 
(373
)
 
—

 
(108
)
 
—

 
—

 
—

 
(833
)
 
(1,879
)
 
—

 
(3,193
)
Recoveries
 
92

 
—

 
15

 
187

 
—

 
—

 
347

 
211

 
—

 
852

Provision
 
154

 
1,289

 
(248
)
 
23

 
179

 
(2
)
 
2,457

 
1,895

 
—

 
5,747

Ending balance
 
$
4,257

 
$
14,850

 
$
7,495

 
$
1,899

 
$
7,172

 
$
10

 
$
19,056

 
$
3,998

 
$
—

 
$
58,737

Nine months ended September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
2,873

 
$
16,004

 
$
5,039

 
$
1,738

 
$
6,449

 
$
12

 
$
16,618

 
$
6,800

 
$
—

 
$
55,533

Charge-offs
 
(528
)
 
—

 
(14
)
 
(92
)
 
—

 
—

 
(3,477
)
 
(8,360
)
 
—

 
(12,471
)
Recoveries
 
91

 
—

 
294

 
477

 
—

 
—

 
922

 
970

 
—

 
2,754

Provision
 
552

 
36

 
336

 
(741
)
 
(1,373
)
 
(1
)
 
(995
)
 
9,417

 
—

 
7,231

Ending balance
 
$
2,988

 
$
16,040

 
$
5,655

 
$
1,382

 
$
5,076

 
$
11

 
$
13,068

 
$
8,827

 
$
—

 
$
53,047

September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
1,317

 
$
72

 
$
409

 
$
373

 
$
—

 
$
—

 
$
667

 
$
30

 
 
 
$
2,868

Ending balance: collectively evaluated for impairment
 
$
1,671

 
$
15,968

 
$
5,246

 
$
1,009

 
$
5,076

 
$
11

 
$
12,401

 
$
8,797

 
$
—

 
$
50,179

Financing Receivables:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
2,066,023

 
$
745,583

 
$
905,249

 
$
18,611

 
$
128,407

 
$
13,031

 
$
589,669

 
$
211,571

 
 
 
$
4,678,144

Ending balance: individually evaluated for impairment
 
$
19,757

 
$
1,281

 
$
7,078

 
$
2,385

 
$
—

 
$
—

 
$
5,486

 
$
67

 
 
 
$
36,054

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

Nine months ended September 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
4,186

 
$
11,342

 
$
7,260

 
$
1,671

 
$
4,461

 
$
13

 
$
17,208

 
$
3,897

 
$
—

 
$
50,038

Charge-offs
 
(433
)
 
—

 
(108
)
 
—

 
—

 
—

 
(3,138
)
 
(4,977
)
 
—

 
(8,656
)
Recoveries
 
144

 
—

 
46

 
306

 
—

 
—

 
907

 
686

 
—

 
2,089

Provision
 
360

 
3,508

 
297

 
(78
)
 
2,711

 
(3
)
 
4,079

 
4,392

 
—

 
15,266

Ending balance
 
$
4,257

 
$
14,850

 
$
7,495

 
$
1,899

 
$
7,172

 
$
10

 
$
19,056

 
$
3,998

 
$
—

 
$
58,737

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
1,352

 
$
80

 
$
215

 
$
789

 
$
—

 
$
—

 
$
1,641

 
$
6

 
 
 
$
4,083

Ending balance: collectively evaluated for impairment
 
$
1,521

 
$
15,924

 
$
4,824

 
$
949

 
$
6,449

 
$
12

 
$
14,977

 
$
6,794

 
$
—

 
$
51,450

Financing Receivables:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
2,048,051

 
$
800,395

 
$
863,163

 
$
18,889

 
$
126,768

 
$
16,080

 
$
692,051

 
$
178,222

 
 
 
$
4,743,619

Ending balance: individually evaluated for impairment
 
$
19,854

 
$
1,569

 
$
6,158

 
$
3,629

 
$
—

 
$
—

 
$
20,539

 
$
10

 
 
 
$
51,759

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


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 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
(in thousands)
 
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

Special mention
 
44,088

 
22,500

 
25,053

 
65,541

 
—

 
25,229

Substandard
 
53,896

 
2,015

 
23,130

 
33,197

 
23,813

 
52,683

Doubtful
 
—

 
—

 
2,150

 
—

 
—

 
—

Loss
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
745,583

 
$
128,407

 
$
589,669

 
$
800,395

 
$
126,768

 
$
692,051



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
September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
3,905

 
$
1,513

 
$
4,452

 
$
9,870

 
$
2,056,153

 
$
2,066,023

 
$
—

Commercial real estate
 
5,414

 
—

 
—

 
5,414

 
740,169

 
745,583

 
—

Home equity line of credit
 
1,936

 
177

 
1,367

 
3,480

 
901,769

 
905,249

 
—

Residential land
 
498

 
984

 
497

 
1,979

 
16,632

 
18,611

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
128,407

 
128,407

 
—

Residential construction
 
—

 
—

 
—

 
—

 
13,031

 
13,031

 
—

Commercial
 
1,095

 
218

 
648

 
1,961

 
587,708

 
589,669

 
—

Consumer
 
2,508

 
1,465

 
1,178

 
5,151

 
206,420

 
211,571

 
—

Total loans
 
$
15,356

 
$
4,357

 
$
8,142

 
$
27,855

 
$
4,650,289

 
$
4,678,144

 
$
—

December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
5,467

 
$
2,338

 
$
3,505

 
$
11,310

 
$
2,036,741

 
$
2,048,051

 
$
—

Commercial real estate
 
2,416

 
—

 
—

 
2,416

 
797,979

 
800,395

 
—

Home equity line of credit
 
1,263

 
381

 
1,342

 
2,986

 
860,177

 
863,163

 
—

Residential land
 
—

 
—

 
255

 
255

 
18,634

 
18,889

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
126,768

 
126,768

 
—

Residential construction
 
—

 
—

 
—

 
—

 
16,080

 
16,080

 
—

Commercial
 
413

 
510

 
1,303

 
2,226

 
689,825

 
692,051

 
—

Consumer
 
1,945

 
1,001

 
963

 
3,909

 
174,313

 
178,222

 
—

Total loans
 
$
11,504

 
$
4,230

 
$
7,368

 
$
23,102

 
$
4,720,517

 
$
4,743,619

 
$
—



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 TDR loans was as follows:
(in thousands)
 
September 30, 2017
 
December 31, 2016
Real estate:
 
 

 
 

Residential 1-4 family
 
$
12,853

 
$
11,154

Commercial real estate
 
—

 
223

Home equity line of credit
 
4,000

 
3,080

Residential land
 
1,022

 
878

Commercial construction
 
—

 
—

Residential construction
 
—

 
—

Commercial
 
3,691

 
6,708

Consumer
 
1,791

 
1,282

  Total nonaccrual loans
 
$
23,357

 
$
23,325

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

Commercial real estate
 
1,281

 
1,346

Home equity line of credit
 
5,250

 
4,934

Residential land
 
1,555

 
2,751

Commercial construction
 
—

 
—

Residential construction
 
—

 
—

Commercial
 
2,052

 
14,146

Consumer
 
67

 
10

     Total troubled debt restructured loans not included above
 
$
21,797

 
$
37,637



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
(in thousands)
 
Recorded
investment
 
Unpaid
principal
balance
 
Related
Allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
With no related allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,987

 
$
10,541

 
$
—

 
$
9,650

 
$
70

 
$
9,503

 
$
230

Commercial real estate
 
—

 
—

 
—

 
—

 
—

 
121

 
11

Home equity line of credit
 
1,565

 
1,889

 
—

 
1,918

 
32

 
2,108

 
97

Residential land
 
1,134

 
1,425

 
—

 
1,209

 
73

 
1,080

 
107

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
2,901

 
6,257

 
—

 
1,808

 
29

 
2,888

 
37

Consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
15,587

 
$
20,112

 
$
—

 
$
14,585

 
$
204

 
$
15,700

 
$
482

With an allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,770

 
$
9,972

 
$
1,317

 
$
9,788

 
$
97

 
$
9,963

 
$
333

Commercial real estate
 
1,281

 
1,281

 
72

 
1,284

 
13

 
1,292

 
41

Home equity line of credit
 
5,513

 
5,543

 
409

 
5,076

 
68

 
4,670

 
164

Residential land
 
1,251

 
1,251

 
373

 
1,251

 
12

 
1,620

 
73

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
2,585

 
2,595

 
667

 
2,482

 
225

 
4,104

 
694

Consumer
 
67

 
67

 
30

 
67

 
1

 
55

 
2

 
 
$
20,467

 
$
20,709

 
$
2,868

 
$
19,948

 
$
416

 
$
21,704

 
$
1,307

Total
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
19,757

 
$
20,513

 
$
1,317

 
$
19,438

 
$
167

 
$
19,466

 
$
563

Commercial real estate
 
1,281

 
1,281

 
72

 
1,284

 
13

 
1,413

 
52

Home equity line of credit
 
7,078

 
7,432

 
409

 
6,994

 
100

 
6,778

 
261

Residential land
 
2,385

 
2,676

 
373

 
2,460

 
85

 
2,700

 
180

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
5,486

 
8,852

 
667

 
4,290

 
254

 
6,992

 
731

Consumer
 
67

 
67

 
30

 
67

 
1

 
55

 
2

 
 
$
36,054

 
$
40,821

 
$
2,868

 
$
34,533

 
$
620

 
$
37,404

 
$
1,789



40

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


 
 
December 31, 2016
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
(in thousands)
 
Recorded
investment
 
Unpaid
principal
balance
 
Related
allowance
 
Average
recorded
investment
 
Interest
income
recognized*
 
Average
recorded
investment
 
Interest
income
recognized*
With no related allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,571

 
$
10,400

 
$
—

 
$
10,069

 
$
65

 
$
10,378

 
$
268

Commercial real estate
 
223

 
228

 
—

 
1,206

 
—

 
1,177

 
—

Home equity line of credit
 
1,500

 
1,900

 
—

 
1,220

 
6

 
1,035

 
15

Residential land
 
1,218

 
1,803

 
—

 
1,521

 
16

 
1,532

 
47

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
6,299

 
8,869

 
—

 
14,352

 
141

 
9,240

 
154

Consumer
 
—

 
—

 
—

 
10

 
—

 
3

 
—

 
 
$
18,811

 
$
23,200

 
$
—

 
$
28,378

 
$
228

 
$
23,365

 
$
484

With an allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
10,283

 
$
10,486

 
$
1,352

 
$
11,800

 
$
119

 
$
11,933

 
$
356

Commercial real estate
 
1,346

 
1,346

 
80

 
2,444

 
—

 
1,939

 
—

Home equity line of credit
 
4,658

 
4,712

 
215

 
4,165

 
36

 
3,470

 
91

Residential land
 
2,411

 
2,411

 
789

 
2,915

 
44

 
3,090

 
165

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
14,240

 
14,240

 
1,641

 
11,433

 
65

 
15,075

 
275

Consumer
 
10

 
10

 
6

 
11

 
—

 
12

 
—

 
 
$
32,948

 
$
33,205

 
$
4,083

 
$
32,768

 
$
264

 
$
35,519

 
$
887

Total
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
19,854

 
$
20,886

 
$
1,352

 
$
21,869

 
$
184

 
$
22,311

 
$
624

Commercial real estate
 
1,569

 
1,574

 
80

 
3,650

 
—

 
3,116

 
—

Home equity line of credit
 
6,158

 
6,612

 
215

 
5,385

 
42

 
4,505

 
106

Residential land
 
3,629

 
4,214

 
789

 
4,436

 
60

 
4,622

 
212

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
20,539

 
23,109

 
1,641

 
25,785

 
206

 
24,315

 
429

Consumer
 
10

 
10

 
6

 
21

 
—

 
15

 
—

 
 
$
51,759

 
$
56,405

 
$
4,083

 
$
61,146

 
$
492

 
$
58,884

 
$
1,371

*
Since loan was classified as impaired.
 Troubled debt restructurings.  A loan modification is deemed to be a troubled debt restructuring (TDR) when ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty. 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 collectibility 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.
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 third quarters and first nine months of 2017 and 2016 and the impact on the allowance for loan losses were as follows:
 
 
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
 
 
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

 
$
251

 
$
251

 
$
46

 
11

 
$
2,239

 
$
2,351

 
$
305

Commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Home equity line of credit
 
12

 
1,268

 
1,268

 
237

 
30

 
2,705

 
2,705

 
492

Residential land
 
—

 
—

 
—

 
—

 
1

 
120

 
121

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
6

 
3,462

 
3,462

 
53

 
14

 
20,119

 
20,119

 
723

Consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
20

 
$
4,981

 
$
4,981

 
$
336

 
56

 
$
25,183

 
$
25,296

 
$
1,520

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 third quarters and first nine months of 2017 and 2016, 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
(dollars in thousands)
 
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
 
—
 
—

 
—
 
—

Residential land
 
—
 
—

 
—
 
—

Commercial construction
 
—
 
—

 
—
 
—

Residential construction
 
—
 
—

 
—
 
—

Commercial
 
—
 
—

 
—
 
—

Consumer
 
—
 
—

 
—
 
—

 
 
—
 
$
—

 
1
 
$
222

 
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
(dollars in thousands)
 
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

Commercial real estate
 
—
 
—

 
—
 
—

Home equity line of credit
 
—
 
—

 
—
 
—

Residential land
 
—
 
—

 
—
 
—

Commercial construction
 
—
 
—

 
—
 
—

Residential construction
 
—
 
—

 
—
 
—

Commercial
 
—
 
—

 
1
 
25

Consumer
 
—
 
—

 
—
 
—

 
 
1
 
$
239

 
2
 
$
264

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 and $2.6 million at September 30, 2017 and December 31, 2016, respectively.
The Company had $4.9 million and $3.9 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 2017 and December 31, 2016, 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 million and $70.0 million for the three months ended September 30, 2017 and 2016 and $119.7 million and $168.5 million for the nine months ended September 30, 2017 and 2016, respectively, and recognized gains on such sales of $0.5 million and $2.4 million for the three months ended September 30, 2017 and 2016 and $1.9 million and $5.1 million for the nine months ended September 30, 2017 and 2016, respectively.
There were no repurchased mortgage loans for the three and nine months ended September 30, 2017 and 2016. The repurchase reserve was $0.1 million as of September 30, 2017 and 2016.

43

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Mortgage servicing fees, a component of other income, net, were $0.8 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively and $2.3 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.
Changes in the carrying value of mortgage servicing rights were as follows:
(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
(in thousands)
 
2017
 
2016
 
2017
 
2016
Mortgage servicing rights
 
 
 
 
 
 
 
 
Beginning balance
 
$
9,181

 
$
9,016

 
$
9,373

 
$
8,884

Amount capitalized
 
394

 
824

 
1,192

 
1,944

Amortization
 
(505
)
 
(649
)
 
(1,495
)
 
(1,637
)
Other-than-temporary impairment
 
—

 
—

 
—

 
—

Carrying amount before valuation allowance
 
9,070

 
9,191

 
9,070

 
9,191

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

ASB capitalizes mortgage servicing rights 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

Unpaid principal balance
 
$
1,212,730

 
$
1,188,380

Weighted average note rate
 
3.94
%
 
3.96
%
Weighted average discount rate
 
10.0
%
 
9.4
%
Weighted average prepayment speed
 
9.2
%
 
8.5
%
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

Prepayment rate:
 
 
 
 
  25 basis points adverse rate change
 
$
(878
)
 
$
(567
)
  50 basis points adverse rate change
 
(1,847
)
 
(1,154
)
Discount rate:
 
 
 
 
  25 basis points adverse rate change
 
(111
)
 
(128
)
  50 basis points adverse rate change
 
(220
)
 
(254
)

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
Repurchase agreements
 
 
 
 
 
 
September 30, 2017
 
$104
 
$—
 
$104
December 31, 2016
 
93
 
—
 
93
 
 
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)


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.
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
(in thousands)
 
Notional amount
 
Fair value
 
Notional amount
 
Fair value
Interest rate lock commitments
 
$
385

 
$
7

 
$
25,883

 
$
421

Forward commitments
 
500

 
(2
)
 
30,813

 
(177
)
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
(in thousands)
 
 Asset derivatives
 
 Liability
derivatives
 
 Asset derivatives
 
 Liability
derivatives
Interest rate lock commitments
 
$
7

 
$
—

 
$
445

 
$
24

Forward commitments
 
—

 
2

 
8

 
185

 
 
$
7

 
$
2

 
$
453

 
$
209

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
(in thousands)
 
 
2017
 
2016
 
2017
 
2016
Interest rate lock commitments
 
Mortgage banking income
 
$
(119
)
 
$
48

 
$
(414
)
 
$
459

Forward commitments
 
Mortgage banking income
 
(90
)
 
103

 
175

 
(134
)
 
 
 
 
$
(209
)
 
$
151

 
$
(239
)
 
$
325

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $18.6 million and $14.0 million at September 30, 2017 and December 31, 2016, 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 September 30, 2017, 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.
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. 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. As of September 30, 2017 and December 31, 2016, no amounts were outstanding under the Facilities or previously existing 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 of the Utilities, issued, at par:
 
Refunding Series 2017A Special Purpose Revenue Bonds
Refunding Series 2017B Special Purpose Revenue Bonds
Aggregate principal amount
$125 million
$140 million
Fixed coupon interest rate
3.10%
4.00%
Maturity date
May 1, 2026
March 1, 2037
Department loaned the proceeds to:
 
 
Hawaiian Electric
$62 million
$100 million
Hawaii Electric Light
$8 million
$20 million
Maui Electric
$55 million
$20 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 Bonds
Series 2007A Special Purpose Revenue Bonds
Aggregate principal amount
$125 million
$140 million
Fixed coupon interest rate
4.60%
4.65%
Maturity date
May 1, 2026
March 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 includes substantially the same financial covenant and customary conditions as the loan agreement with The Bank 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 loan were used to pay off the $125 million maturing loan.
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

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 income
2,452

 
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 income
7,837

 
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
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
 
Affected line item in the
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
 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
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
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
Total reclassifications
 
$
346

 
$
157

 
$
1,457

 
$
464

 
 
Hawaiian Electric consolidated
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Window forward contracts
 
$
—

 
$
(173
)
 
$
454

 
$
(173
)
 
Construction in progress
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
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
Total reclassifications
 
$
22

 
$
(170
)
 
$
521

 
$
(166
)
 
 


48

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


7 · Retirement benefits
Defined benefit pension and other postretirement benefit plans information.  For the first nine months of 2017, the Company contributed $50 million ($49 million by the Utilities) to its pension and other postretirement benefit plans, compared to $49 million ($48 million by the Utilities) in the first nine months of 2016. The Company’s current estimate of contributions to its pension and other postretirement benefit plans in 2017 is $67 million ($66 million by the Utilities, $1 million by HEI and nil by ASB), compared to $65 million ($64 million by the Utilities, $1 million by HEI and nil by ASB) in 2016. In addition, the Company expects to pay directly $2 million ($1 million by the Utilities) of benefits in 2017, comparable to benefits paid directly in 2016.
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
 
 
Pension benefits
 
Other benefits
 
Pension benefits
 
Other benefits
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
HEI consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
16,271

 
$
15,126

 
$
843

 
$
831

 
$
48,635

 
$
45,430

 
$
2,530

 
$
2,499

Interest cost
 
20,304

 
20,396

 
2,363

 
2,417

 
60,881

 
61,154

 
7,089

 
7,254

Expected return on plan assets
 
(25,689
)
 
(24,640
)
 
(3,078
)
 
(3,064
)
 
(77,056
)
 
(73,920
)
 
(9,248
)
 
(9,207
)
Amortization of net prior service gain
 
(14
)
 
(15
)
 
(448
)
 
(449
)
 
(41
)
 
(43
)
 
(1,345
)
 
(1,345
)
Amortization of net actuarial loss
 
6,638

 
6,228

 
283

 
200

 
19,858

 
18,605

 
848

 
603

Net periodic pension/benefit cost
 
17,510

 
17,095

 
(37
)
 
(65
)
 
52,277

 
51,226

 
(126
)
 
(196
)
Impact of PUC D&Os
 
(4,534
)
 
(4,653
)
 
346

 
336

 
(14,557
)
 
(13,464
)
 
1,019

 
1,008

Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
 
$
12,976

 
$
12,442

 
$
309

 
$
271

 
$
37,720

 
$
37,762

 
$
893

 
$
812

Hawaiian Electric consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
15,764

 
$
14,699

 
$
839

 
$
821

 
$
47,294

 
$
44,097

 
$
2,515

 
$
2,463

Interest cost
 
18,659

 
18,702

 
2,279

 
2,334

 
55,974

 
56,106

 
6,837

 
7,003

Expected return on plan assets
 
(23,973
)
 
(22,908
)
 
(3,037
)
 
(3,023
)
 
(71,919
)
 
(68,725
)
 
(9,110
)
 
(9,072
)
Amortization of net prior service loss (gain)
 
2

 
3

 
(451
)
 
(451
)
 
6

 
10

 
(1,353
)
 
(1,353
)
Amortization of net actuarial loss
 
6,098

 
5,674

 
275

 
198

 
18,294

 
17,020

 
826

 
595

Net periodic pension/benefit cost
 
16,550

 
16,170

 
(95
)
 
(121
)
 
49,649

 
48,508

 
(285
)
 
(364
)
Impact of PUC D&Os
 
(4,534
)
 
(4,653
)
 
346

 
336

 
(14,557
)
 
(13,464
)
 
1,019

 
1,008

Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
 
$
12,016

 
$
11,517

 
$
251

 
$
215

 
$
35,092

 
$
35,044

 
$
734

 
$
644

HEI consolidated recorded retirement benefits expense of $25 million ($22 million by the Utilities) and $26 million ($23 million by the Utilities) in the first nine months of 2017 and 2016, 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 nine months of 2017 and 2016, 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 $5.1 million and $4.1 million, respectively, and cash contributions were $5.0 million and $4.6 million, respectively. For the first nine months of 2017 and 2016, the Utilities’ expenses for its defined contribution pension plan under the HEIRSP were $1.4 million and $1.2 million, respectively, and cash contributions were $1.4 million and $1.2 million, respectively.

49

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


8 · 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 was added to the shares available for issuance under these programs.
As of September 30, 2017, approximately 3.3 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 0.4 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 September 30, 2017, there were 85,428 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
(in millions)
 
2017
 
2016
 
2017
 
2016
HEI consolidated
 
 
 
 
 
 
 
 
Share-based compensation expense 1
 
$
1.1

 
$
1.6

 
$
4.4

 
$
3.6

Income tax benefit
 
0.4

 
0.5

 
1.5

 
1.2

Hawaiian Electric consolidated
 
 
 
 
 
 
 
 
Share-based compensation expense 1
 
0.4

 
0.5

 
1.6

 
1.0

Income tax benefit
 
0.2

 
0.2

 
0.6

 
0.4

1 
For the three months and nine months ended September 30, 2017 and 2016, 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
($ in millions)
 
2017
 
2016
 
2017
 
2016
Shares granted
 
—

 
19,846

 
35,770

 
19,846

Fair value
 
$
—

 
$
0.6

 
$
1.2

 
$
0.6

Income tax benefit
 
—

 
0.2

 
0.5

 
0.2

The number of shares issued to nonemployee directors 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 30
 
2017
 
2016
 
2017
 
2016
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
Outstanding, beginning of period
206,483

 
$
31.50

 
225,752

 
$
29.59

 
220,683

 
$
29.57

 
210,634

 
$
28.82

Granted
—


—

 
766

 
30.65

 
97,873


33.47

 
95,048


29.91

Vested
(687
)
 
24.48

 
(4,419
)
 
27.26

 
(89,681
)
 
28.84

 
(83,583
)
 
27.88

Forfeited
—

 
—

 
(2,352
)
 
29.69

 
(23,079
)
 
31.50

 
(2,352
)
 
29.69

Outstanding, end of period
205,796

 
$
31.53

 
219,747

 
$
29.64

 
205,796

 
$
31.53

 
219,747

 
$
29.64

Total weighted-average grant-date fair value of shares granted ($ millions)
$
—

 
 
 
$
—

 
 
 
$
3.3

 
 
 
$
2.8

 
 
(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 nine months of 2017 and 2016, total restricted stock units that vested and related dividends had a fair value of $3.4 million and $2.7 million, respectively, and the related tax benefits were $1.1 million and $0.9 million, respectively.
As of September 30, 2017, there was $4.8 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 2.6 years.
Long-term incentive plan payable in stock.  The 2017-2019 long-term incentive plan (LTIP) provides 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 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 provide for performance awards payable in cash, and thus are 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 30
 
2017
 
2016
 
2017
 
2016
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
Outstanding, beginning of period
33,770

 
$
39.51

 
83,947

 
$
22.95

 
83,106

 
$
22.95

 
162,500

 
$
27.66

Granted (target level)
—

 
—

 
—

 
—

 
37,204

 
39.51

 
—


—

Vested (issued or unissued and cancelled)
—

 
—

 
—

 
—

 
(83,106
)
 
22.95

 
(78,553
)
 
32.69

Forfeited
—

 
—

 
(175
)
 
22.95

 
(3,434
)
 
39.51

 
(175
)
 
22.95

Outstanding, end of period
33,770

 
$
39.51

 
83,772

 
$
22.95

 
33,770

 
$
39.51

 
83,772

 
$
22.95

Total weighted-average grant-date fair value of shares granted ($ millions)
$
—

 
 
 
$
—

 
 
 
$
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 rate
 
1.46
%
Expected life in years
 
3

Expected volatility
 
20.1
%
Range of expected volatility for Peer Group
 
15.4% to 26.0%

Grant date fair value (per share)
 
$39.51
For the nine months ended September 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 September 30, 2017, there was $1.0 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 2.3 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 30
 
2017
 
2016
 
2017
 
2016
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
 
Shares
 
(1)
Outstanding, beginning of period
135,078

 
$
33.47

 
113,550

 
$
25.18

 
109,816

 
$
25.18

 
222,647

 
$
26.02

Granted (target level)
—

 
—

 
—


—

 
148,818

 
33.47

 
—


—

Vested (issued)
—

 
—

 
—

 
—

 
(109,816
)
 
25.18

 
(109,097
)
 
26.89

Forfeited
—

 
—

 
(699
)
 
25.19

 
(13,740
)
 
33.48

 
(699
)
 
25.19

Outstanding, end of period
135,078

 
$
33.47

 
112,851

 
$
25.18

 
135,078

 
$
33.47

 
112,851

 
$
25.18

Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions)
$
—

 
 
 
$
—

 
 
 
$
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 nine months ended September 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.
As of September 30, 2017, there was $3.4 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 2.3 years.
9 · Income taxes
        The Company’s ETRs (combined federal and state income tax rates) for the third quarters of 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 due 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 when the 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. The lower ETR was due in part to the tax benefits recognized for the DPAD 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 taken in the past.

52

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


10 · Cash flows
Nine months ended September 30
 
2017
 
2016
(in millions)
 
 
 
 
Supplemental disclosures of cash flow information
 
 

 
 

HEI consolidated
 
 
 
 
Interest paid to non-affiliates
 
$
62

 
$
61

Income taxes paid (including refundable credits)
 
32

 
19

Income taxes refunded (including refundable credits)
 
—

 
45

Hawaiian Electric consolidated
 
 
 
 
Interest paid to non-affiliates
 
45

 
43

Income taxes paid (including refundable credits)
 
9

 
—

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

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

Loans transferred from held for investment to held for sale (investing)
 
41

 
14

Common stock issued (gross) for director and executive/management compensation (financing)2
 
11

 
7

Obligations to fund low income housing investments (investing)
 
10

 
—

Hawaiian Electric consolidated
 
 
 
 
Electric utility property, plant and equipment
 
 
 
 
Estimated fair value of noncash contributions in aid of construction (investing)
 
3

 
12

Unpaid invoices and accruals for capital expenditures (investing)
 
 
 
 
Change during the period
 
29

 
(7
)
Balance, end of period
 
113

 
63

1 The 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:                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.
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 loans carried at the lower of cost or market 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. Noting 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 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 deposits. 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 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

55

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


these liabilities have no stated maturity.
 
 
 
 
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

 
$
—

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 nine months ended September 30, 2017.
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
Mortgage revenue bond
 
2017
2016
 
2017
2016
(in thousands)
 
 
 
 
 
 
Beginning balance
 
$
15,427

$
—

 
$
15,427

$
—

Principal payments received
 
—

—

 
—

—

Purchases
 
—

—

 
—

—

Unrealized gain (loss) included in other comprehensive income
 
—

—

 
—

—

Ending balance
 
$
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 September 30, 2017, the weighted average discount rate was 2.826% 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

For nine months ended September 30, 2017 and 2016, 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)
($ in thousands)
 
Fair value
 
Valuation technique
 
Significant unobservable input
 
Range
 
Weighted
Average
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Residential loans
 
$
731

 
Fair value of collateral
 
Appraised value less 7% selling cost
 
50-91%
 
69%
Commercial loans
 
2,150

 
Fair value of collateral
 
Appraised value
 
72-76%
 
76%
Total loans
 
$
2,881

 
 
 
 
 
 
 
 
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.

59


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 2016 Form 10-K and should be read in conjunction with such discussion and the 2016 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 2016 Form 10-K, as well as the quarterly (as of and for the three and nine months ended September 30, 2017) 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
 
%
 
 
share amounts)
 
2017
 
2016
 
change
 
Primary reason(s)*
Revenues
 
$
1,897,028

 
$
1,763,259

 
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
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
Basic earnings per common share
 
$
1.22

 
$
1.89

 
(35
)
 
Lower 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

* 
Also, see segment discussions which follow.
HEI’s consolidated ROACE was 8.5% for the twelve months ended September 30, 2017 and 12.3% for the twelve months ended September 30, 2016. The higher ROACE for the twelve months ended September 30, 2016 was primarily due to the merger termination fee received in July 2016.
Dividends.  The payout ratios for the first nine months of 2017 and full year 2016 were 76% and 54%, 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.

60


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 quarters of 2017, Hawaii’s tourism industry, a significant driver of Hawaii’s economy, ended with strong growth in both visitor spending and arrivals. Visitor expenditures increased 7.1% and arrivals increased 4.9% compared to the same time period in 2016. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii for the fourth quarter of 2017 to increase by 4.7% over the fourth quarter of 2016 driven primarily by an increase in seats from Asia, Canada and the West Coast.
Hawaii’s unemployment rate continued to decline to 2.5% in September 2017 which was lower than the 3.0% rate a year ago in September 2016 and lower than the national unemployment rate of 4.2% in September 2017. It was the second lowest unemployment rate in the nation along with Colorado.
Hawaii real estate activity, as indicated by the home resale market, experienced growth in median sales prices in 2017. Median sales prices for single family residential homes and condominiums on Oahu through September 2017 were higher by 3.4% and 5.4%, respectively, over the same time period in 2016. The number of closed sales for both single family residential homes and condominiums through September of 2017 were also up compared to same time period of 2016 by 5.0% and 5.8%, respectively.
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, the price of crude oil has remained relatively stable through the first three quarters of 2017.
At its September 2017 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of “1.0% to 1.25%” in view of its 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 economy 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 growth in the number of jobs is anticipated to decline as construction activity eases and unemployment remains low. Risks remain stemming from geopolitical uncertainty and its impact on tourism and from the impact of the financial markets on real estate development and sales.
“Other” segment.
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
Primary reason(s)
Revenues
 
$
127

 
$
94

 
$
299

 
$
262

 
 
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
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)
The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI and ASB Hawaii, Inc. (ASBH), both holding companies; 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; as well as eliminations of intercompany transactions. For the third quarter and first nine months of 2016, merger and spin-off related expenses (net of $6 million of reimbursements from NEE and insurers) recorded at HEI

61


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 CONDITION
Liquidity 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 requirements for the foreseeable future.
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 during the first nine months of 2017 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.
For the first nine months of 2017, net cash provided by operating activities of HEI consolidated was $291 million. Net cash used by investing activities for the same period 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 trustee for the redemption of previously issued SPRBs. 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 nine months of 2017, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $66 million and $28 million, respectively.

62


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 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 48 to 49, 64 to 65, and 75 to 78 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2016 Form 10-K.

63


Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
Electric utility
RESULTS OF OPERATIONS
Results.
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


64


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)
1
The 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.
2
The 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.
3
Increase reserve for additional costs for investigation of PCB contamination onshore and offshore of Waiau Power Plant
4
KWH 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% for the twelve months ended September 30, 2017, and 8.1% for the twelve months ended September 30, 2016.
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 sales 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” in the “HEI Consolidated” section above.

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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

66


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

67


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 and

68


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

69


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

70


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

71


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.

72


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).

73


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

 
 


74


 
 
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.

75


                       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


76



 
 
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.

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                       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.

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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.”

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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

80


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

81


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.
(dollars in millions)
 
September 30, 2017
 
December 31, 2016
 
% change
Total assets
 
$
6,619

 
$
6,421

 
3

Available-for-sale investment securities
 
1,320

 
1,105

 
19

Loans receivable held for investment, net
 
4,623

 
4,683

 
(1
)
Deposit liabilities
 
5,752

 
5,549

 
4

Other bank borrowings
 
154

 
193

 
(20
)
As of September 30, 2017, ASB was one of Hawaii’s largest financial institutions based on assets of $6.6 billion and deposits of $5.8 billion.
As of September 30, 2017, ASB’s unused FHLB borrowing capacity was approximately $1.9 billion. As of September 30, 2017, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.8 billion. As of September 30, 2017, the Company did not have commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
For the nine months ended September 30, 2017, net cash provided by ASB’s operating activities was $80 million. Net cash used during the same period by ASB’s investing activities was $211 million, primarily due to purchases of investment securities of $369 million, additions to premises and equipment of $36 million, and contributions to low-income housing investments of $8 million, partly offset by receipt of repayments from investment securities of $155 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 million, primarily due to increases in deposit liabilities of $203 million, proceeds from FHLB advances of $60 million, and a net increase in retail repurchase agreements of $24 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 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 September 30, 2017, ASB was well-capitalized (minimum ratio requirements noted in parentheses)

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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% (5.0%). As of December 31, 2016, ASB was well-capitalized with a common equity Tier-1 ratio of 12.2%, Tier-1 capital ratio of 12.2%, a Total capital ratio of 13.4% 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 2016 Form 10-K (pages 79 to 81).
ASB’s interest-rate risk sensitivity measures as of September 30, 2017 and December 31, 2016 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)
(basis points)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
+300
 
3.4
%
 
1.9
%
 
(6.0
)%
 
(8.0
)%
+200
 
2.5

 
0.8

 
(2.7
)
 
(4.6
)
+100
 
1.4

 
—

 
—

 
(1.6
)
-100
 
(2.6
)
 
(0.5
)
 
(6.1
)
 
(1.6
)
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 scenarios was more asset sensitive for all rate increases as of September 30, 2017 compared to December 31, 2016. Interest income increased due to the growth of the investment portfolio and higher income from the commercial and HELOC loan portfolios due to an increase in the short-term LIBOR and prime rates. In addition, the repricing assumptions of certain commercial loans were updated, which resulted in a net increase in NII.
ASB’s base EVE increased to $1.15 billion as of September 30, 2017, compared to $1.09 billion as of December 31, 2016, due to the growth and mix of the balance sheet. The growth of the investment portfolio was 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 declined as of September 30, 2017 compared to December 31, 2016. During the first nine months of the year, the purchase of intermediate-termed duration 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.
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.

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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 third quarter of 2017 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 third quarter of 2017 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 2016 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 and ASB) 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 25 to 35 of HEI’s and Hawaiian Electric’s 2016 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative

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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 during the third quarter 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
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 25,972 shares and 163,512 of the 181,072 shares were purchased for the DRIP; none of the 33,787 shares, none of the 25,972 shares and 13,700 of the 181,072 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
 
 
2017
 
2016
 
2016
 
2015
 
2014
 
2013
 
2012
HEI and Subsidiaries
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Excluding interest on ASB deposits
 
3.92

 
5.34

 
5.05

 
3.68

 
3.80

 
3.55

 
3.30

Including interest on ASB deposits
 
3.66

 
5.04

 
4.75

 
3.54

 
3.65

 
3.42

 
3.15

Hawaiian Electric and Subsidiaries
 
3.58

 
4.18

 
4.11

 
3.97

 
4.04

 
3.72

 
3.37

 
See HEI Exhibit 12.1 and Hawaiian Electric Exhibit 12.2.

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Item 6. Exhibits
 
 
Letter Amendment effective August 15, 2017 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company
 
 
 
 
Hawaiian Electric Industries, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, nine months ended September 30, 2017 and 2016 and years ended December 31, 2016, 2015, 2014, 2013 and 2012
 
 
 
 
Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer)
 
 
 
 
Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer)
 
 
 
 
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 Company, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, nine months ended September 30, 2017 and 2016 and years ended December 31, 2016, 2015, 2014, 2013 and 2012
 
 
 
 
Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Alan M. Oshima (Hawaiian Electric Chief Executive Officer)
 
 
 
 
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 Certification Pursuant to 18 U.S.C. Section 1350

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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 Accounting
 
 
(Principal Financial Officer of Hawaiian Electric)
 
Officer of HEI)
 
 
 
 
 
 
 
 
Date: November 2, 2017
 
Date: November 2, 2017


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