Edgar Filing: HAWAIIAN ELECTRIC INDUSTRIES INC

Document

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 March 31, 2018

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 April 27, 2018
Hawaiian Electric Industries, Inc. (Without Par Value)		108,841,348 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)		16,142,216 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.

This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2018

TABLE OF CONTENTS



Page No.
ii	Glossary of Terms
iv	Cautionary Note Regarding Forward-Looking Statements

	PART I. FINANCIAL INFORMATION
1	Item 1.	Financial Statements
		Hawaiian Electric Industries, Inc. and Subsidiaries
1		Condensed Consolidated Statements of Income (unaudited) - three months ended March 31, 2018 and 2017
2		Condensed Consolidated Statements of Comprehensive Income (unaudited) - three months ended March 31, 2018 and 2017
3		Condensed Consolidated Balance Sheets (unaudited) - March 31, 2018 and December 31, 2017
4		Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - three months ended March 31, 2018 and 2017
5		Condensed Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2018 and 2017
		Hawaiian Electric Company, Inc. and Subsidiaries
6		Condensed Consolidated Statements of Income (unaudited) - three months ended March 31, 2018 and 2017
6		Condensed Consolidated Statements of Comprehensive Income (unaudited) - three months ended March 31, 2018 and 2017
7		Condensed Consolidated Balance Sheets (unaudited) - March 31, 2018 and December 31, 2017
8		Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited) - three months ended March 31, 2018 and 2017
9		Condensed Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2018 and 2017
10		Notes to Condensed Consolidated Financial Statements (unaudited)
60	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
60		HEI consolidated
64		Electric Utilities
74		Bank
80	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
81	Item 4.	Controls and Procedures

	PART II.	OTHER INFORMATION
81	Item 1.	Legal Proceedings
81	Item 1A.	Risk Factors
82	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
82	Item 5.	Other Information
83	Item 6.	Exhibits
84	Signatures

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2018

GLOSSARY OF TERMS



Terms		Definitions
ADIT		Accumulated deferred income tax balances
AES Hawaii		AES Hawaii, Inc.
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income/(loss)
ASC		Accounting Standards Codification
ASB		American Savings Bank, F.S.B., a wholly-owned subsidiary of ASB Hawaii, Inc.
ASB Hawaii		ASB Hawaii, Inc. (formerly American Savings Holdings, Inc.), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
ASU		Accounting Standards Update
CIAC		Contributions in aid of construction
CIP CT-1		Campbell Industrial Park 110 MW combustion turbine No. 1
Company		Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; Pacific Current, LLC and its subsidiaries, Hamakua Holdings, LLC (and its subsidiary, Hamakua Energy, LLC) and Mauo Holdings, LLC (and its subsidiary, Mauo, LLC); The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.); and HEI Properties, Inc. (dissolved in 2015 and wound up in 2017)
Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
CBRE		Community-based renewable energy
DER		Distributed energy resources
D&O		Decision and order from the PUC
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
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

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.
Hamakua Energy		Hamakua Energy, LLC, an indirect subsidiary of HEI and successor in interest to Hamakua Energy Partners, L.P., an affiliate of Arclight Capital Partners (a Boston based private equity firm focused on energy infrastructure investments) and successor in interest to Encogen Hawaii, L.P.
HEI		Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., HEI Properties, Inc. (dissolved in 2015 and wound up in 2017), The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Pacific Current, LLC
HEIRSP		Hawaiian Electric Industries Retirement Savings Plan
HELOC		Home equity line of credit
HPOWER		City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
IPP		Independent power producer
Kalaeloa		Kalaeloa Partners, L.P.
KWH		Kilowatthour/s (as applicable)
LTIP		Long-term incentive plan
Maui Electric		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MPIR		Major Project Interim Recovery
MSR		Mortgage servicing right
Mauo		Mauo, LLC, an indirect subsidiary of HEI
MW		Megawatt/s (as applicable)
NEM		Net energy metering
NII		Net interest income
NPBC		Net periodic benefit costs
NPPC		Net periodic pension costs
O&M		Other operation and maintenance
OCC		Office of the Comptroller of the Currency
OPEB		Postretirement benefits other than pensions
Pacific Current		Pacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC and Mauo Holdings, LLC
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
Tax Act		2017 Tax Cuts and Jobs Act (H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018)
TDR		Troubled debt restructuring
Trust III		HECO Capital Trust III
Utilities		Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
VIE		Variable interest entity

iii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic, political and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:

•

international, national and local economic and political conditions--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; 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, trade policy and tariffs, and other policy and regulation changes advanced or proposed by President Trump and his administration;


•	weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of climate change, such as more severe storms and rising sea levels), including their impact on the Company's and Utilities' operations and the economy;


•	the timing and extent of changes in interest rates and the shape of the yield curve;


•	the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile and challenging market conditions, and the cost of such financings, if available;


•	the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale;


•	changes in laws, regulations (including tax regulations), market conditions and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;


•	the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated;


•	increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);

•

the 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, the PUC’s April 2014 statement of its 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, distributed generation, 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;


•	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 such as the commercial development of energy storage and microgrids and banking through alternative channels;


•	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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)



	Three months ended March 31
(in thousands, except per share amounts)	2018			2017
Revenues
Electric utility	$	570,427		$	518,611
Bank	75,419			72,856
Other	28			95
Total revenues	645,874			591,562
Expenses
Electric utility	519,058			468,250
Bank	50,532			48,501
Other	4,395			5,073
Total expenses	573,985			521,824
Operating income (loss)
Electric utility	51,369			50,361
Bank	24,887			24,355
Other	(4,367		)	(4,978		)
Total operating income	71,889			69,738
Retirement defined benefits expense—other than service costs	(1,833		)	(1,876		)
Interest expense, net—other than on deposit liabilities and other bank borrowings	(21,518		)	(19,568		)
Allowance for borrowed funds used during construction	1,444			889
Allowance for equity funds used during construction	3,294			2,399
Income before income taxes	53,276			51,582
Income taxes	12,556			16,916
Net income	40,720			34,666
Preferred stock dividends of subsidiaries	473			473
Net income for common stock	$	40,247		$	34,193
Basic earnings per common share	$	0.37		$	0.31
Diluted earnings per common share	$	0.37		$	0.31
Dividends declared per common share	$	0.31		$	0.31
Weighted-average number of common shares outstanding	108,818			108,674
Net effect of potentially dilutive shares	206			184
Weighted-average shares assuming dilution	109,024			108,858

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended March 31
(in thousands)	2018			2017
Net income for common stock	$	40,247		$	34,193
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 $4,867 and $(148), respectively	(13,297		)	223
Derivatives qualifying as cash flow hedges:
Reclassification adjustment to net income, net of tax benefits of nil and $289, respectively	—			454
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,792 and $2,502, respectively	5,146			3,921
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,603 and $2,301, respectively	(4,622		)	(3,613		)
Other comprehensive income (loss), net of taxes	(12,773		)	985
Comprehensive income attributable to Hawaiian Electric Industries, Inc.	$	27,474		$	35,178

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)



(dollars in thousands)	March 31, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	244,785		$	261,881
Accounts receivable and unbilled revenues, net	266,336			263,209
Available-for-sale investment securities, at fair value	1,418,490			1,401,198
Held-to-maturity investment securities, at amortized cost	43,450			44,515
Stock in Federal Home Loan Bank, at cost	10,158			9,706
Loans held for investment, net	4,688,129			4,617,131
Loans held for sale, at lower of cost or fair value	7,379			11,250
Property, plant and equipment, net of accumulated depreciation of $2,587,998 and $2,553,295 at March 31, 2018 and December 31, 2017, respectively	4,542,558			4,460,248
Regulatory assets	872,499			869,297
Other	526,744			513,535
Goodwill	82,190			82,190
Total assets	$	12,702,718		$	12,534,160
Liabilities and shareholders’ equity
Liabilities
Accounts payable	$	190,221		$	193,714
Interest and dividends payable	29,786			25,837
Deposit liabilities	6,079,067			5,890,597
Short-term borrowings—other than bank	238,445			117,945
Other bank borrowings	100,430			190,859
Long-term debt, net—other than bank	1,684,002			1,683,797
Deferred income taxes	381,478			388,430
Regulatory liabilities	895,093			880,770
Defined benefit pension and other postretirement benefit plans liability	502,304			509,514
Other	475,822			521,018
Total liabilities	10,576,648			10,402,481
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: 108,841,157 shares and 108,787,807 shares at March 31, 2018 and December 31, 2017, respectively	1,663,149			1,662,491
Retained earnings	483,342			476,836
Accumulated other comprehensive loss, net of tax benefits	(54,714		)	(41,941		)
Total shareholders’ equity	2,091,777			2,097,386
Total liabilities and shareholders’ equity	$	12,702,718		$	12,534,160

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

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, 2017	108,788	$	1,662,491		$	476,836		$	(41,941	)	$	2,097,386
Net income for common stock	—	—			40,247			—			40,247
Other comprehensive loss, net of tax benefits	—	—			—			(12,773		)	(12,773		)
Issuance of common stock, net of expenses	53	658			—			—			658
Common stock dividends	—	—			(33,741		)	—			(33,741		)
Balance, March 31, 2018	108,841	$	1,663,149		$	483,342		$	(54,714	)	$	2,091,777
Balance, December 31, 2016	108,583	$	1,660,910		$	438,972		$	(33,129	)	$	2,066,753
Net income for common stock	—	—			34,193			—			34,193
Other comprehensive income, net of taxes	—	—			—			985			985
Issuance of common stock, net of expenses	162	(2,630		)	—			—			(2,630		)
Common stock dividends	—	—			(33,713		)	—			(33,713		)
Balance, March 31, 2017	108,745	$	1,658,280		$	439,452		$	(32,144	)	$	2,065,588

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)



	Three months ended March 31
(in thousands)	2018			2017
Cash flows from operating activities
Net income	$	40,720		$	34,666
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	53,091			50,051
Other amortization	8,745			2,372
Provision for loan losses	3,541			3,907
Loans originated and purchased, held for sale	(36,409		)	(35,725		)
Proceeds from sale of loans, held for sale	33,114			40,588
Deferred income taxes	(2,889		)	10,096
Share-based compensation expense	1,657			1,056
Allowance for equity funds used during construction	(3,294		)	(2,399		)
Other	2,150			(347		)
Changes in assets and liabilities
Increase in accounts receivable and unbilled revenues, net	(7,829		)	(12,337		)
Increase in fuel oil stock	(1,704		)	(7,444		)
Decrease (increase) in regulatory assets	(16,900		)	5,909
Increase in accounts, interest and dividends payable	22,808			24,903
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes	(29,842		)	(42,175		)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability	(390		)	1,012
Change in other assets and liabilities	(31,892		)	(27,142		)
Net cash provided by operating activities	34,677			46,991
Cash flows from investing activities
Available-for-sale investment securities purchased	(88,403		)	(171,878		)
Principal repayments on available-for-sale investment securities	51,895			48,200
Principal repayment of held-to-maturity investment securities	1,032			—
Purchase of stock from Federal Home Loan Bank	(2,853		)	(488		)
Redemption of stock from Federal Home Loan Bank	2,400			—
Net decrease (increase) in loans held for investment	(75,006		)	890
Proceeds from sale of commercial loans	7,149			13,493
Proceeds from sale of real estate acquired in settlement of loans	589			185
Capital expenditures	(133,352		)	(91,242		)
Contributions in aid of construction	4,330			10,650
Contributions to low income housing investments	(1,425		)	—
Other	2,593			5,709
Net cash used in investing activities	(231,051		)	(184,481		)
Cash flows from financing activities
Net increase in deposit liabilities	86,095			126,161
Net increase in short-term borrowings with original maturities of three months or less	120,485			2,300
Net increase in retail repurchase agreements	11,946			21,071
Proceeds from other bank borrowings	60,000			—
Repayments of other bank borrowings	(60,000		)	(13,534		)
Withheld shares for employee taxes on vested share-based compensation	(991		)	(3,687		)
Common stock dividends	(33,741		)	(33,713		)
Preferred stock dividends of subsidiaries	(473		)	(473		)
Other	(4,043		)	(4,857		)
Net cash provided by financing activities	179,278			93,268
Net decrease in cash and cash equivalents	(17,096		)	(44,222		)
Cash and cash equivalents, beginning of period	261,881			278,452
Cash and cash equivalents, end of period	$	244,785		$	234,230

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)



	Three months ended March 31
(in thousands)	2018			2017
Revenues	$	570,427		$	518,611
Expenses
Fuel oil	166,968			144,270
Purchased power	139,910			127,124
Other operation and maintenance	107,610			98,817
Depreciation	50,466			48,216
Taxes, other than income taxes	54,104			49,823
Total expenses	519,058			468,250
Operating income	51,369			50,361
Allowance for equity funds used during construction	3,294			2,399
Retirement defined benefits expense—other than service costs	(1,264		)	(1,423		)
Interest expense and other charges, net	(17,694		)	(17,504		)
Allowance for borrowed funds used during construction	1,444			889
Income before income taxes	37,149			34,722
Income taxes	9,175			12,758
Net income	27,974			21,964
Preferred stock dividends of subsidiaries	229			229
Net income attributable to Hawaiian Electric	27,745			21,735
Preferred stock dividends of Hawaiian Electric	270			270
Net income for common stock	$	27,475		$	21,465

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 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 March 31
(in thousands)	2018			2017
Net income for common stock	$	27,475		$	21,465
Other comprehensive income (loss), net of taxes:
Derivatives qualifying as cash flow hedges:
Reclassification adjustment to net income, net of tax benefits of nil and $289, respectively	—			454
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,614 and $2,304, respectively	4,653			3,618
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,603 and $2,301, respectively	(4,622		)	(3,613		)
Other comprehensive income, net of taxes	31			459
Comprehensive income attributable to Hawaiian Electric Company, Inc.	$	27,506		$	21,924

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)



(dollars in thousands, except par value)	March 31, 2018			December 31, 2017
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	52,940		$	53,177
Plant and equipment	6,452,215			6,401,040
Less accumulated depreciation	(2,507,942		)	(2,476,352		)
Construction in progress	291,937			263,094
Utility property, plant and equipment, net	4,289,150			4,240,959
Nonutility property, plant and equipment, less accumulated depreciation of $1,252 as of March 31, 2018 and $1,251 as of December 31, 2017	7,582			7,580
Total property, plant and equipment, net	4,296,732			4,248,539
Current assets
Cash and cash equivalents	23,399			12,517
Customer accounts receivable, net	141,433			127,889
Accrued unbilled revenues, net	99,635			107,054
Other accounts receivable, net	3,953			7,163
Fuel oil stock, at average cost	88,723			86,873
Materials and supplies, at average cost	55,692			54,397
Prepayments and other	30,208			25,355
Regulatory assets	102,800			88,390
Total current assets	545,843			509,638
Other long-term assets
Regulatory assets	769,699			780,907
Other	98,295			91,529
Total other long-term assets	867,994			872,436
Total assets	$	5,710,569		$	5,630,613
Capitalization and liabilities
Capitalization
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 16,142,216 shares at March 31, 2018 and December 31, 2017)	$	107,634		$	107,634
Premium on capital stock	614,667			614,675
Retained earnings	1,125,842			1,124,193
Accumulated other comprehensive income (loss), net of taxes	(1,188		)	(1,219		)
Common stock equity	1,846,955			1,845,283
Cumulative preferred stock — not subject to mandatory redemption	34,293			34,293
Long-term debt, net	1,318,654			1,318,516
Total capitalization	3,199,902			3,198,092
Commitments and contingencies (Note 3)
Current liabilities
Current portion of long-term debt	49,973			49,963
Short-term borrowings from non-affiliates	121,983			4,999
Accounts payable	142,399			159,610
Interest and preferred dividends payable	26,204			22,575
Taxes accrued, including revenue taxes	166,465			199,101
Regulatory liabilities	6,933			3,401
Other	59,875			59,456
Total current liabilities	573,832			499,105
Deferred credits and other liabilities
Deferred income taxes	393,089			394,041
Regulatory liabilities	888,160			877,369
Unamortized tax credits	91,936			90,369
Defined benefit pension and other postretirement benefit plans liability	465,626			472,948
Other	98,024			98,689
Total deferred credits and other liabilities	1,936,835			1,933,416
Total capitalization and liabilities	$	5,710,569		$	5,630,613

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited)



	Common stock			Premium on capital			Retained			Accumulated other comprehensive
(in thousands)	Shares	Amount		stock			earnings			income (loss)			Total
Balance, December 31, 2017	16,142	$	107,634	$	614,675		$	1,124,193		$	(1,219	)	$	1,845,283
Net income for common stock	—	—		—			27,475			—			27,475
Other comprehensive income, net of taxes	—	—		—			—			31			31
Common stock dividends	—	—		—			(25,826		)	—			(25,826		)
Common stock issuance expenses	—	—		(8		)	—			—			(8		)
Balance, March 31, 2018	16,142	$	107,634	$	614,667		$	1,125,842		$	(1,188	)	$	1,846,955
Balance, December 31, 2016	16,020	$	106,818	$	601,491		$	1,091,800		$	(322	)	$	1,799,787
Net income for common stock	—	—		—			21,465			—			21,465
Other comprehensive income, net of taxes	—	—		—			—			459			459
Common stock dividends	—	—		—			(21,942		)	—			(21,942		)
Balance, March 31, 2017	16,020	$	106,818	$	601,491		$	1,091,323		$	137		$	1,799,769

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)



	Three months ended March 31
(in thousands)	2018			2017
Cash flows from operating activities
Net income	$	27,974		$	21,964
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	50,466			48,216
Other amortization	5,344			1,949
Deferred income taxes	(1,580		)	11,064
Allowance for equity funds used during construction	(3,294		)	(2,399		)
Other	2,681			436
Changes in assets and liabilities
Increase in accounts receivable	(15,037		)	(7,328		)
Decrease (increase) in accrued unbilled revenues	7,419			(5,939		)
Increase in fuel oil stock	(1,850		)	(7,444		)
Increase in materials and supplies	(1,295		)	(3,366		)
Decrease (increase) in regulatory assets	(16,900		)	5,909
Increase in accounts payable	5,143			17,231
Change in prepaid and accrued income taxes, tax credits and revenue taxes	(32,866		)	(43,984		)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability	(938		)	264
Change in other assets and liabilities	4,513			(4,694		)
Net cash provided by operating activities	29,780			31,879
Cash flows from investing activities
Capital expenditures	(114,457		)	(84,712		)
Contributions in aid of construction	4,330			10,650
Other	603			2,702
Net cash used in investing activities	(109,524		)	(71,360		)
Cash flows from financing activities
Common stock dividends	(25,826		)	(21,942		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(499		)	(499		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	116,984			1,500
Other	(33		)	(657		)
Net cash provided by (used in) financing activities	90,626			(21,598		)
Net increase (decrease) in cash and cash equivalents	10,882			(61,079		)
Cash and cash equivalents, beginning of period	12,517			74,286
Cash and cash equivalents, end of period	$	23,399		$	13,207

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2017 Form 10-K.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 · Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited condensed consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 2017.

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 March 31, 2018 and December 31, 2017 and the results of their operations and cash flows for the three months ended March 31, 2018 and 2017. All such adjustments are of a normal recurring nature, unless otherwise disclosed below or in other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.

Recent accounting pronouncements.

Revenues from contracts with customers. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company and Hawaiian Electric adopted ASU No. 2014-09 (and subsequently issued revenue-related ASUs, as applicable) in the first quarter of 2018. There was no cumulative effect adjustment and no impact on the timing or pattern of revenue recognition, but ASU No. 2014-09 required changes with respect to the Company’s and Hawaiian Electric’s revenue disclosures. See Note 7.

Financial instruments. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things:


•	Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.


•	Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.


•	Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).


•	Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.

The Company adopted ASU No. 2016-01 in the first quarter of 2018 and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated financial statements.

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 adopted ASU No. 2016-15 in the first quarter of 2018 using a retrospective transition method and there was no impact from the adoption to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Restricted cash. In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

The Company adopted ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.

Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations—Clarifying the Definition of a Business.” This update clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted ASU No. 2017-01 in the first quarter of 2018 and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated financial statements.

Net periodic pension cost and net periodic postretirement benefit cost. In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost (NPPC) and net periodic postretirement benefit cost (NPBC) as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization under GAAP, when applicable.

The Company adopted ASU No. 2017-07 in the first quarter of 2018: (1) retrospectively for the presentation in the income statement of the service cost component and the other components of NPPC and NPBC, and (2) prospectively for the capitalization in assets of the service cost component of NPPC and NPBC for Hawaiian Electric and its subsidiaries. HEI and ASB do not capitalize pension and OPEB costs.

In Settlement Agreements in the 2017 Hawaiian Electric and 2016 Hawaii Electric Light rate cases, Hawaiian Electric and Hawaii Electric Light, respectively, and the Consumer Advocate agreed to the deferral of the non-service cost components of NPPC and NPBC, which would have been capitalized prior to ASU No. 2017-07, as part of the pension tracking mechanism. In the Hawaiian Electric Interim D&O, the PUC did not identify this item for further review, and Hawaiian Electric will follow the Settlement Agreement. Hawaii Electric Light and Maui Electric will follow Hawaiian Electric’s treatment until rates are set in the next rate cases. The treatment under the Settlement Agreement will be followed beginning in 2018 until each utility’s next rate case. In each utility’s next rate case, rates established would include recovery of the deferred non-service cost components and seek to adopt the capitalization policy which reflects the requirements of ASU No. 2017-07 (i.e., only the service cost components of NPPC and NPBC will be capitalized).

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Thus, the adoption of ASU 2017-07 in the first quarter of 2018 does not have a net income impact. The following table summarizes the impact to the prior period financial statements of the adoption of ASU No. 2017-07:



(in thousands)	As previously filed			Adjustment from adoption of ASU No. 2017-07			As currently reported
Three months ended March 31, 2017
HEI Condensed Consolidated Income Statement
Expenses
Electric utility	$	469,673		$	(1,423	)	$	468,250
Bank	48,696			(195		)	48,501
Other	5,331			(258		)	5,073
Total expenses	523,700			(1,876		)	521,824
Operating income
Electric utility	48,938			1,423			50,361
Bank	24,160			195			24,355
Other	(5,236		)	258			(4,978		)
Total operating income	67,862			1,876			69,738
Retirement defined benefits expense--other than service costs	—			(1,876		)	(1,876		)
Hawaiian Electric Condensed Consolidated Income Statement
Other operation and maintenance	100,240			(1,423		)	98,817
Total expense	469,673			(1,423		)	468,250
Operating income	48,938			1,423			50,361
Retirement defined benefits expense--other than service costs	—			(1,423		)	(1,423		)
Hawaiian Electric Condensed Consolidating Income Statement (in Note 3)
Hawaiian Electric (parent only)
Other operation and maintenance	67,278			(1,285		)	65,993
Total expense	333,188			(1,285		)	331,903
Operating income	29,655			1,285			30,940
Retirement defined benefits expense--other than service costs	—			(1,285		)	(1,285		)
Hawaii Electric Light
Other operation and maintenance	15,516			83			15,599
Total expense	68,497			83			68,580
Operating income	10,485			(83		)	10,402
Retirement defined benefits expense--other than service costs	—			83			83
Maui Electric
Other operation and maintenance	17,446			(221		)	17,225
Total expense	67,988			(221		)	67,767
Operating income	8,805			221			9,026
Retirement defined benefits expense--other than service costs	—			(221		)	(221		)
ASB Statements of Income Data (in Note 4)
Compensation and employee benefits	23,237			(195		)	23,042
Other expense	4,311			195			4,506

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

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 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 is currently analyzing the potential impact of adoption, which includes an in-process assessment of all of its operating leases and other arrangements that may meet the definition of a lease under the standard.

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. The guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. The Company has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The team has assigned roles and responsibilities and developed key tasks to complete and a general timeline to be followed. The Company is evaluating the effect that this ASU will have on the consolidated financial statements and disclosures. Economic conditions and the composition of the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment.

Condensed Consolidated Statements of Cash Flows error. Subsequent to the issuance of interim Condensed Consolidated Financial Statements (unaudited) for the quarter ended March 31, 2017, the Company and the Utilities identified an error within their previously reported interim Condensed Consolidated Statements of Cash Flows (unaudited). The timing of certain capital expenditure payments, including those that had retainage balances or were related to certain capitalized amounts were not reflected timely. The Company and the Utilities have evaluated the effect of the error, both qualitatively and quantitatively, and concluded that it is immaterial to their respective previously issued condensed consolidated financial statements. For the three months ended March 31, 2017, the correction of this error resulted in decreases in Net Cash Provided by Operating Activities (impacting the change in Accounts, Interest and Dividends Payable for the Company and Accounts Payable for the Utilities) and Net Cash Used in Investing Activities (impacting the Capital Expenditures for the Company and the Utilities) of $47 million.

Reclassifications. Reclassifications made to prior year-end financial statements to conform to 2018 presentation include a reclassification of contributions in aid of construction balances to “Property, plant and equipment, net” and “Total property, plant and equipment, net” for the Company and Hawaiian Electric, respectively, which reduced the amounts of the respective balances.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 2 · Segment financial information



(in thousands)	Electric utility		Bank		Other			Total
Three months ended March 31, 2018
Revenues from external customers	$	570,414	$	75,419	$	41		$	645,874
Intersegment revenues (eliminations)	13		—		(13		)	—
Revenues	$	570,427	$	75,419	$	28		$	645,874
Income (loss) before income taxes	$	37,149	$	24,500	$	(8,373	)	$	53,276
Income taxes (benefit)	9,175		5,540		(2,159		)	12,556
Net income (loss)	27,974		18,960		(6,214		)	40,720
Preferred stock dividends of subsidiaries	499		—		(26		)	473
Net income (loss) for common stock	$	27,475	$	18,960	$	(6,188	)	$	40,247
Total assets (at March 31, 2018)	$	5,710,569	$	6,889,445	$	102,704		$	12,702,718
Three months ended March 31, 2017
Revenues from external customers	$	518,566	$	72,856	$	140		$	591,562
Intersegment revenues (eliminations)	45		—		(45		)	—
Revenues	$	518,611	$	72,856	$	95		$	591,562
Income before income taxes	$	34,722	$	24,160	$	(7,300	)	$	51,582
Income taxes	12,758		8,347		(4,189		)	16,916
Net income	21,964		15,813		(3,111		)	34,666
Preferred stock dividends of subsidiaries	499		—		(26		)	473
Net income for common stock	$	21,465	$	15,813	$	(3,085	)	$	34,193
Total assets (at December 31, 2017)	$	5,630,613	$	6,798,659	$	104,888		$	12,534,160

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.

Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation. Hamakua Energy's profit on electricity sales to Hawaii Electric Light is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the ratemaking process, future revenue from Hawaii Electric Light’s sale of the electricity will approximate its purchase price from Hamakua Energy under the PPA.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 3 · Electric utility segment

Revenue taxes. The Utilities’ revenues include amounts for recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. For the three months ended March 31, 2018 and 2017, the Utilities’ revenues include recovery of revenue taxes of approximately $51 million and $46 million, respectively, which amounts are in “Taxes, other than income taxes” expense, in the unaudited condensed consolidated statements of income. However, the Utilities pay revenue taxes to the taxing authorities in the period based on (1) the prior year’s billed revenues (in the case of public service company taxes and PUC fees) in the current year or (2) the current year’s cash collections from electric sales (in the case of franchise taxes) after year-end.

Unconsolidated variable interest entities.

HECO Capital Trust III. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric. Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not have the power to direct the activities that most significantly impact the economic performance of Trust III nor the obligation to absorb their expected losses, if any, that could potentially be significant to the 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 March 31, 2018 and December 31, 2017 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 three months ended March 31, 2018 consisted of $0.8 million of interest income received from the 2004 Debentures; $0.8 million of distributions to holders of the Trust Preferred Securities; and $25,000 of common dividends on the trust common securities to Hawaiian Electric.

Power purchase agreements. As of March 31, 2018, the Utilities had five PPAs for firm capacity and other PPAs with independent power producers (IPPs) and Schedule Q providers (i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which is currently required to be consolidated as VIEs.

Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and the predecessor of Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and the predecessor of Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and the predecessor of Hamakua Energy in its unaudited condensed consolidated financial statements. HEI, however, through Pacific Current now owns Hamakua Energy and consolidates it in the HEI 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 an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPPs were “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 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 to the IPP.

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.

Interim increases. For the three months ended March 31, 2018, the Utilities recognized $7.0 million of revenues with respect to interim orders related to general rate increase requests. Such recorded amounts are subject to refund, with interest, if they exceed amounts in a final order.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Power purchase agreements. Purchases from all IPPs were as follows:



	Three months ended March 31
(in millions)	2018		2017
Kalaeloa	$	40	$	40
AES Hawaii	37		29
HPOWER	15		17
Puna Geothermal Venture	11		8
Hamakua Energy	7		7
Other IPPs ¹	30		26
Total IPPs	$	140	$	127


¹	Includes wind power, solar power, feed-in tariff projects and other PPAs.

Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. Hawaiian Electric and Kalaeloa are currently in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith, but would end 60 days after either party notifies the other in writing that negotiations have terminated. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA prior to October 31, 2018. This agreement contemplates continued negotiations between the parties and accounts for time needed for PUC approval of a negotiated resolution.

AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years beginning September 1992, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, but Hawaiian Electric and AES Hawaii were not able to reach 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 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 continued. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on Amendment No. 4, which is subject to PUC approval. Amendment No. 4, among other things, provides (1) that AES Hawaii will make certain operational commitments to improve reliability, (2) for inclusion of AES Hawaii in the Utilities’ greenhouse gas partnership, (3) provisions to allow AES Hawaii to reduce coal combustion by modifying its fuel consumption to include biomass upon approval by Hawaiian Electric, and (4) for release of an option agreement by Hawaiian Electric for land owned by AES Hawaii. Amendment No. 4 includes a stay of the arbitration proceeding pending review by the PUC. If approved by the PUC, Amendment No. 4 will resolve AES Hawaii’s claims.

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. Under 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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

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 benefits 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.

On November 30, 2017, the PUC issued an order, which, among other things, directed the Utilities to file a position statement regarding the reasonableness of the project, a reworked low-level benefits analysis and initial details of the metrics that will be used to demonstrate the achievement of benefits. On December 18, 2017, the Utilities filed their response to the order, re-affirming the need for the project and guaranteed minimum level of $244 million in benefits to customers. The response further noted that in Hawaiian Electric’s 2017 test year rate case, Hawaiian Electric and the Consumer Advocate have agreed in principle to a “rate case-centric” approach for a benefits delivery mechanism pending PUC approval. On January 4, 2018, the Consumer Advocate filed a statement of position (SOP) on the Utilities’ response, stating that it does not recommend revocation of the PUC’s prior conditional approval of the project or reductions to the previously ordered cost caps, and continues to recommend the use of a rate case-centric approach to facilitate pass through of the system’s benefits to customers. The Utilities filed a response to the Consumer Advocate’s SOP on January 11, 2018, noting among other things that the Consumer Advocate’s SOP is in general alignment with the Utilities’ position on the project. Monthly reports on the status and costs of the project continue to be filed. Further discussions with the PUC continue on the calculations of the benefits.

The ERP/EAM Implementation Project is expected to go live by October 1, 2018. As of March 31, 2018, the Project incurred costs of $47.7 million of which $8.6 million were charged to other operation and maintenance (O&M) expense, $2.6 million relate to capital costs and $36.5 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 March 31, 2018 amounted to $131.6 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 to the system. Project costs incurred as of March 31, 2018 amounted to $7.0 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 cost recovery discussion.) Hawaiian Electric provided supplemental materials in August 2017, as requested by the PUC, to support meeting the MPIR guidelines, accompanied by system performance guarantee and cost savings sharing mechanisms. A decision on these matters is pending.

Hawaiian Electric executed a fixed-price Engineering, Procurement, and Construction (EPC) contract for the project on December 5, 2017. The EPC contract includes the cost of the solar panels for the project, which is not subject to modification due to any tariffs that may be imposed under the current photovoltaic (PV) cell and module import tariff guidelines.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Construction of the facility is scheduled to begin in the second quarter of 2018, and the facility is expected to be placed in service in the fourth quarter of 2018.

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 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. On April 4, 2018, the Utilities and Hawaiian Telcom entered into several agreements, subject to PUC approval, for the purchase by the Utilities of Hawaiian Telcom’s interest in all the joint poles, and licensing and operating agreement between the Utilities and Hawaiian Telcom subsequent to the transfer of the joint pole interest to the Utilities. Consideration of approximately $48 million to be paid for Hawaiian Telcom’s interest in the poles will be offset in part by the receivables owed by Hawaiian Telcom to the Utilities. As of March 31, 2018, receivables under the joint pole agreement, net of a reserve for a portion of the interest, from Hawaiian Telcom are $22.4 million ($15.1 million at Hawaiian Electric, $6.0 million at Hawaii Electric Light, and $1.3 million at Maui Electric). Management expects the net receivable amounts will be realized. The remaining consideration for acquiring Hawaiian Telcom’s interest in the joint poles is to be settled through the set-off of current and future license fees due from Hawaiian Telcom, after which Hawaiian Telcom would resume cash payments for license fees under the agreement.

Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances.

Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases into the environment associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.

Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. Although Maui Electric never operated at the Site or owned the Site property, after discussions with the EPA and the Hawaii Department of Health (DOH), Maui Electric agreed to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel to determine the extent of impacts of PCBs, residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of March 31, 2018, representing the probable and reasonably estimated cost to complete the additional investigation and estimated cleanup costs at the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued investigation.

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.

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. Appropriate remedial measures are being developed to address the extent of the onshore contamination, and any associated costs have not yet been determined.

As of March 31, 2018, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.7 million. The reserve represents the probable and reasonably estimable cost to complete the onshore and offshore investigations and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the assessment of potential source control requirements, as well as the further investigation of contaminated sediment offshore from the Waiau Power Plant by the Navy.

Regulatory proceedings

Decoupling. Decoupling is a regulatory model that is intended to facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The decoupling model implemented in Hawaii 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 2017 and 2018.


•	Maui Electric's RAM revenues in 2017 and 2018 were below the RAM Cap.


•	Hawaii Electric Light’s RAM revenues were below the RAM Cap in 2017; however, the 2018 RAM revenues were limited to the RAM Cap.

2017 decoupling order. On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order) that required the establishment of specific performance-incentive mechanisms and provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases. The performance-incentive mechanisms are discussed further in the section below.

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 must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects 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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

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 29, 2018, the Utilities submitted to the PUC their annual decoupling filings for tariffed rates effective from June 1, 2018 through May 31, 2019. The net annual incremental amounts to be collected (refunded) are as follows:



(in millions)	Hawaiian Electric		Hawaii Electric Light		Maui Electric
2018 Annual incremental RAM adjusted revenues	$	13.8	$	3.4	$	2.3
Annual change in accrued RBA balance as of December 31, 2017 (and associated revenue taxes)	$	6.6	$	0.7	$	3.2
2017 Tax Reform Act Adjustment	$	—	$	—	$	(2.4	)
Net annual incremental amount to be collected under the tariffs	$	20.4	$	4.1	$	3.1

* Maui Electric incorporated a ($2.4 million) adjustment into its 2018 annual decoupling filing to incorporate the impact of the lower corporate income tax rate and the exclusion of the domestic production activities deduction, as a result of the Tax Act. Tax adjustments for Hawaiian Electric and Hawaii Electric Light are described in the discussion below of their respective on-going rate cases.

Performance incentive mechanisms. The PUC has ordered the following performance incentive mechanisms (PIM), which will be reflected in the annual decoupling filing beginning in 2019.


•	Service Quality performance incentives are measured on a calendar-year basis beginning in 2018.

•

Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one 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 $6.2 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).


•	Demand Response measured by the demand response resources acquired in 2018. The award is equal to 5% of the total of the annual maintenance cost for cost-effective demand response capability contracted with aggregators by December 31, 2018. The maximum award is $0.5 million for the three utilities in total and there are no penalties. This incentive applies to one-time performance in 2018 only.

•

Procurement of low-cost variable renewable resources through the request for proposal process in 2018 measured by comparison of the procurement price to target prices. The incentive is 20% of savings determined by comparing procured price to a target of 11.5 cents per kilowatt-hour for renewable projects with storage capability and 9.5 cents per kilowatt-hour for energy-only renewable projects. This incentive has a cap of $3.5 million for the three utilities in total and has no penalty.

Performance-based regulation proceeding. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). The PUC intends to provide a forum to collaboratively develop modifications or new components to better align utility and customer interests. The PUC stated that PBR seeks to utilize both revenue adjustment mechanisms and performance mechanisms to more strongly align utilities’ incentives with customer interests.

The order stated that, in general, the PUC is interested in ratemaking elements and/or mechanisms that result in:


•	Greater cost control and reduced rate volatility;


•	Efficient investment and allocation of resources regardless of classification as capital or operating expense;


•	Fair distribution of risks between utilities and customers; and


•	Fulfillment of State policy goals.

The PUC envisions that the PBR components through this investigation are those that: (a) target areas of current utility performance that may benefit from improvement; and (b) reward the utility for achieving specific outcomes that are in the public interest and/or penalize the utility for not achieving said outcomes. To that end, through this investigation, the PUC intends to: (1) identify specific areas of utility performance that should be improved; (2) determine appropriate metrics for

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

measuring successful outcomes in those areas; and (3) establish reasonable financial rewards and/or penalties that are sufficient to incent the utility to achieve those outcomes.

The order indicated that the proceeding would have two phases. Phase 1 would examine the current regulatory framework and identify those areas of utility performance that are deserving of further focus for PBR framework development and/or PIMs in Phase 2. Topics for Phase 1 could include what are additional key goals for which performance incentives should be developed, what targets or priority areas of utility performance should be measured, and how should performance be measured.

Performance-based ratemaking legislation. On April 24, 2018, Senate Bill No. 2939 SD2 was signed into law, which establishes performance metrics that the PUC shall consider while establishing performance incentives and penalty mechanisms under a performance-based ratemaking model. The law requires that the PUC establish these performance-based ratemaking mechanisms on or before January 1, 2020.

Most recent rate proceedings.

Hawaiian Electric consolidated 2014 and 2017 test year rate cases. In June 2014, Hawaiian Electric submitted its 2014 test year rate case filing, stating that it intended to forgo the opportunity to seek a general rate increase in base rates. In December 2016, Hawaiian Electric filed an application with the PUC for a general rate increase, and the PUC issued an order consolidating the Hawaiian Electric filings for the 2014 and 2017 test year rate cases.

On December 15, 2017, the PUC issued an interim decision and order (Interim D&O), which approved the interim rate relief set forth in Hawaiian Electric’s statement of probable entitlement filed on November 17, 2017, including the rate of return of 7.57% and the ROACE of 9.50% and a capital structure that includes 57% common equity, but made the following downward adjustments: (1) reduced the net pension regulatory asset; (2) reduced the pension contribution regulatory asset; and (3) a “hold-back” of $5 million relating to baseline plant additions from 2014 through the 2017 test year, pending further examination of the prudence of Hawaiian Electric’s baseline plant additions.

Hawaiian Electric filed a motion for partial reconsideration of the Interim D&O, and on January 18, 2018, the PUC issued an Order (January 18 Order) irrevocably reversing the net pension regulatory asset adjustment in the Interim D&O, among other things, and instead imposed a hold back of $6 million of revenues, and indicated the PUC will verify whether the $6 million is the appropriate revenue reduction amount to benefit customers; however no further adjustment will be made to the net pension regulatory asset in the final D&O.

On January 19, 2018, Hawaiian Electric submitted revised schedules and revised revenue requirements, reflecting the Interim D&O and January 18 Order. The revised revenues requirements, based on an overall rate of return of 7.57%, which reflects a capital structure that includes 57% common equity and ROACE for interim purposes of 9.5%, and the adjustments resulting from the Interim D&O, indicated an interim increase in revenues of $36 million. On February 9, 2018, the PUC approved Hawaiian Electric’s proposed interim schedules, reflecting an interim increase of $36 million, which went into effect on February 16, 2018.

On March 5, 2018, Hawaiian Electric and the Consumer Advocate filed a stipulated settlement letter that resolved between them the remaining issues identified by the PUC (Settlement on Remaining Issues), except that Hawaiian Electric and the Consumer Advocate recommended that the PUC not adopt or implement Blue Planet’s ECAC proposals and that the PUC decide this sub-issue based on the evidence admitted in this proceeding. The Settlement on Remaining Issues also proposed the following: (1) to address the Tax Act, the 2017 test year revenue requirement would be reduced by $38.3 million; (2) Hawaiian Electric would accept a $5 million adjustment that reduces O&M expenses and would be reflected in final base rates; (3) the “hold-back” of $5 million relating to baseline plant additions from 2014 through the 2017 test year should be removed from any subsequent orders setting rates for Hawaiian Electric’s 2017 test year rate case; (4) the fair rate of return on rate base would be determined using the adjusted capital structure, and debt and preferred stock cost rates, included in the November 2017 Stipulated Settlement, and an ROACE of 9.50%; (5) the November 2017 Stipulated Settlement would remain intact, to the extent not inconsistent with or impacted by the modified Interim D&O or this settlement agreement; and (6) the Parties waived their rights to an evidentiary hearing on all of the remaining issues subject to approval of this settlement agreement.

On March 9, 2018, the PUC issued an order that approved the Settlement on Remaining Issues and cancelled the evidentiary hearing. The PUC will issue a final decision and order, which will include its decision regarding Blue Planet’s proposal to modify the ECAC, as well as establish Hawaiian Electric’s final rates for this proceeding.

On March 29, 2018, the PUC issued an order approving Hawaiian Electric’s proposed revised schedules of operations and proposed tariff sheets to implement the approved Settlement on Remaining Issues, effective April 13, 2018.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Maui Electric consolidated 2015 and 2018 test year rate cases. In December 2014, Maui Electric submitted its 2015 test year rate case filing, proposing no change to its base rates. In August 2017, the PUC issued an order consolidating the Maui Electric filings for the 2015 and 2018 test year rate cases.

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, and 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.

In accordance with a PUC order, on February 26, 2018, Maui Electric filed revised schedules to reflect the following adjustments resulting from the Tax Act in its 2018 test year revenue requirement: (1) $8.1 million income tax expense reduction; (2) $0.5 million annual amortization credit for Excess ADIT; and (3) $7.1 million increase in rate base resulting from the decrease in ADIT for bonus depreciation loss and contributions in aid of construction (CIAC) taxability. Maui Electric further stated that it would need to adjust the above impacts when it can more precisely calculate the amortization subject to the Average Rate Assumption Method (ARAM) and as additional guidance and interpretations of the Tax Act are released.

On March 7, 2018, the PUC issued a revised procedural schedule that includes Maui Electric and the Consumer Advocate submitting statements of probable entitlement on July 13, 2018, an evidentiary hearing from July 30 to August 3, 2018, and an interim D&O on August 13, 2018.

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.

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.

On April 24, 2018, the PUC issued an order approving Hawaii Electric Light’s motion filed on March 27, 2018, to adjust interim rates to incorporate the effects of the Tax Act. The effect of the Tax Act resulted in a total net reduction of $9.5 million to the test year revenue requirement. The interim rate adjustment became effective May 1, 2018.

Tax Cuts and Jobs Act impact on utility rates. On January 26, 2018, the PUC issued an order opening a proceeding to investigate the impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act), naming multiple public utilities in Hawaii as parties to the proceeding. The order directed the parties to immediately begin tracking the impacts of the Tax Act, as of January 1, 2018, and to use deferred regulatory accounting practices, such as the use of regulatory assets and liabilities, to record the differences resulting from the Tax Act and what would have been recorded if the Tax Act did not go into effect. The order further stated that the PUC will provide further direction regarding final utility rate adjustments as a result of the Tax Act through subsequent orders in dockets outside of this proceeding (i.e., in rate cases or order to show cause proceedings).

See above sections for each Utility’s estimated impacts from the Tax Act and associated reductions to revenue requirements for each respective pending rate cases. Hawaiian Electric’s interim rates for the 2017 test year will reflect the Tax Act reductions effective April 13, 2018. Adjustment to Hawaii Electric Light’s interim rates for the 2016 test year is pending PUC approval. Adjustments to Maui Electric’s current rates for the Tax Act are proposed for incorporation in the annual Revenue Balancing Account adjustment to be effective on June 1, 2018. (See discussion in “Decoupling” section above.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

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 (see Hawaiian Electric and Subsidiaries' unaudited Condensed Consolidated Statements of Capitalization) and (c) relating to the trust preferred securities of Trust III. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income

Three months ended March 31, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric	Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	401,180		87,933		81,356	—	(42	)	$	570,427
Expenses
Fuel oil	114,498			18,487		33,983	—	—		166,968
Purchased power	107,370			23,834		8,706	—	—		139,910
Other operation and maintenance	72,940			16,098		18,572	—	—		107,610
Depreciation	34,439			10,055		5,972	—	—		50,466
Taxes, other than income taxes	38,167			8,212		7,725	—	—		54,104
Total expenses	367,414			76,686		74,958	—	—		519,058
Operating income	33,766			11,247		6,398	—	(42	)	51,369
Allowance for equity funds used during construction	2,887			111		296	—	—		3,294
Equity in earnings of subsidiaries	9,325			—		—	—	(9,325	)	—
Retirement defined benefits expense—other than service costs	(1,062		)	(103	)