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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
 OR
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as
 
Commission
 
I.R.S. Employer
Specified in Its Charter
 
File Number
 
Identification No.
HAWAIIAN ELECTRIC INDUSTRIES, INC.
 
1-8503
 
99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC.
 
1-4955
 
99-0040500
State of Hawaii
(State or other jurisdiction of incorporation or organization)
 
Hawaiian Electric Industries, Inc. – 1001 Bishop Street, Suite 2900, Honolulu, Hawaii  96813
Hawaiian Electric Company, Inc. – 900 Richards Street, Honolulu, Hawaii  96813
(Address of principal executive offices and zip code)
 
Hawaiian Electric Industries, Inc. – (808) 543-5662
Hawaiian Electric Company, Inc. – (808) 543-7771
(Registrant’s telephone number, including area code) 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Hawaiian Electric Industries, Inc. Yes x No o
 
Hawaiian Electric Company, Inc. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Hawaiian Electric Industries, Inc. Yes x No o
 
Hawaiian Electric Company, Inc. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Hawaiian Electric Industries, Inc.
 
Large accelerated filer  x
 
Hawaiian Electric Company, Inc.
 
Large accelerated filer o
 
 
Accelerated filer o
 
 
 
Accelerated filer o
 
 
Non-accelerated filer o
 
 
 
Non-accelerated filer  x
 
 
(Do not check if a smaller reporting company)
 
 
 
(Do not check if a smaller reporting company)
 
 
Smaller reporting company o
 
 
 
Smaller reporting company o
 
 
Emerging growth company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Hawaiian Electric Industries, Inc. o
 
Hawaiian Electric Company, Inc. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Hawaiian Electric Industries, Inc. Yes o No x
 
Hawaiian Electric Company, Inc. Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.
Class of Common Stock
 
Outstanding October 27, 2018
Hawaiian Electric Industries, Inc. (Without Par Value)
 
108,879,245 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 September 30, 2018
 
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i



Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended September 30, 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
ECRC
 
Energy cost recovery clause
EIP
 
2010 Equity and Incentive Plan, as amended and restated
EPA
 
Environmental Protection Agency — federal
EPS
 
Earnings per share
ERP/EAM
 
Enterprise Resource Planning/Enterprise Asset Management
EVE
 
Economic value of equity
Exchange Act
 
Securities Exchange Act of 1934
FASB
 
Financial Accounting Standards Board
FDIC
 
Federal Deposit Insurance Corporation
federal
 
U.S. Government
FHLB
 
Federal Home Loan Bank
FHLMC
 
Federal Home Loan Mortgage Corporation
FNMA
 
Federal National Mortgage Association
FRB
 
Federal Reserve Board
GAAP
 
Accounting principles generally accepted in the United States of America

ii

GLOSSARY OF TERMS, continued

Terms
 
Definitions
GNMA
 
Government National Mortgage Association
Hawaii Electric Light
 
Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
Hawaiian Electric
 
Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.
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
PIMs
 
Performance incentive mechanisms
PPA
 
Power purchase agreement
PPAC
 
Purchased power adjustment clause
PSIPs
 
Power Supply Improvement Plans
PUC
 
Public Utilities Commission of the State of Hawaii
PV
 
Photovoltaic
RAM
 
Rate adjustment mechanism
RBA
 
Revenue balancing account
RFP
 
Request for proposals
ROACE
 
Return on average common equity
RORB
 
Return on rate base
RPS
 
Renewable portfolio standards
SEC
 
Securities and Exchange Commission
See
 
Means the referenced material is incorporated by reference
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; 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 ability of the Utilities to achieve performance incentive mechanisms currently in place;
the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Senate Bill No. 2939 SD2, including the potential addition of new performance incentive mechanisms, third party proposals adopted by the PUC in its implementation of PBR, and the implications of not achieving performance incentive goals;
the impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;
the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;

iv



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

v


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Revenues
 
 

 
 

 
 

 
 

Electric utility
 
$
687,409

 
$
598,769

 
$
1,865,962

 
$
1,674,255

Bank
 
80,496

 
74,289

 
233,019

 
222,474

Other
 
143

 
127

 
218

 
299

Total revenues
 
768,048

 
673,185

 
2,099,199

 
1,897,028

Expenses
 
 

 
 

 
 

 
 

Electric utility
 
613,373

 
510,272

 
1,685,413

 
1,478,915

Bank
 
53,232

 
47,313

 
153,951

 
146,146

Other
 
3,379

 
4,127

 
11,083

 
12,954

Total expenses
 
669,984

 
561,712

 
1,850,447

 
1,638,015

Operating income (loss)
 
 

 
 

 
 

 
 

Electric utility
 
74,036

 
88,497

 
180,549

 
195,340

Bank
 
27,264

 
26,976

 
79,068

 
76,328

Other
 
(3,236
)
 
(4,000
)
 
(10,865
)
 
(12,655
)
Total operating income
 
98,064

 
111,473

 
248,752

 
259,013

Retirement defined benefits expense—other than service costs
 
(1,276
)
 
(1,928
)
 
(4,673
)
 
(5,710
)
Interest expense, net—other than on deposit liabilities and other bank borrowings
 
(22,523
)
 
(19,227
)
 
(66,042
)
 
(59,235
)
Allowance for borrowed funds used during construction
 
1,006

 
1,339

 
3,815

 
3,371

Allowance for equity funds used during construction
 
1,962

 
3,482

 
8,239

 
8,908

Income before income taxes
 
77,233

 
95,139

 
190,091

 
206,347

Income taxes
 
10,862

 
34,595

 
36,473

 
72,003

Net income
 
66,371

 
60,544

 
153,618

 
134,344

Preferred stock dividends of subsidiaries
 
471

 
471

 
1,417

 
1,417

Net income for common stock
 
$
65,900

 
$
60,073

 
$
152,201

 
$
132,927

Basic earnings per common share
 
$
0.61

 
$
0.55

 
$
1.40

 
$
1.22

Diluted earnings per common share
 
$
0.60

 
$
0.55

 
$
1.40

 
$
1.22

Weighted-average number of common shares outstanding
 
108,879

 
108,786

 
108,847

 
108,737

Net effect of potentially dilutive shares
 
176

 
79

 
243

 
172

Weighted-average shares assuming dilution
 
109,055

 
108,865

 
109,090

 
108,909

 
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.


1



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2018
 
2017
 
2018
 
2017
Net income for common stock
 
$
65,900

 
$
60,073

 
$
152,201

 
$
132,927

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 tax benefits (taxes) of $1,876, $(137), $8,335 and $(1,619), respectively
 
(5,123
)
 
208

 
(22,768
)
 
2,452

Derivatives qualifying as cash flow hedges:
 
 

 
 

 
 

 
 

Reclassification adjustment to net income, net of tax benefits of nil, nil, nil and $289, respectively
 

 

 

 
454

Retirement benefit plans:
 
 

 
 

 
 

 
 

Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,832, $2,516, $5,486 and $7,526, respectively
 
5,259

 
3,942

 
15,755

 
11,793

Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,639, $2,290, $4,916 and $6,872, respectively
 
(4,725
)
 
(3,596
)
 
(14,174
)
 
(10,790
)
Other comprehensive income (loss), net of taxes
 
(4,589
)
 
554

 
(21,187
)
 
3,909

Comprehensive income attributable to Hawaiian Electric Industries, Inc.
 
$
61,311

 
$
60,627

 
$
131,014

 
$
136,836

 
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.


2



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) 
(dollars in thousands)
 
September 30, 2018
 
December 31, 2017
Assets
 
 

 
 

Cash and cash equivalents
 
$
172,054

 
$
261,881

Accounts receivable and unbilled revenues, net
 
336,309

 
263,209

Available-for-sale investment securities, at fair value
 
1,387,571

 
1,401,198

Held-to-maturity investment securities, at amortized cost
 
102,498

 
44,515

Stock in Federal Home Loan Bank, at cost
 
8,158

 
9,706

Loans held for investment, net
 
4,700,232

 
4,617,131

Loans held for sale, at lower of cost or fair value
 
1,036

 
11,250

Property, plant and equipment, net of accumulated depreciation of $2,651,109 and $2,553,295 at September 30, 2018 and December 31, 2017, respectively
 
4,694,101

 
4,460,248

Regulatory assets
 
830,924

 
869,297

Other
 
596,481

 
513,535

Goodwill
 
82,190

 
82,190

Total assets
 
$
12,911,554

 
$
12,534,160

Liabilities and shareholders’ equity
 
 

 
 

Liabilities
 
 

 
 

Accounts payable
 
$
167,192

 
$
193,714

Interest and dividends payable
 
30,280

 
25,837

Deposit liabilities
 
6,130,415

 
5,890,597

Short-term borrowings—other than bank
 
203,359

 
117,945

Other bank borrowings
 
71,110

 
190,859

Long-term debt, net—other than bank
 
1,782,242

 
1,683,797

Deferred income taxes
 
385,651

 
388,430

Regulatory liabilities
 
932,352

 
880,770

Defined benefit pension and other postretirement benefit plans liability
 
496,753

 
509,514

Other
 
545,862

 
521,018

Total liabilities
 
10,745,216

 
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: 108,879,245 shares and 108,787,807 shares at September 30, 2018 and December 31, 2017, respectively
 
1,667,371

 
1,662,491

Retained earnings
 
527,802

 
476,836

Accumulated other comprehensive loss, net of tax benefits
 
(63,128
)
 
(41,941
)
Total shareholders’ equity
 
2,132,045

 
2,097,386

Total liabilities and shareholders’ equity
 
$
12,911,554

 
$
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.


3


Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 
 
 
Common stock
 
Retained
 
Accumulated
other
comprehensive
 
 
(in thousands)
 
Shares
 
Amount
 
Earnings
 
income (loss)
 
Total
Balance, December 31, 2017
 
108,788

 
$
1,662,491

 
$
476,836

 
$
(41,941
)
 
$
2,097,386

Net income for common stock
 

 

 
152,201

 

 
152,201

Other comprehensive loss, net of tax benefits
 

 

 

 
(21,187
)
 
(21,187
)
Issuance of common stock, net of expenses
 
91

 
4,880

 

 

 
4,880

Common stock dividends (93¢ per share)
 

 

 
(101,235
)
 

 
(101,235
)
Balance, September 30, 2018
 
108,879

 
$
1,667,371

 
$
527,802

 
$
(63,128
)
 
$
2,132,045

Balance, December 31, 2016
 
108,583

 
$
1,660,910

 
$
438,972

 
$
(33,129
)
 
$
2,066,753

Net income for common stock
 

 

 
132,927

 

 
132,927

Other comprehensive income, net of taxes
 

 

 

 
3,909

 
3,909

Issuance of common stock, net of expenses
 
203

 
582

 

 

 
582

Common stock dividends (93¢ per share)
 

 

 
(101,149
)
 

 
(101,149
)
Balance, September 30, 2017
 
108,786

 
$
1,661,492

 
$
470,750

 
$
(29,220
)
 
$
2,103,022

 
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.


4



Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
 
Nine months ended September 30
(in thousands)
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net income
 
$
153,618

 
$
134,344

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

 
 

Depreciation of property, plant and equipment
 
159,646

 
150,123

Other amortization
 
31,473

 
15,362

Provision for loan losses
 
12,337

 
7,231

Loans originated and purchased, held for sale
 
(105,956
)
 
(105,816
)
Proceeds from sale of loans, held for sale
 
109,335

 
119,731

Deferred income taxes
 
10,823

 
21,397

Share-based compensation expense
 
5,891

 
4,383

Allowance for equity funds used during construction
 
(8,239
)
 
(8,908
)
Other
 
(4,524
)
 
(1,350
)
Changes in assets and liabilities
 
 

 
 

Increase in accounts receivable and unbilled revenues, net
 
(79,128
)
 
(26,250
)
Decrease (increase) in fuel oil stock
 
(5,060
)
 
6,177

Decrease (increase) in regulatory assets
 
(6,474
)
 
3,922

Increase (decrease) in accounts, interest and dividends payable
 
(7,122
)
 
18,581

Change in prepaid and accrued income taxes, tax credits and utility revenue taxes
 
(32,006
)
 
2,828

Increase in defined benefit pension and other postretirement benefit plans liability
 
7,517

 
670

Change in other assets and liabilities
 
15,548

 
(22,311
)
Net cash provided by operating activities
 
257,679

 
320,114

Cash flows from investing activities
 
 

 
 

Available-for-sale investment securities purchased
 
(190,411
)
 
(369,467
)
Principal repayments on available-for-sale investment securities
 
168,334

 
155,026

Purchases of held-to-maturity investment securities
 
(62,096
)
 

Principal repayments of held-to-maturity investment securities
 
4,007

 

Purchase of stock from Federal Home Loan Bank
 
(9,933
)
 
(2,868
)
Redemption of stock from Federal Home Loan Bank
 
11,480

 
4,380

Net decrease (increase) in loans held for investment
 
(96,212
)
 
13,188

Proceeds from sale of commercial loans
 
7,149

 
31,427

Proceeds from sale of real estate acquired in settlement of loans
 
589

 
411

Capital expenditures
 
(404,984
)
 
(343,375
)
Contributions in aid of construction
 
24,361

 
40,603

Contributions to low income housing investments
 
(7,714
)
 

Other
 
13,669

 
1,345

Net cash used in investing activities
 
(541,761
)
 
(469,330
)
Cash flows from financing activities
 
 

 
 

Net increase in deposit liabilities
 
137,443

 
203,397

Net increase in short-term borrowings with original maturities of three months or less
 
85,369

 
24,498

Net increase in retail repurchase agreements
 
32,626

 
24,469

Proceeds from other bank borrowings
 
237,000

 
59,500

Repayments of other bank borrowings
 
(287,000
)
 
(123,034
)
Proceeds from issuance of long-term debt
 
100,000

 
265,000

Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds
 
(1,867
)
 
(265,000
)
Withheld shares for employee taxes on vested share-based compensation
 
(996
)
 
(3,796
)
Common stock dividends
 
(101,235
)
 
(101,149
)
Preferred stock dividends of subsidiaries
 
(1,417
)
 
(1,417
)
Other
 
(5,668
)
 
(9,531
)
Net cash provided by financing activities
 
194,255

 
72,937

Net decrease in cash and cash equivalents
 
(89,827
)
 
(76,279
)
Cash and cash equivalents, beginning of period
 
261,881

 
278,452

Cash and cash equivalents, end of period
 
$
172,054

 
$
202,173


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.

5



Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
687,409

 
$
598,769

 
$
1,865,962

 
$
1,674,255

Expenses
 
 

 
 

 
 

 
 

Fuel oil
 
206,551

 
146,258

 
545,236

 
431,787

Purchased power
 
177,590

 
160,347

 
478,238

 
440,538

Other operation and maintenance
 
113,553

 
98,681

 
333,805

 
302,437

Depreciation
 
50,983

 
48,206

 
151,810

 
144,578

Taxes, other than income taxes
 
64,696

 
56,780

 
176,324

 
159,575

Total expenses
 
613,373

 
510,272

 
1,685,413

 
1,478,915

Operating income
 
74,036

 
88,497

 
180,549

 
195,340

Allowance for equity funds used during construction
 
1,962

 
3,482

 
8,239

 
8,908

Retirement defined benefits expense—other than service costs
 
(682
)
 
(1,421
)
 
(2,934
)
 
(4,279
)
Interest expense and other charges, net
 
(18,968
)
 
(16,907
)
 
(54,822
)
 
(52,625
)
Allowance for borrowed funds used during construction
 
1,006

 
1,339

 
3,815

 
3,371

Income before income taxes
 
57,354

 
74,990

 
134,847

 
150,715

Income taxes
 
7,144

 
27,005

 
24,995

 
54,623

Net income
 
50,210

 
47,985

 
109,852

 
96,092

Preferred stock dividends of subsidiaries
 
228

 
228

 
686

 
686

Net income attributable to Hawaiian Electric
 
49,982

 
47,757

 
109,166

 
95,406

Preferred stock dividends of Hawaiian Electric
 
270

 
270

 
810

 
810

Net income for common stock
 
$
49,712

 
$
47,487

 
$
108,356

 
$
94,596

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 September 30
 
Nine months ended September 30
(in thousands)
 
2018
 
2017
 
2018
 
2017
Net income for common stock
 
$
49,712

 
$
47,487

 
$
108,356

 
$
94,596

Other comprehensive income (loss), net of taxes:
 
 

 
 

 
 

 
 

Derivatives qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
Reclassification adjustment to net income, net of tax benefits of nil, nil, nil and $289, respectively
 

 

 

 
454

Retirement benefit plans:
 
 

 
 

 
 

 
 

Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,648, $2,306, $4,945 and $6,916, respectively
 
4,753

 
3,618

 
14,259

 
10,857

Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,639, $2,290, $4,916 and $6,872, respectively
 
(4,725
)
 
(3,596
)
 
(14,174
)
 
(10,790
)
Other comprehensive income, net of taxes
 
28

 
22

 
85

 
521

Comprehensive income attributable to Hawaiian Electric Company, Inc.
 
$
49,740

 
$
47,509

 
$
108,441

 
$
95,117

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.

6



Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value)
 
September 30, 2018

 
December 31, 2017

Assets
 
 

 
 

Property, plant and equipment
 
 
 
 
Utility property, plant and equipment
 
 

 
 

Land
 
$
53,515

 
$
53,177

Plant and equipment
 
6,720,046

 
6,401,040

Less accumulated depreciation
 
(2,567,708
)
 
(2,476,352
)
Construction in progress
 
193,086

 
263,094

Utility property, plant and equipment, net
 
4,398,939

 
4,240,959

Nonutility property, plant and equipment, less accumulated depreciation of $1,254 as of September 30, 2018 and $1,251 as of December 31, 2017
 
7,580

 
7,580

Total property, plant and equipment, net
 
4,406,519

 
4,248,539

Current assets
 
 

 
 

Cash and cash equivalents
 
7,224

 
12,517

Customer accounts receivable, net
 
178,785

 
127,889

Accrued unbilled revenues, net
 
127,702

 
107,054

Other accounts receivable, net
 
3,378

 
7,163

Fuel oil stock, at average cost
 
91,822

 
86,873

Materials and supplies, at average cost
 
58,507

 
54,397

Prepayments and other
 
60,732

 
25,355

Regulatory assets
 
89,430

 
88,390

Total current assets
 
617,580

 
509,638

Other long-term assets
 
 

 
 

Regulatory assets
 
741,494

 
780,907

Other
 
116,534

 
91,529

Total other long-term assets
 
858,028

 
872,436

Total assets
 
$
5,882,127

 
$
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 September 30, 2018 and December 31, 2017)
 
$
107,634

 
$
107,634

Premium on capital stock
 
614,667

 
614,675

Retained earnings
 
1,155,070

 
1,124,193

Accumulated other comprehensive loss, net of tax benefits
 
(1,134
)
 
(1,219
)
Common stock equity
 
1,876,237

 
1,845,283

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

 
34,293

Long-term debt, net
 
1,418,631

 
1,318,516

Total capitalization
 
3,329,161

 
3,198,092

Commitments and contingencies (Note 3)
 


 


Current liabilities
 
 

 
 

Current portion of long-term debt
 
49,993

 
49,963

Short-term borrowings from non-affiliates
 
85,913

 
4,999

Accounts payable
 
122,932

 
159,610

Interest and preferred dividends payable
 
28,258

 
22,575

Taxes accrued, including revenue taxes
 
195,776

 
199,101

Regulatory liabilities
 
10,159

 
3,401

Other
 
81,054

 
59,456

Total current liabilities
 
574,085

 
499,105

Deferred credits and other liabilities
 
 

 
 

Deferred income taxes
 
401,069

 
394,041

Regulatory liabilities
 
922,193

 
877,369

Unamortized tax credits
 
93,073

 
90,369

Defined benefit pension and other postretirement benefit plans liability
 
460,279

 
472,948

Other
 
102,267

 
98,689

Total deferred credits and other liabilities
 
1,978,881

 
1,933,416

Total capitalization and liabilities
 
$
5,882,127

 
$
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.

7



Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited)
 
 
 
Common stock
 
Premium
on
capital
 
Retained
 
Accumulated
other
comprehensive
 
 
(in thousands)
 
Shares
 
Amount
 
stock
 
earnings
 
income (loss)
 
Total
Balance, December 31, 2017
 
16,142

 
$
107,634

 
$
614,675

 
$
1,124,193

 
$
(1,219
)
 
$
1,845,283

Net income for common stock
 

 

 

 
108,356

 

 
108,356

Other comprehensive income, net of taxes
 

 

 

 

 
85

 
85

Common stock dividends
 

 

 

 
(77,479
)
 

 
(77,479
)
Common stock issuance expenses
 

 

 
(8
)
 

 

 
(8
)
Balance, September 30, 2018
 
16,142

 
$
107,634

 
$
614,667

 
$
1,155,070

 
$
(1,134
)
 
$
1,876,237

Balance, December 31, 2016
 
16,020

 
$
106,818

 
$
601,491

 
$
1,091,800

 
$
(322
)
 
$
1,799,787

Net income for common stock
 

 

 

 
94,596

 

 
94,596

Other comprehensive income, net of taxes
 

 

 

 

 
521

 
521

Common stock dividends
 

 

 

 
(65,825
)
 

 
(65,825
)
Common stock issuance expenses
 

 

 
(4
)
 

 

 
(4
)
Balance, September 30, 2017
 
16,020

 
$
106,818

 
$
601,487

 
$
1,120,571

 
$
199

 
$
1,829,075

 
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.



8



Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) 
 
 
Nine months ended September 30
(in thousands)
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net income
 
$
109,852


$
96,092

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


 

Depreciation of property, plant and equipment
 
151,810


144,578

Other amortization
 
19,823


6,118

Deferred income taxes
 
12,835


29,537

Allowance for equity funds used during construction
 
(8,239
)

(8,908
)
Other
 
(1,952
)
 
526

Changes in assets and liabilities
 
 


 

Increase in accounts receivable
 
(53,139
)

(8,087
)
Increase in accrued unbilled revenues
 
(20,648
)

(18,014
)
Decrease (increase) in fuel oil stock
 
(4,949
)

6,177

Increase in materials and supplies
 
(4,110
)

(2,280
)
Decrease (increase) in regulatory assets
 
(6,474
)

3,922

Increase (decrease) in accounts payable
 
(8,712
)

6,130

Change in prepaid and accrued income taxes, tax credits and revenue taxes
 
(37,137
)

5,291

Increase in defined benefit pension and other postretirement benefit plans liability
 
5,888


453

Change in other assets and liabilities
 
38,874


(2,662
)
Net cash provided by operating activities
 
193,722


258,873

Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(334,730
)
 
(306,975
)
Contributions in aid of construction
 
24,361

 
40,603

Other
 
9,811

 
8,114

Net cash used in investing activities
 
(300,558
)
 
(258,258
)
Cash flows from financing activities
 
 

 
 

Common stock dividends
 
(77,479
)
 
(65,825
)
Preferred stock dividends of Hawaiian Electric and subsidiaries
 
(1,496
)
 
(1,496
)
Proceeds from issuance of long-term debt
 
100,000

 
265,000

Funds transferred for redemption of special purpose revenue bonds
 

 
(265,000
)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
 
80,914

 
6,000

Other
 
(396
)
 
(3,593
)
Net cash provided by (used in) financing activities
 
101,543

 
(64,914
)
Net decrease in cash and cash equivalents
 
(5,293
)
 
(64,299
)
Cash and cash equivalents, beginning of period
 
12,517

 
74,286

Cash and cash equivalents, end of period
 
$
7,224

 
$
9,987


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.



9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1 · Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited condensed consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 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 September 30, 2018 and December 31, 2017 and the results of their operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 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.

10


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. 
The PUC approved in the Utilities’ rate cases, stipulated agreements to defer non-service cost components of NPPC and NPBC, which would have been capitalized prior to ASU No. 2017-07, as part of each utility’s pension tracking mechanisms. Such treatment is effective starting in 2018 and continues 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 each utility plans to seek to capitalize only the service components of NPPC and NPBC going forward, which reflects the requirements of ASU No. 2017-07.

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


 Thus, the adoption of ASU 2017-07 in the first quarter of 2018 does not have a net income impact. The following table summarizes the impact to the prior period financial statements of the adoption of ASU No. 2017-07:
 
Three months ended
September 30, 2017
 
Nine months ended
September 30, 2017
(in thousands)
As previously filed
Adjustment from adoption of ASU No. 2017-07
As currently reported
 
As previously filed
Adjustment from adoption of ASU No. 2017-07
As currently reported
HEI Condensed Consolidated Income Statement
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Electric utility
$
511,693

$
(1,421
)
$
510,272

 
$
1,483,194

$
(4,279
)
$
1,478,915

Bank
47,525

(212
)
47,313

 
146,754

(608
)
146,146

Other
4,422

(295
)
4,127

 
13,777

(823
)
12,954

Total expenses
563,640

(1,928
)
561,712

 
1,643,725

(5,710
)
1,638,015

Operating income
 
 
 
 
 
 
 
Electric utility
87,076

1,421

88,497

 
191,061

4,279

195,340

Bank
26,764

212

26,976

 
75,720

608

76,328

Other
(4,295
)
295

(4,000
)
 
(13,478
)
823

(12,655
)
Total operating income
109,545

1,928

111,473

 
253,303

5,710

259,013

Retirement defined benefits expense--other than service costs

(1,928
)
(1,928
)
 

(5,710
)
(5,710
)
Hawaiian Electric Condensed Consolidated Income Statement
 
 
 
 
Other operation and maintenance
100,102

(1,421
)
98,681

 
306,716

(4,279
)
302,437

Total expense
511,693

(1,421
)
510,272

 
1,483,194

(4,279
)
1,478,915

Operating income
87,076

1,421

88,497

 
191,061

4,279

195,340

Retirement defined benefits expense--other than service costs

(1,421
)
(1,421
)
 

(4,279
)
(4,279
)
Hawaiian Electric Condensed Consolidating Income Statement (in Note 3)
 
 
 
 
 
 
Hawaiian Electric (parent only)
 
 
 
 
 
 
 
Other operation and maintenance
66,221

(1,225
)
64,996

 
204,460

(3,812
)
200,648

Total expense
367,619

(1,225
)
366,394

 
1,058,382

(3,812
)
1,054,570

Operating income
61,648

1,225

62,873

 
128,142

3,812

131,954

Retirement defined benefits expense--other than service costs

(1,225
)
(1,225
)
 

(3,812
)
(3,812
)
Hawaii Electric Light
 
 
 
 
 
 
 
Other operation and maintenance
16,593

15

16,608

 
49,667

183

49,850

Total expense
71,292

15

71,307

 
212,692

183

212,875

Operating income
13,042

(15
)
13,027

 
32,334

(183
)
32,151

Retirement defined benefits expense--other than service costs

15

15

 

183

183

Maui Electric
 
 
 
 
 
 
 
Other operation and maintenance
17,288

(211
)
17,077

 
52,589

(650
)
51,939

Total expense
72,782

(211
)
72,571

 
212,120

(650
)
211,470

Operating income
12,416

211

12,627

 
30,636

650

31,286

Retirement defined benefits expense--other than service costs

(211
)
(211
)
 

(650
)
(650
)
ASB Statements of Income Data (in Note 4)
 
 
 
 
 
 
Compensation and employee benefits
23,724

(212
)
23,512

 
71,703

(608
)
71,095

Other expense
5,050

212

5,262

 
14,066

608

14,674


12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which is intended to improve and simplify accounting rules around hedge accounting. The amendments in ASU No. 2017-12 improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments also expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, but early adoption is permitted. The Company early adopted ASU No. 2017-12 in the second quarter of 2018, with an effective date of April 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize a liability to make lease payments (the lease liability) and a right-of-use asset, representing its right to use the underlying asset for the lease term, for all leases (except short-term leases) at the commencement date. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election and recognize lease expense for such leases generally on a straight-line basis over the lease term. For finance leases, a lessee is required to recognize interest on the lease liability separately from amortization of the right-of-use asset in the 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. The Company plans to elect the practical expedient package provided by the new standard under which the Company will not have to reassess whether any expired or existing contracts are or contain leases, whether there is a change in lease classification for any expired or existing leases under the new standard, or whether there were initial direct costs for any existing leases that would be treated differently under the new standard. The Company also plans to elect the additional adoption method to initially apply the new requirements as of the effective date, i.e., January 1, 2019, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, the Company will continue to report comparative periods presented in the financial statements in the period of adoption under ASC 840, including the required disclosures under ASC 840.
The Company is in the process of analyzing the measurement provisions of the new standard and their impact on its existing lease arrangements that fall within the scope of ASU No. 2016-02.
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.


13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Compensation-defined benefit plans. In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020. The Company is evaluating the impact of the adoption of ASU No. 2018-14 on its financial statement disclosures, but does not expect it to have a material impact.
Cloud computing implementation costs. In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU No. 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the impact of the adoption of ASU No. 2018-15 on its consolidated financial statements.
Condensed Consolidated Statements of Cash Flows error. Subsequent to the issuance of interim Condensed Consolidated Financial Statements (unaudited) for the quarter ended September 30, 2017, the Company and the Utilities identified an error within their previously reported interim Condensed Consolidated Statements of Cash Flows (unaudited). The timing of certain capital expenditure payments, including those that had retainage balances or were related to certain capitalized amounts were not reflected timely. The Company and the Utilities have evaluated the effect of the error, both qualitatively and quantitatively, and concluded that it is immaterial to their respective previously issued condensed consolidated financial statements. For the nine months ended September 30, 2017, the correction of this error resulted in increases 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 $29 million.
Reclassifications. Reclassifications made to prior year-end financial statements to conform to 2018 presentation include a reclassification of contributions in aid of construction (CIAC) balances to “Property, plant and equipment, net” and “Total property, plant and equipment, net” for the Company and Hawaiian Electric, respectively, which reduced the amounts of the respective balances.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)


Note 2 · Segment financial information
(in thousands) 
 
Electric utility
 
Bank
 
Other
 
Total
Three months ended September 30, 2018
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
687,396

 
$
80,496

 
$
156

 
$
768,048

Intersegment revenues (eliminations)
 
13

 

 
(13
)
 

Revenues
 
$
687,409

 
$
80,496

 
$
143

 
$
768,048

Income (loss) before income taxes
 
$
57,354

 
$
26,831

 
$
(6,952
)
 
$
77,233

Income taxes (benefit)
 
7,144

 
5,610

 
(1,892
)
 
10,862

Net income (loss)
 
50,210

 
21,221

 
(5,060
)
 
66,371

Preferred stock dividends of subsidiaries
 
498

 

 
(27
)
 
471

Net income (loss) for common stock
 
$
49,712

 
$
21,221

 
$
(5,033
)
 
$
65,900

Nine months ended September 30, 2018
 
 

 
 

 
 

 
 

Revenues from external customers
 
$
1,865,922

 
$
233,019

 
$
258

 
$
2,099,199

Intersegment revenues (eliminations)
 
40

 

 
(40
)
 

Revenues
 
$
1,865,962

 
$
233,019

 
$
218

 
$
2,099,199

Income (loss) before income taxes
 
$
134,847

 
$
77,845

 
$
(22,601
)
 
$
190,091

Income taxes (benefit)
 
24,995

 
17,103

 
(5,625
)
 
36,473

Net income (loss)
 
109,852

 
60,742

 
(16,976
)
 
153,618

Preferred stock dividends of subsidiaries
 
1,496

 

 
(79
)
 
1,417

Net income (loss) for common stock
 
$
108,356

 
$
60,742

 
$
(16,897
)
 
$
152,201

Total assets (at September 30, 2018)
 
$
5,882,127