Toward a
Sustainable Future
2017 Annual Report To Shareholders
C
In Hawai‘i, we’re keenly aware of our interdependence—with one another, with our
environment and within our economy. As one of Hawai‘i’s largest public companies,
we view it as our responsibility, and central to our mission of being a catalyst for a
better Hawai‘i, to work toward a sustainable future. And we believe the best way to get
there is in collaboration with our stakeholders and the communities we serve.
We are inspired by and honored to support organizations that are charting new
paths to a sustainable future, like the Polynesian Voyaging Society. In 2017, the
Polynesian Voyaging Society’s canoes Hokule‘a and Hikianalia, pictured on the front
cover, returned home to Hawai‘i, completing a three-year, worldwide journey to connect
cultures and motivate action to “Malama Honua” (care for our earth).
Cover photo: © Jake Marote Photography
Letter to Shareholders
“ Our company is privileged to be at the heart of our state’s ambitious
goal to use Hawai‘i’s abundance of renewable resources for 100%
of its energy needs. Such a goal cannot be achieved just by one
company alone. We must be a catalyst that helps Hawai‘i reimagine
an energy future that is clean and sustainable so we can work
together as a state to bring it to fruition.”
Constance H. Lau
HEI President and Chief Executive Officer
Dear Fellow Shareholders,
Across the HEI family of companies, our dedicated employees work toward a vibrant and
sustainable future for Hawai‘i every day. We envision that future as one that advances the
well-being of our communities, strengthens our local economy and protects our environment.
Our company is privileged to be at the heart of our state’s
support a strong economy by putting funds to work locally
ambitious goal to use Hawai‘i’s abundance of renewable
through loans and mortgages to Hawai‘i businesses and
resources for 100% of its energy needs. Such a goal cannot
families. And through employee volunteerism and company
be achieved just by one company alone. We must be a
contributions, we’re supporting organizations that work to
catalyst that helps Hawai‘i reimagine an energy future that is
preserve our unique environment, help our children reach
clean and sustainable so we can work together as a state to
their full potential and promote Hawai‘i’s economic growth for
bring it to fruition. We’re working with stakeholders to bring
the benefit of the broader community of which we are a part.
more clean energy onto our grids and to reduce fossil fuel
As HEI’s success is inextricably linked to Hawai‘i’s success,
use both at our utility and in other sectors to lower emissions
we believe this work is both the right thing to do for our state
and keep more dollars in our state. At our bank, we’re helping
and the best path to long-term value for our shareholders.
1
PACIFIC CURRENT
Provides electricity and related services for
95% of Hawai‘i’s population and operates
3 utilities on 5 separate islands.
3rd largest bank in Hawai‘i with
more than $6 billion in assets and
49 branches across the state.
Invests in clean energy and sustainability
projects as a part of HEI’s strategy to be
a catalyst for a better Hawai‘i.
1
We’re pursuing a broad portfolio of renewable
resources to reach Hawai‘i’s 100% clean energy goal
by 2045, bringing more renewable sources onto our
grids, adding battery storage to use more of the clean
energy that is generated and developing new customer
programs for rooftop solar and energy management.
D
N
E
G
E
L
P
A
M
Current Renewable Energy Projects
Selected Proposed Renewable Projects
Biofuels (B), Biomass (M), Geothermal (G),
Hydroelectric (H), Photovoltaic (P), Wind (W)
W
W
PB
P
P
P
B
M
P
P
Oahu
P
The 28 MW Waianae Solar
project, the largest in the
state thus far, went into
service in 2017.
Three grid-scale solar projects
under construction will add 110
MW to the grid starting in 2019.
30% of single family
homes on Oahu
had rooftop solar
in 2017.
Hawaiian Electric started
construction this year on a
20 MW solar facility at Joint Base
Pearl Harbor-Hickam under an
agreement with the U.S. Navy.
Hawaiian Electric
Together with the Hawai‘i Public Utilities Commission (PUC) and
launched our online Customer Interconnection Tool, a unique
portal enabling customers to apply online to interconnect their
other stakeholders, in 2017 we made major strides toward our
rooftop systems and follow the status of their applications from
goal of 100% renewable energy by 2045. The PUC accepted
start to finish. And the PUC approved our Community Based
our plan charting our near-term actions under our Power
Renewable Energy program to allow more of our customers,
Supply Improvement Plan, which is the roadmap that will guide
such as renters, condo owners and small businesses, to benefit
us to achieving that goal. Our regulators also approved our
from renewable energy.
companion grid modernization strategy, which sets forth a
framework for using the latest technology to build more resilient
The collective efforts of our utilities, our regulators, our
and renewable-ready island grids. We’re moving forward
customers and other stakeholders are bearing fruit. Solar
with Hawai‘i’s largest-ever procurement of renewable energy,
continued its strong growth in 2017 with more than 100
including storage, recently requesting bids for 300 megawatts
megawatts—enough to power 32,000 homes—added through
across our service territory. Our utilities have also introduced
customer-sited and grid-scale installations. By the end of the
new programs for private rooftop solar and battery storage to
year, approximately 17% of our residential customers had rooftop
offer customers more options for connecting renewables to
solar installed, compared to 1% nationally. In total in 2017, nearly
the grid. To make the process even easier for customers, we
27% of the electricity on our utilities’ grids came from renewable
Hawaiian Electric Renewable Portfolio Standard Progress
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2
EXCEEDED
2015 GOAL
OF 15%
18.2%
23.2%
21.3%
25.8%
26.8%
ON
COURSE
TO EXCEED
2020 GOAL
OF 30%
9.4%
9.5%
9.5%
13.9%
12.0%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2020
Biomass (including
municipal solid waste)
Hydro
Geothermal
Private, Grid-connected
renewables
Wind
Biofuels
Utility-scale Photovoltaic
and Solar Thermal
Toward a Better Environment
A new 2.7 MW solar plus battery
storage project is planned for
Molokai and will be the first
large-scale solar project on
the island.
A new 30 MW power plant to be fueled
by locally-grown biomass is planned
for the island.
W
Wind provided the
majority—62%—of
Maui’s renewable
energy in 2017.
P
Molokai
Lanai
P
H
W
BW
Maui
P
P
W
M
H
H
H
Hawai‘i Island
With a unique mix of geothermal,
solar, wind and hydroelectricity,
Hawai‘i Island had the highest
renewable use in the state—57%
in 2017.
G
Two new grid-scale solar farms
of 3 MW each are expected to
be in operation in 2018.
W
sources. Hawai‘i Island led the state at 57%, with Maui County
from customers, equipment manufacturers and others, we
and Oahu reaching 34% and 21%, respectively. Using more
created and filed with our regulators this spring a roadmap for
renewables means importing less oil. In 2017 we used 2.2 million
electrification of transportation and other sectors.
fewer barrels than in 2008, significantly reducing greenhouse gas
emissions and saving customers more than $150 million in fuel
In 2017, we had rate reviews underway at all three of our utilities.
cost1 during the year compared to 2008.
After six years without any base rate increases, the PUC
approved interim rate increases for our utilities on Hawai‘i Island
As a state, Hawai‘i is also a leader in transitioning ground
and Oahu, and is reviewing our rate request for our Maui utility.
transportation away from fossil fuels. Hawai‘i ranks second in the
These rate increases help us maintain our financial strength so
nation for electric vehicle sales per capita. Honolulu is in the midst
we can attract the capital needed to provide safe, reliable power
of a pilot project for the transition of bus transportation to an all-
to our customers, support Hawai‘i’s economic development
electric fleet. And the mayors of all Hawai‘i counties committed to
and achieve our state’s 100% renewable goal. As part of our
using 100% renewable fuel sources for ground transportation by
Oahu rate case, we filed with the PUC estimated customer
2045. Our companies continue to support electrification activities,
benefits from tax reform legislation that went into effect in
in transportation and beyond, to help achieve a more sustainable
year-end 2017. We are transferring the net benefits of the new,
future while reducing Hawai‘i’s total energy bill. Using insights
lower tax rate to our customers on all of the islands we serve.
Hawaiian Electric Cumulative Solar Growth
s
n
o
i
t
a
l
l
a
t
s
n
I
V
P
84,000
70,000
56,000
42,000
28,000
14,000
0
12
853
2008
24
2,899
2009
40
5,107
2010
695
586
487
389
301
171
79
10,424
22,550
40,159
50,985
60,522
69,817
74,184
2011
2012
2013
2014
2015
2016
2017
PV Installations
Installed PV (MW)
(1) Estimate based on 2017 oil usage and average price per barrel of $68.78 compared to 2008 oil usage.
)
W
M
(
V
P
d
e
l
l
a
t
s
n
I
720
600
480
360
240
120
0
3
American Savings Bank puts local customer
deposits to work in our state’s economy,
providing approximately $1.4 billion in credit to
Hawai‘i consumers and businesses in 2017.
American Savings Bank
Our team at American Savings Bank works hard to deliver
value for its customers and invest in Hawai‘i, supporting
Commitment Awards for American’s involvement in the
Rice Camp Senior Housing project on Kauai.
a thriving local economy. In 2017, the bank provided
American takes a long-term view toward building a
approximately $1.4 billion of credit to help its customers
sustainable local economy, supporting Hawai‘i’s emerging
achieve their goals, from buying or renovating their homes,
innovation sector through entrepreneurship initiatives
to educating their children, to expanding their businesses.
across the state. American’s Bank for Education KeikiCo
Contest encourages Hawai‘i’s elementary through high
American’s success at making banking easy for customers
school students to develop business plans to earn awards
led to deeper customer relationships and robust deposit
for their schools. Judging from the creative ideas the
growth, enabling us to make these investments in Hawai‘i. It
teams submitted, Hawai‘i’s economic future looks bright.
also led to stronger than expected financial performance in
2017, with net income of $67 million, 17% higher than 2016,
We look forward to the completion this year of American’s
higher net interest income, improved credit quality, and
new Honolulu campus, which it began building in 2017. The
better operating efficiency.
new campus will bring approximately 600 of the bank’s
teammates together at one of Hawai‘i’s most innovative,
American’s investment in Hawai‘i includes supporting critical
collaborative and modern worksites, resulting in greater
community needs, such as affordable housing. In 2017, the
efficiencies for the bank and its customers. It will include
American Bankers Association Foundation awarded the
state-of-the-art energy efficiency features and contribute to
bank an honorable mention in its prestigious Community
the revitalization of Honolulu’s Chinatown community.
New bank campus
at a glance:
• Home to approximately
600 bank teammates
• Innovative, collaborative,
modern space
• Eco-friendly features:
- 469 photovoltaic panels
- Electric vehicle charging stations
- Self-tinting View Dynamic Glass
- Responsive LED lighting
- Reclaimed wood furniture
• More than 2,400 hours spent on
community beautification in the
immediate campus area since 2015
4
Toward a Better Economy Hawaiian Electric, American Savings Bank and HEI employees
provided holiday cheer for Hawai‘i’s seriously ill children and
their families through the annual HUGS (Help, Understanding
& Group Support) holiday event.
Since 2015, bank teammates have dedicated
2,400+ volunteer hours to community
improvement projects in the area
surrounding the new bank campus.
Utility volunteers helped protect Hawai‘i’s
unique natural resources by removing invasive
plants in and around the ponds at Waimea Valley
as part of the Trust for Public Land’s “A Day on
the Land” community workday.
Pacific Current
In 2017 we created a new subsidiary, Pacific Current, to make
Community Commitment
HEI continues to be recognized as one of Hawai‘i’s most
clean energy and sustainability investments. We’re excited to
charitable companies. In 2017, our family of companies
be collaborating with the University of Hawai‘i (UH) and other
contributed more than $2.4 million in charitable donations
local partners to build solar energy plus storage projects
at UH Maui College and four UH Oahu Community College
campuses. These projects will help achieve the net-zero
energy by 2035 goal set by the UH system and the state’s
legislature and further advance Hawai‘i’s overall goal of 100%
and our employees devoted more than 23,000 hours to
volunteer work across the communities we serve.
Outlook for the Future
I am enthusiastic about the prospects for our companies
renewable energy by 2045. Pacific Current also purchased
as well as for our beautiful state of Hawai‘i. As we begin
the 60-megawatt Hamakua Energy power plant on Hawai‘i
2018, we have the foundations in place to make more
Island, which is critical in helping Hawai‘i Electric Light reliably
progress toward Hawai‘i’s 100% renewable energy goal.
integrate renewable energy. We’re pleased to be able to
Upon completion of American’s new campus, the bank
provide local Hawai‘i ownership for these important projects.
will be even better positioned to serve its customers and
2017 Financial Results
As was the case for many companies, in 2017 our
consolidated enterprise experienced some one-time impacts
support Hawai‘i’s economy. And with Pacific Current, we
have an additional platform from which to help carry out
our mission to be a catalyst for a better Hawai‘i.
due to federal tax reform. Including a $14.2 million reduction
On behalf of our more than 3,800 employees, our
due to tax reform and related items, our net income for the
executive team and our board, mahalo (thank you)
year was $165.3 million and our diluted earnings per share
to our shareholders for your continued support of
(EPS) was $1.52. Excluding the one-time tax reform impact,
our companies as we work toward a prosperous and
our core net income was $179.5 million and our core EPS
sustainable future for Hawai‘i.
was $1.65. Moving forward, American, like other banks,
will benefit from the new lower corporate tax rate, and that
Aloha,
will have a net positive financial impact for our consolidated
enterprise. And as mentioned above, customers of our
utilities will also benefit from tax reform, as we are transferring
to them the net benefits of our utilities’ lower tax rate. In
2017 we also continued our history of paying uninterrupted
dividends since 1901, ending the year with an attractive
dividend yield of 3.4%.
Constance H. Lau
President and Chief Executive Officer
Hawaiian Electric Industries, Inc.
5
Toward a Better Community Financial Highlights
Years ended December 31
(dollars in millions, except per share amounts)
2017
2016
2015
Operating income
$
338
$
348
$
323
Net income (loss) for common stock by segment
Electric utility
Bank
Other
Net income for common stock
Core1 net income for common stock
Diluted earnings per common share
Core1 diluted earnings per common share
Return on average common equity
Core1 return on average common equity
Dividends per common share
Annual dividend yield 2
Common shares (millions)
December 31
Weighted-average — basic
Weighted-average — diluted
120
67
(22)
165
179
1.52
1.65
7.9%
8.6%
1.24
3.4%
142
57
49
248
190
2.29
1.75
12.4%
9.5%
1.24
3.7%
136
55
(31)
160
176
1.50
1.65
8.6%
9.4%
1.24
4.3%
108.8
108.7
108.9
108.6
108.1
108.3
107.5
106.4
106.7
Total Return
(percent)
HEI
13.4
21.3
77.2
2017
3-Year
5-Year
10-Year
156.6
S&P 500
Index
Edison
Electric
Institute (EEI)
Index
KBW
Regional
Banking
Index
21.8
38.3
108.1
126.0
11.7
26.1
83.7
97.5
1.8
49.8
125.3
84.8
6
4
2
0
Dividend Yield
(percent)
4.8
4.0
4.3
3.7
3.8
3.7
3.3
3.4
3.4
3.4
Source: S&P Global Inc. / HEI NYSE symbol: HE
EEI Index
HEI
Sources: S&P Global Inc. and EEI
(1) Non-GAAP measure that excludes: for 2017, the tax reform act and related items; for 2016, merger and spin-off-related income and costs after-tax including costs related to
the terminated LNG contract, which required PUC approval of the merger with NextEra Energy, Inc.; and for 2015, after-tax merger and spin-off costs. See Appendix B to this
2017 Annual Report to Shareholders for the reconciliation of GAAP to non-GAAP measures.
2013
2014
2015
2016
2017
(2) At December 31.
6
Hawaiian Electric Industries, Inc.
2017 Annual Report to Shareholders
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number
1-8503
Registrant; State of Incorporation;
Address; and Telephone Number
HAWAIIAN ELECTRIC INDUSTRIES, INC., a Hawaii corporation
1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813
Telephone (808) 543-5662
I.R.S. Employer
Identification No.
99-0208097
1-4955
HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation
99-0040500
900 Richards Street, Honolulu, Hawaii 96813
Telephone (808) 543-7771
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Hawaiian Electric
Industries, Inc.
Hawaiian Electric
Company, Inc.
Title of each class
Common Stock, Without Par Value
Guarantee with respect to 6.50% Cumulative Quarterly
Income Preferred Securities Series 2004 (QUIPSSM)
of HECO Capital Trust III
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Hawaiian Electric Industries, Inc.
Hawaiian Electric Company, Inc.
Name of each exchange
on which registered
New York Stock Exchange
New York Stock Exchange
Title of each class
None
Cumulative Preferred Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Hawaiian Electric Industries Inc. Yes X No
Hawaiian Electric Company, Inc. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Hawaiian Electric Industries Inc. Yes No X
Hawaiian Electric Company, Inc. Yes No X
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
Hawaiian Electric Company, Inc. Yes X No
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
Hawaiian Electric Company, Inc. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Hawaiian Electric Industries Inc. Large accelerated filer X
Hawaiian Electric Company, Inc. Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
company)
Smaller reporting company
Emerging growth company
Accelerated filer
Non-accelerated filer X
(Do not check if a smaller reporting
company)
Smaller reporting company
Emerging growth company
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. Yes No
Hawaiian Electric Company, Inc. Yes No
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 No X
Hawaiian Electric Company, Inc. Yes No X
Aggregate market value
of the voting and non-
voting common equity
held by non-affiliates of
the registrants as of
June 30, 2017
Hawaiian Electric Industries, Inc. (HEI)
$3,522,474,037
Hawaiian Electric Company, Inc.
(Hawaiian Electric)
None
Number of shares of common stock
outstanding of the registrants as of
June 30, 2017
February 13, 2018
108,785,486
(Without par value)
108,841,157
(Without par value)
16,019,785
($6 2/3 par value)
16,142,216
($6 2/3 par value)
DOCUMENTS INCORPORATED BY REFERENCE
Hawaiian Electric’s Exhibit 99.1, consisting of:
Hawaiian Electric’s Directors, Executive Officers and Corporate Governance—Part III
Hawaiian Electric’s Executive Compensation—Part III
Hawaiian Electric’s Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—
Part III
Hawaiian Electric’s Certain Relationships and Related Transactions, and Director Independence—Part III
Hawaiian Electric’s Principal Accounting Fees and Services—Part III
Selected sections of Proxy Statement of HEI for the 2018 Annual Meeting of Shareholders to be filed-Part III
This combined Form 10-K represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian
Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each
registrant on its own behalf. Hawaiian Electric makes no representations as to any information not relating
to it or its subsidiaries.
TABLE OF CONTENTS
Glossary of Terms
Cautionary Note Regarding Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant (HEI)
PART I
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Page
ii
vi
1
26
37
37
37
37
37
39
41
43
80
83
182
182
183
183
184
185
185
186
186
198
i
Defined below are certain terms used in this report:
GLOSSARY OF TERMS
Terms
ABO
ADIT
AES Hawaii
AFS
AFUDC
AOCI
AOS
APBO
ARO
ASB
ASB Hawaii
ASC
ASU
Btu
CAA
CERCLA
Chevron
CIAC
CIP CT-1
CIS
Company
Consolidated Financial
Statements
Definitions
Accumulated benefit obligation
Accumulated deferred income tax balances
AES Hawaii, Inc.
Available-for-sale
Allowance for funds used during construction
Accumulated other comprehensive income (loss)
Adequacy of supply
Accumulated postretirement benefit obligation
Asset retirement obligations
American Savings Bank, F.S.B., a wholly-owned subsidiary of ASB Hawaii Inc.
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.
Accounting Standards Codification
Accounting Standards Update
British thermal unit
Clean Air Act
Comprehensive Environmental Response, Compensation and Liability Act
Chevron Products Company, which assigned their fuel oil supply contracts with the Utilities to Island
Energy Services, LLC.
Contributions in aid of construction
Campbell Industrial Park 110 MW combustion turbine No. 1
Customer Information System
When used in Hawaiian Electric Industries, Inc. sections and in the Notes to Consolidated Financial
Statements, “Company” refers to Hawaiian Electric Industries, Inc. and its direct and indirect
subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed
under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; HEI
Properties, Inc. (dissolved in 2015 and wound up in 2017); The Old Oahu Tug Service, Inc. (formerly
Hawaiian Tug & Barge Corp.); and Pacific Current, LLC and its subsidiaries, Hamakua Holdings, LLC
(and its subsidiary, Hamakua Energy, LLC) and Mauo Holdings, LLC (and its subsidiary, Mauo, LLC)
When used in Hawaiian Electric Company, Inc. sections, “Company” refers to Hawaiian Electric
Company, Inc. and its direct subsidiaries.
HEI’s and Hawaiian Electric's combined Consolidated Financial Statements, including notes, in Item 8 of
this Form 10-K
Consumer Advocate
Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
CBRE
D&O
DBEDT
DBF
DG
DER
Dodd-Frank Act
DOH
DRIP
DSM
ECAC
EEPS
EGU
EIP
EPA
EPS
ERISA
ERL
ERP/EAM
Community-based renewable energy
Decision and order from the PUC
State of Hawaii Department of Business Economic Development and Tourism
State of Hawaii Department of Budget and Finance
Distributed generation
Distributed energy resources
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Department of Health of the State of Hawaii
HEI Dividend Reinvestment and Stock Purchase Plan
Demand-side management
Energy cost adjustment clause
Energy Efficiency Portfolio Standards
Electrical generating unit
2010 Executive Incentive Plan, as amended
Environmental Protection Agency - federal
Earnings per share
Employee Retirement Income Security Act of 1974, as amended
Environmental Response Law of the State of Hawaii
Enterprise Resource Planning/Enterprise Asset Management
ii
Terms
Definitions
GLOSSARY OF TERMS (continued)
Exchange Act
FASB
FDIC
FDICIA
federal
FERC
FHLB
FHLMC
FICO
Fitch
FNMA
FRB
GAAP
GHG
GNMA
Gramm Act
Hawaii Electric Light
Hawaiian Electric
Securities Exchange Act of 1934
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation Improvement Act of 1991
U.S. Government
Federal Energy Regulatory Commission
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
Fair Isaac Corporation
Fitch Ratings, Inc.
Federal National Mortgage Association
Federal Reserve Board
Accounting principles generally accepted in the United States of America
Greenhouse gas
Government National Mortgage Association
Gramm-Leach-Bliley Act of 1999
Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
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.
Hawaiian Electric’s MD&A
Hawaiian Electric Company, Inc.’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K
HEI
HEI's 2018 Proxy Statement
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
Selected sections of Proxy Statement for the 2018 Annual Meeting of Shareholders of Hawaiian Electric
Industries, Inc. to be filed after the date of this Form 10-K, which are incorporated in this Form 10-K
by reference
HEI’s MD&A
Hawaiian Electric Industries, Inc.’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K
HEIPI
HEIRSP
HELOC
Hamakua Energy
HPOWER
HTB
HTM
IPP
IRP
IRR
Island Energy
Kalaeloa
kV
kW
KWH
LNG
LSFO
LTIP
HEI Properties, Inc. (dissolved in 2015 and wound up in 2017), a wholly-owned subsidiary of Hawaiian
Electric Industries, Inc.
Hawaiian Electric Industries Retirement Savings Plan
Home equity line of credit
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.
City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets
and the stock of its subsidiary, Young Brothers, Limited, and changed its name to The Old Oahu Tug
Services, Inc.
Held-to-maturity
Independent power producer
Integrated resource plan
Interest rate risk
Island Energy Services, LLC (a fuel oil supplier and subsidiary of One Rock Capital Partners, L.P.), who
purchased Chevron's Hawaii assets on November 1, 2016 and was assigned Chevron's fuel oil supply
contracts with the Utilities.
Kalaeloa Partners, L.P.
Kilovolt
Kilowatt/s (as applicable)
Kilowatthour/s (as applicable)
Liquefied natural gas
Low sulfur fuel oil
Long-term incentive plan
iii
Terms
Definitions
GLOSSARY OF TERMS (continued)
MATS
Maui Electric
MBtu
MD&A
Merger
Mercury and Air Toxics Standards
Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Million British thermal unit
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As provided in the Merger Agreement (see below), merger of NEE Acquisition Sub II, Inc. with and into
HEI, with HEI surviving, and then merger of HEI with and into NEE Acquisition Sub I, LLC, with NEE
Acquisition Sub I, LLC surviving as a wholly owned subsidiary of NextEra Energy, Inc.
Merger Agreement
Agreement and Plan of Merger by and among HEI, NextEra Energy, Inc., NEE Acquisition Sub II, Inc.
and NEE Acquisition Sub I, LLC, dated December 3, 2014 and terminated July 16, 2016
Moody’s
MOU
MPIR
MSFO
MSR
MW
MWh
NA
NAAQS
NEE
NEM
NII
NM
NPBC
NPPC
NQSO
O&M
OCC
OPEB
OTS
OTTI
PBO
PCB
PGV
PPA
PPAC
PSD
PSIPs
PUC
PURPA
PV
QF
QTL
RAM
RBA
Registrant
REIP
RFP
RHI
ROA
ROACE
RORB
RPS
S&P
SAR
Moody’s Investors Service’s
Memorandum of Understanding
Major Project Interim Recovery
Medium sulfur fuel oil
Mortgage servicing right
Megawatt/s (as applicable)
Megawatthour/s (as applicable)
Not applicable
National Ambient Air Quality Standard
NextEra Energy, Inc.
Net energy metering
Net interest income
Not meaningful
Net periodic benefits costs
Net periodic pension costs
Nonqualified stock options
Other operation and maintenance
Office of the Comptroller of the Currency
Postretirement benefits other than pensions
Office of Thrift Supervision, Department of Treasury
Other-than-temporary impairment
Projected benefit obligation
Polychlorinated biphenyls
Puna Geothermal Venture
Power purchase agreement
Purchased power adjustment clause
Prevention of Significant Deterioration
Power Supply Improvement Plans
Public Utilities Commission of the State of Hawaii
Public Utility Regulatory Policies Act of 1978
Photovoltaic
Qualifying Facility under the Public Utility Regulatory Policies Act of 1978
Qualified Thrift Lender
Rate adjustment mechanism
Revenue balancing account
Each of Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc.
Renewable Energy Infrastructure Program
Request for proposals
Renewable Hawaii, Inc., a wholly-owned nonregulated subsidiary of Hawaiian Electric Company, Inc.
Return on assets
Return on average common equity
Return on rate base
Renewable portfolio standards
Standard & Poor’s
Stock appreciation right
iv
Terms
SEC
See
SLHCs
SOIP
Spin-Off
SPRBs
ST
state
Tax Act
TDR
Tesoro
TOOTS
Trust III
UBC
Utilities
VIE
GLOSSARY OF TERMS (continued)
Definitions
Securities and Exchange Commission
Means the referenced material is incorporated by reference (or means refer to the referenced section in
this document or the referenced exhibit or other document)
Savings & Loan Holding Companies
1987 Stock Option and Incentive Plan, as amended. Shares of HEI common stock reserved for issuance
under the SOIP were deregistered and delisted in 2015.
The previously planned distribution to HEI shareholders of all of the common stock of ASB Hawaii
immediately prior to the Merger, which was terminated
Special Purpose Revenue Bonds
Steam turbine
State of Hawaii
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)
Troubled debt restructuring
Tesoro Hawaii Corporation dba BHP Petroleum Americas Refining Inc., a fuel oil supplier
The Old Oahu Tug Service, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc.
HECO Capital Trust III
Uluwehiokama Biofuels Corp., a wholly-owned nonregulated subsidiary of Hawaiian Electric
Company, Inc.
Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company,
Limited
Variable interest entity
v
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 and policy and regulation changes advanced or proposed by President Trump and his administration;
• weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of
climate change, such as more severe storms and rising sea levels), including their impact on the Company's and Utilities' operations
and the economy;
the timing and extent of changes in interest rates and the shape of the yield curve;
the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other
short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile
and challenging market conditions, and the cost of such financings, if available;
the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available
for sale;
changes in laws, regulations (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 in April 2014, its April 2014 inclinations on the future of Hawaii’s electric utilities and the
vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and
the state’s public policy goals, and subsequent orders of the PUC;
capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as
demand-side management (DSM), distributed generation (DG), combined heat and power or other firm capacity supply-side
resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;
fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy
cost adjustment clauses (ECACs);
the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased
power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than
pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining
kilowatthour sales;
the impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;
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);
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
vi
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 (e.g., Item 1A. Risk Factors) and in other reports 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.
vii
PART I
ITEM 1.
BUSINESS
HEI Consolidated
HEI and subsidiaries and lines of business. HEI was incorporated in 1981 under the laws of the State of Hawaii and is a
holding company with its principal subsidiaries engaged in electric utility and banking businesses operating primarily in the
State of Hawaii. HEI’s predecessor, Hawaiian Electric, was incorporated under the laws of the Kingdom of Hawaii (now the
State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, Hawaiian Electric became an HEI
subsidiary and common shareholders of Hawaiian Electric became common shareholders of HEI.
Hawaiian Electric and its operating utility subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric Light) and
Maui Electric Company, Limited (Maui Electric), are regulated electric public utilities. Hawaiian Electric also owns all the
common securities of HECO Capital Trust III (a Delaware statutory trust), which was formed to effect the issuance of $50
million of cumulative quarterly income preferred securities in 2004, for the benefit of Hawaiian Electric, Hawaii Electric Light
and Maui Electric. In December 2002, Hawaiian Electric formed a subsidiary, Renewable Hawaii, Inc., to invest in renewable
energy projects, but it has made no investments and currently is inactive. In September 2007, Hawaiian Electric formed another
subsidiary, Uluwehiokama Biofuels Corp. (UBC), to invest in a biodiesel refining plant to be built on the island of Maui, which
project has been terminated.
Besides Hawaiian Electric and its subsidiaries, HEI also currently owns directly or indirectly the following subsidiaries:
ASB Hawaii, Inc. (ASB Hawaii) (a holding company, formerly known as American Savings Holdings, Inc.) and its subsidiary,
American Savings Bank, F.S.B. (ASB); HEI Properties, Inc. (HEIPI), which was dissolved on December 11, 2015 and wound
up in June 2017; The Old Oahu Tug Service, Inc. (TOOTS); and Pacific Current, LLC, and its direct and indirect subsidiaries.
ASB, acquired by HEI in 1988, is one of the largest financial institutions in the State of Hawaii with assets of $6.8 billion
as of December 31, 2017.
TOOTS administers certain employee and retiree-related benefit programs and monitors matters related to its predecessor’s
former maritime freight transportation operations.
In September 2017, HEI formed new 100% owned subsidiaries—Pacific Current, LLC and its subsidiary Hamakua
Holdings, LLC and its subsidiary, Hamakua Energy, LLC. On November 24, 2017, Hamakua Energy, LLC acquired Hamakua
Energy Partners, L.P.’s 60-megawatt combined cycle power plant and other assets from affiliates of ArcLight Capital Partners, a
private equity firm focused on energy infrastructure investments. The plant sells power to Hawaii Electric Light under an
existing power purchase agreement (PPA) that expires in 2030.
In November 2017, HEI formed new 100% owned subsidiaries—Mauo Holdings, LLC (a 100% owned subsidiary of
Pacific Current, LLC) and its subsidiary, Mauo, LLC. See Note 2 in the Notes to the Consolidated Financial Statements.
Termination of proposed Merger. For information concerning the termination of HEI's Merger Agreement with NextEra
Energy, Inc., see Note 15 of the Consolidated Financial Statements.
Additional information. For additional information about HEI, see HEI’s MD&A, HEI’s “Quantitative and Qualitative
Disclosures about Market Risk” and HEI’s Consolidated Financial Statements, including the Notes thereto.
The Company’s website address is www.hei.com. The information on the Company’s website is not incorporated by
reference in this annual report on Form 10-K unless, and except to the extent, specifically incorporated herein by reference. HEI
and Hawaiian Electric currently make available free of charge through this website their annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports (since 1994) as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the SEC. HEI and Hawaiian Electric intend to
continue to use HEI’s website as a means of disclosing additional information. Such disclosures will be included on HEI’s
website in the Investor Relations section. Accordingly, investors should routinely monitor such portions of HEI’s website, in
addition to following HEI’s, Hawaiian Electric’s and ASB’s press releases, SEC filings and public conference calls and
webcasts. Investors may also wish to refer to the PUC website at dms.puc.hawaii.gov/dms in order to review documents filed
with and issued by the PUC. No information at the PUC website is incorporated herein by reference.
Commitments and contingencies. See “HEI Consolidated—Liquidity and capital resources –Selected contractual obligations
and commitments” in HEI’s MD&A, Hawaiian Electric’s “Commitments and contingencies” below and Note 4 of the
Consolidated Financial Statements.
1
Regulation. HEI and Hawaiian Electric are each holding companies within the meaning of the Public Utility Holding
Company Act of 2005 and implementing regulations, which requires holding companies and their subsidiaries to grant the
Federal Energy Regulatory Commission (FERC) access to books and records relating to FERC’s jurisdictional rates. FERC
granted HEI and Hawaiian Electric a waiver from its record retention, accounting and reporting requirements, effective
May 2006.
HEI is subject to an agreement entered into with the PUC (the PUC Agreement) which, among other things, requires PUC
approval of any change in control of HEI. The PUC Agreement also requires HEI to provide the PUC with periodic financial
information and other reports concerning intercompany transactions and other matters. It also prohibits the electric utilities from
loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without
PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common
stock. See “Restrictions on dividends and other distributions” and “Electric utility—Regulation” below.
HEI and ASB Hawaii are subject to Federal Reserve Board (FRB) regulation, supervision and reporting requirements as
savings and loan holding companies. As a result of the enactment of the Dodd-Frank Act, supervision and regulation of HEI and
ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally chartered
savings bank, moved to the Office of the Comptroller of the Currency (OCC) in July 2011. In the event the OCC has reasonable
cause to believe that any activity of HEI or ASB Hawaii constitutes a serious risk to the financial safety, soundness or stability
of ASB, the OCC is authorized to impose certain restrictions on HEI, ASB Hawaii and/or any of their subsidiaries. Possible
restrictions include precluding or limiting: (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or ASB
Hawaii, and their subsidiaries or affiliates; and (iii) any activities of ASB that might expose ASB to the liabilities of HEI and/or
ASB Hawaii and their other affiliates. See “Restrictions on dividends and other distributions” below.
Bank regulations generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in
activities other than those which are specifically enumerated in the regulations. However, the unitary savings and loan holding
company relationship among HEI, ASB Hawaii and ASB is “grandfathered” under the Gramm-Leach-Bliley Act of 1999
(Gramm Act) so that HEI and its subsidiaries are able to continue to engage in their current activities so long as ASB satisfies
the qualified thrift lender (QTL) test discussed under “Bank—Regulation—Qualified thrift lender test.” ASB met the QTL test
at all times during 2017; however, the failure of ASB to satisfy the QTL test in the future could result in a need for HEI to
divest ASB.
HEI is also affected by provisions of the Dodd-Frank Act relating to corporate governance and executive compensation,
including provisions requiring shareholder “say on pay” and “say on pay frequency” votes, mandating additional disclosures
concerning executive compensation and compensation consultants and advisors and further restricting proxy voting by brokers
in the absence of instructions. See “Bank—Legislation and regulation” in HEI’s MD&A for a discussion of effects of the Dodd-
Frank Act on HEI and ASB.
Restrictions on dividends and other distributions. HEI is a legal entity separate and distinct from its various subsidiaries.
As a holding company with no significant operations of its own, HEI’s principal sources of funds are dividends or other
distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its creditors
and shareholders, to participate in any distribution of the assets of any of its subsidiaries are subject to the prior claims of the
creditors and preferred shareholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are
recognized as primary.
The abilities of certain of HEI’s subsidiaries to pay dividends or make other distributions to HEI are subject to contractual
and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric
utility subsidiaries falls below 35% of the total capitalization of the electric utilities (including the current maturities of long-
term debt, but excluding short-term borrowings), the electric utility subsidiaries would, absent PUC approval, be restricted in
their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and
preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing
dividend restriction shall not be construed as relinquishing any right the PUC may have to review the dividend policies of the
electric utility subsidiaries. As of December 31, 2017, the consolidated common stock equity of HEI’s electric utility
subsidiaries was 57% of their total capitalization (as calculated for purposes of the PUC Agreement). As of December 31, 2017,
Hawaiian Electric and its subsidiaries had common stock equity of $1.8 billion of which approximately $755 million was not
available for transfer to HEI without regulatory approval.
The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a
limited exception for stock redemptions that do not result in any decrease in ASB’s capital and would improve ASB’s financial
condition, ASB is prohibited from declaring any dividends, making any other capital distributions, or paying a management fee
to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly
undercapitalized or critically undercapitalized. See “Bank—Regulation—Prompt corrective action.” All dividends are subject to
2
review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of
any dividend ASB proposes to declare and pay to ASB Hawaii and HEI. Also see Note 12 to the Consolidated Financial
Statements.
HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that
could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual
restrictions applicable to HEI and/or its subsidiaries will significantly affect the operations of HEI or its ability to pay dividends
on its common stock.
Environmental regulation. HEI and its subsidiaries are subject to federal and state statutes and governmental regulations
pertaining to water quality, air quality and other environmental factors. See the “Environmental regulation” discussions in the
“Electric utility” and “Bank” sections below.
Securities ratings. See the Fitch Ratings, Inc. (Fitch), Moody’s Investors Service’s (Moody’s) and Standard & Poor’s (S&P)
ratings of HEI’s and Hawaiian Electric’s securities and discussion under “Liquidity and capital resources” (both “HEI
Consolidated” and “Electric utility”) in HEI’s MD&A. These ratings reflect only the view, at the time the ratings are issued, of
the applicable rating agency from whom an explanation of the significance of such ratings may be obtained. There is no
assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered,
suspended or withdrawn entirely by the applicable rating agency if, in such rating agency’s judgment, circumstances so warrant.
Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability of
HEI’s and/or Hawaiian Electric’s securities, which could increase the cost of capital of HEI and Hawaiian Electric, and could
affect costs, including interest charges, under HEI's and/or Hawaiian Electric's debt securities and credit facilities. Neither HEI
nor Hawaiian Electric management can predict future rating agency actions or their effects on the future cost of capital of HEI
or Hawaiian Electric.
Revenue bonds have been issued by the Department of Budget and Finance of the State of Hawaii for the benefit of
Hawaiian Electric and its subsidiaries, but the source of their repayment are the unsecured obligations of Hawaiian Electric and
its subsidiaries under loan agreements and notes issued to the Department, including Hawaiian Electric’s guarantees of its
subsidiaries’ obligations. The payment of principal and interest due on revenue bonds currently outstanding and issued prior to
2009 are insured, but the ratings of these insurers have been withdrawn—see “Electric Utility—Liquidity and capital resources”
in HEI’s MD&A.
Employees. The Company had full-time employees as follows:
December 31
HEI
Hawaiian Electric and its subsidiaries
ASB
2017
41
2,724
1,115
3,880
2016
41
2,662
1,093
3,796
2015
39
2,727
1,152
3,918
2014
44
2,759
1,162
3,965
2013
43
2,764
1,159
3,966
The employees of HEI and its direct and indirect subsidiaries, other than the electric utilities, are not covered by any
collective bargaining agreement. The International Brotherhood of Electrical Workers Local 1260 represents roughly half of the
Utilities' workforce covered by a collective bargaining agreement that expires on October 31, 2018.
Properties. HEI leases office space from nonaffiliated lessors in downtown Honolulu under leases that expire in
December 2022. See the discussions under “Electric Utility” and “Bank” below for a description of properties they own and
lease.
Hamakua Energy, LLC owns a total of approximately 93 acres located on the Hamakua coast on the island of Hawaii. Its
power plant is situated on approximately 59 acres and the remaining 34 acres includes surrounding parcels of which 30 acres
are located on the ocean front.
Electric utility
Hawaiian Electric and subsidiaries and service areas. Hawaiian Electric, Hawaii Electric Light and Maui Electric (Utilities)
are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of
electricity on the islands of Oahu; Hawaii; and Maui, Lanai and Molokai, respectively. Hawaiian Electric acquired Maui
Electric in 1968 and Hawaii Electric Light in 1970. In 2017, the electric utilities’ revenues and net income amounted to
approximately 88% and 73% respectively, of HEI’s consolidated revenues and net income, compared to approximately 88%
and 58% (impacted by a merger termination fee and other impacts at HEI corporate) in 2016 and approximately 90% and 85%
in 2015, respectively.
3
The islands of Oahu, Hawaii, Maui, Lanai and Molokai have a combined population estimated at 1.4 million, or
approximately 95% of the total population of the State of Hawaii, and comprise a service area of 5,815 square miles. The
principal communities served include Honolulu (on Oahu), Hilo and Kona (on Hawaii) and Wailuku and Kahului (on Maui).
The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural
operations. The state has granted Hawaiian Electric, Hawaii Electric Light and Maui Electric nonexclusive franchises, which
authorize the Utilities to construct, operate and maintain facilities over and under public streets and sidewalks. Each of these
franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed.
Sales of electricity.
Years ended December 31
2017
2016
2015
(dollars in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
* As of December 31.
Customer
accounts*
Electric sales
revenues
Customer
accounts*
Electric sales
revenues
Customer
accounts*
Electric sales
revenues
304,948
$
1,592,016
304,261
$
1,466,225
302,958
$
1,636,245
85,925
71,352
331,697
323,882
85,029
70,872
309,521
306,767
84,309
70,533
343,843
343,722
462,225
$
2,247,595
460,162
$
2,082,513
457,800
$
2,323,810
Seasonality. Kilowatthour (KWH) sales of the Utilities follow a seasonal pattern, but they do not experience extreme
seasonal variations due to extreme weather variations experienced by some electric utilities on the U.S. mainland. KWH sales
in Hawaii tend to increase in the warmer, more humid months as a result of increased demand for air conditioning.
Significant customers. The Utilities derived approximately 11% of their operating revenues in 2017, 2016 and 2015 from
the sale of electricity to various federal government agencies.
Under the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007 and/or executive orders:
(1) federal agencies must establish energy conservation goals for federally funded programs, (2) goals were set to reduce
federal agencies’ energy consumption by 3% per year up to 30% by fiscal year 2015 relative to fiscal year 2003, and
(3) renewable energy goals were established for electricity consumed by federal agencies. Executive Order 13693 signed in
March 2015, updated the earlier provisions and adopted new reduction targets for years after fiscal year 2015, requiring federal
buildings to achieve a 2.5% reduction in consumption annually. Hawaiian Electric continues to work with various federal
agencies to implement measures that will help them achieve their energy reduction and renewable energy objectives.
State of Hawaii and U.S. Department of Energy MOU. On September 15, 2014, the State of Hawaii and the U.S.
Department of Energy executed a Memorandum of Understanding (MOU) recognizing that Hawaii is embarking on the next
phase of its clean energy future. The MOU provides the framework for a comprehensive, sustained effort to better realize its
vast renewable energy potential and allow Hawaii to push forward in three main areas: the power sector, transportation and
energy efficiency. This next phase is focused on stimulating deployment of clean energy infrastructure as a catalyst for
economic growth, energy system innovation and test bed investments.
Energy Efficiency. The PUC issued an order on January 3, 2012 approving a framework for Energy Efficiency
Portfolio Standards (EEPS) that set 2008 as the initial base year for evaluation and linearly allocated the 2030 goal to interim
incremental reduction goals of 1,375 GWH by 2015 and 975 GWH by each of the years 2020, 2025 and 2030. These goals may
be revised through goal evaluations scheduled every five years or as the result of recommendations by an EEPS technical
working group (TWG) for consideration by the PUC. Pursuant to the PUC's EEPS framework, the PUC has contracted with a
public benefits fee administrator to operate and manage energy efficiency programs, and any incentive and/or penalty
mechanisms related to the achievement of the goals are at the discretion of the PUC.
The Division of Consumer Advocacy’s 2017 Compliance Resolution Fund Report states that it appears Hawaii has met its
2016 Renewable Portfolio Standards and EEPS goals and is progressing towards its 2020 goals. The EEPS has contributed to
lower sales; however, the implementation of decoupling has delinked sales and revenues. See "Decoupling" in Note 3 of the
Consolidated Financial Statements.
Electrification of Transportation. In December 2016, a coalition of eight public, private and non-profit organizations
came together to form Drive Electric Hawaii and entered into a MOU that put forth a shared a vision of supporting and
promoting electrification transportation. Drive Electric Hawaii seeks to promote the use of electric vehicles, cuts fossil-fuel
transportation and adds more renewable energy through collaboration on education, promotion, advocacy and infrastructure.
4
Neither HEI nor Hawaiian Electric management can predict with certainty the impact of these or other governmental
mandates or MOU's on HEI’s or Hawaiian Electric’s future results of operations, financial condition or liquidity.
Selected consolidated electric utility operating statistics.
Years ended December 31
KWH sales (millions)
Residential
Commercial
Large light and power
Other
KWH net generated and purchased (millions)
Net generated
Purchased
Losses and system uses (%)
Energy supply (December 31)
Net generating capability—MW
Firm and other purchased capability—MW
Net peak demand—MW1
Btu per net KWH generated
Average fuel oil cost per MBtu (cents)
Customer accounts (December 31)
Residential
Commercial
Large light and power
Other
Electric revenues (thousands)
Residential
Commercial
Large light and power
Other
Average revenue per KWH sold (cents)
Residential
Commercial
Large light and power
Other
Residential statistics
2017
2016
2015
2014
2013
2,334.5
2,867.9
3,443.3
44.7
8,690.4
4,888.4
4,247.1
9,135.5
4.7
1,673
551
2,224
1,584
10,812
1,114.3
406,241
53,732
656
1,596
2,332.7
2,911.5
3,555.1
46.0
8,845.3
4,940.4
4,349.1
9,289.5
4.6
1,669
551
2,220
1,593
10,710
862.3
402,818
55,089
670
1,585
2,396.5
2,977.8
3,532.9
49.3
8,956.5
5,124.5
4,308.3
9,432.8
4.8
1,669
555
2,224
1,610
10,632
1,206.5
400,655
54,878
659
1,608
2,379.7
3,022.0
3,524.5
50.0
8,976.2
5,131.3
4,306.7
9,438.0
4.7
1,787
575
2,362
1,554
10,613
2,087.6
398,256
54,924
596
1,640
2,450.9
3,105.9
3,462.7
50.0
9,069.5
5,352.0
4,195.2
9,547.2
4.8
1,787
567
2,354
1,535
10,570
2,103.2
394,910
54,616
556
1,660
462,225
460,162
457,800
455,416
451,742
$
691,857
$
638,776
$
709,886
$
879,605
$
892,438
766,921
776,808
12,009
711,553
720,878
11,306
798,202
802,366
13,356
1,027,588
1,051,119
17,163
1,044,166
1,015,079
17,008
$
2,247,595
$
2,082,513
$
2,323,810
$
2,975,475
$
2,968,691
25.86
29.64
26.74
22.56
26.82
23.54
27.38
24.44
20.28
24.61
25.90
29.62
26.81
22.71
27.05
33.15
36.96
34.00
29.82
34.36
32.73
36.41
33.62
29.31
34.02
6,220
2,265
Average annual use per customer account (KWH)
5,779
5,806
5,996
6,000
Average annual revenue per customer account
$
1,713
$
1,590
$
1,776
$
2,218
$
Average number of customer accounts
403,983
401,796
399,674
396,640
394,024
1
Sum of the net peak demands on all islands served, noncoincident and nonintegrated.
5
Generation statistics. The following table contains certain generation statistics as of and for the year ended December 31,
2017. The net generating and firm purchased capability available for operation at any given time may be more or less than
shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Hawaiian
Electric
Island of
Oahu
Hawaii
Electric
Light
Island of
Hawaii
Maui Electric
Island of
Maui
Island of
Lanai
Island of
Molokai
Total
999.5
—
101.8
—
—
121.0
456.5
1,678.8
50.1
29.5
—
46.3
56.3
—
94.6
35.9
96.8
—
—
113.6
—
—
—
10.1
—
—
—
—
—
—
9.6
—
2.2
—
—
—
1,085.5
146.0
101.8
48.5
169.9
121.0
551.1
276.8
246.3
10.1
11.8
2,223.8
Net generating and firm purchased capability
(MW) as of December 31, 20171
Conventional oil-fired steam units
Diesel
Combustion turbines (peaking units)
Other combustion turbines
Combined-cycle unit
Biodiesel
Firm contract power2
Net peak demand (MW)3
Reserve margin
Annual load factor
KWH net generated and purchased (millions)
6,854.7
1,123.6
1,094.7
1,184.0
190.5
198.5
41.0%
66.1%
45.3%
67.3%
25.0%
63.0%
5.4
87.0%
66.2%
31.4
5.9
1,584.3
100.0%
60.2%
42.0%
65.8%
31.1
9,135.5
1
2
3
Hawaiian Electric units at normal ratings; Hawaii Electric Light and Maui Electric units at reserve ratings.
Nonutility generators - Hawaiian Electric: 208 MW (Kalaeloa Partners, L.P., oil-fired), 180 MW (AES Hawaii, Inc., coal-fired) and 68.5
MW (HPOWER, refuse-fired); Hawaii Electric Light: 34.6 MW (Puna Geothermal Venture, geothermal) and 60 MW (Hamakua Energy,
LLC, oil-fired).
Noncoincident and nonintegrated.
Generating reliability and reserve margin. Hawaiian Electric serves the island of Oahu and Hawaii Electric Light serves the
island of Hawaii. Maui Electric has three separate electrical systems—one each on the islands of Maui, Molokai and Lanai.
Hawaiian Electric, Hawaii Electric Light and Maui Electric have isolated electrical systems that are not currently
interconnected to each other or to any other electrical grid and, thus, each maintains a higher level of reserve generation than is
typically carried by interconnected mainland U.S. utilities, which are able to share reserve capacity. These higher levels of
reserve margins are required to meet peak electric demands, to provide for scheduled maintenance of generating units
(including the units operated by IPPs relied upon for firm capacity) and to allow for the forced outage of the largest generating
unit in the system.
See “Adequacy of supply” in HEI’s MD&A under “Electric utility.”
Nonutility generation. The Utilities have supported state and federal energy policies which encourage the development of
renewable energy sources that reduce the use of fuel oil as well as the development of qualifying facilities. The Utilities'
renewable energy sources and potential sources range from wind, solar, photovoltaic, geothermal, wave and hydroelectric
power to energy produced by the municipal waste and other biofuels.
The rate schedules of the electric utilities contain ECACs and PPACs that allow them to recover costs of fuel and purchase
power expenses. The PUC approved the PPACs for the first time for Hawaiian Electric, Hawaii Electric Light and Maui Electric
in March 2011, February 2012 and May 2012, respectively.
In addition to the firm capacity PPAs described below, the electric utilities also purchase energy on an as-available basis
directly from nonutility generators and through its Feed-In Tariff programs. The electric utilities also receive renewable energy
from customers under its Net Energy Metering and Customer Grid Supply programs.
The PUC has allowed rate recovery for the firm capacity and purchased energy costs for the electric utilities’ approved firm
capacity and as-available energy PPAs.
6
Hawaiian Electric firm capacity PPAs. Hawaiian Electric currently has three major PPAs that provide a total of 456.5 MW
of firm capacity, representing 27% of Hawaiian Electric’s total net generating and firm purchased capacity on the Island of
Oahu as of December 31, 2017.
In March 1988, Hawaiian Electric entered into a PPA with AES Barbers Point, Inc. (now known as AES Hawaii, Inc. (AES
Hawaii)), a Hawaii-based, indirect subsidiary of The AES Corporation. The agreement with AES Hawaii, as amended (through
Amendment No. 2), provides that, for a period of 30 years beginning September 1992, Hawaiian Electric will purchase 180
megawatts (MW) of firm capacity. The AES Hawaii coal-fired cogeneration plant utilizes a “clean coal” technology and is
designed to sell sufficient steam to be a “Qualifying Facility” (QF) under the Public Utility Regulatory Policies Act of 1978
(PURPA). See “Commitments and contingencies–Power purchase agreements–AES Hawaii, Inc.” in Note 3 to the Consolidated
Financial Statements for an update regarding this PPA.
In October 1988, Hawaiian Electric entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited
partnership, which, through affiliates, contracted to design, build, operate and maintain a QF. The agreement with Kalaeloa, as
amended, provided that Hawaiian Electric would purchase 180 MW of firm capacity for a period of 25 years beginning in
May 1991 and terminating in May 2016. The Kalaeloa facility is a combined-cycle operation, consisting of two oil-fired
combustion turbines burning low sulfur fuel oil (LSFO) and a steam turbine that utilizes waste heat from the combustion
turbines. Following two additional amendments, effective in 2005, Kalaeloa currently supplies Hawaiian Electric with 208 MW
of firm capacity. In January 2011, Hawaiian Electric initiated renegotiation of the agreement with Kalaeloa (exempt from the
PUC’s Competitive Bidding Framework). The PPA, as amended, automatically extends on a month-to-month basis as long as
the parties are still negotiating in good faith. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the
PPA prior to October 31, 2018. This agreement complements continued negotiations between the parties and accounts for time
needed for PUC approval of a negotiated resolution.
Hawaiian Electric also entered into a PPA in March 1986 and a firm capacity amendment in April 1991 with the City and
County of Honolulu with respect to a refuse-fired plant (HPOWER). Under the amended PPA, the HPOWER facility supplied
Hawaiian Electric with 46 MW of firm capacity. In May 2012, Hawaiian Electric entered into an amended and restated PPA
with the City and County of Honolulu to purchase additional firm capacity (including the then existing 46 MW) from the
expanded HPOWER facility for a term of 20 years from the commercial operation date (April 2, 2013). Under the amended and
restated PPA, which the PUC approved, Hawaiian Electric purchases 68.5 MW of firm capacity.
Hawaii Electric Light firm capacity PPAs. As of December 31, 2017, Hawaii Electric Light has two major PPAs that
provide a total of for 94.6 MW of firm capacity, representing 34% of Hawaii Electric Light's total net generating and firm
purchased capacity on the Island of Hawaii as of December 31, 2017.
Hawaii Electric Light has a 35-year PPA with Puna Geothermal Venture (PGV) for 30 MW of firm capacity from its
geothermal steam facility, which will expire on December 31, 2027. In February 2011, Hawaii Electric Light and PGV
amended the PPA for the pricing on a portion of the energy payments and entered into a new PPA for Hawaii Electric Light to
acquire an additional 8 MW of firm, dispatchable capacity. The PUC approved the amendment and the new PPA in December
2011. PGV’s expansion became commercially operational in March 2012 for a total facility capacity of 34.6 MW.
In October 1997, Hawaii Electric Light entered into an agreement with Encogen, which was succeeded by Hamakua
Energy Partners, L. P. (HEP). The agreement requires Hawaii Electric Light to purchase up to 60 MW (net) of firm capacity for
a period of 30 years, expiring on December 31, 2030. The dual-train combined-cycle (DTCC) facility, which primarily burns
naphtha (a mixture of liquid hydrocarbons), consists of two oil-fired combustion turbines and a steam turbine that utilizes waste
heat from the combustion turbines. In December 2015, Hawaii Electric Light signed an Asset Purchase Agreement (APA) to
purchase the 60 MW generating plant from HEP, and in February 2016, filed an application with the PUC requesting approval
of the APA. In May 2017, the PUC denied the application on the grounds that customer benefits were not sufficiently
demonstrated to justify the purchase and in July 2017, the APA was terminated. In November 2017, Hamakua Energy, LLC, an
indirect subsidiary of HEI, purchased the plant from HEP.
In May 2012, Hawaii Electric Light signed a PPA with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable,
dispatchable firm capacity fueled by locally grown biomass on the island of Hawaii. This PPA was approved by the PUC in
December 2013. Per the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016, however, Hu Honua
encountered construction delays, failed to meet its obligations under the PPA, and failed to provide adequate assurances that it
could perform or had the financial means to perform. Hawaii Electric Light terminated the PPA on March 1, 2016. On
November 30, 2016, Hu Honua filed a civil complaint in the United States District Court for the District of Hawaii that
included claims purportedly arising out of the termination of Hu Honua’s PPA. On May 26, 2017, Hawaii Electric Light and Hu
Honua entered into a settlement agreement to settle 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. The Amended and Restated PPA was approved by the PUC on July 28, 2017. On August 25, 2017,
7
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.
Maui Electric firm capacity PPAs. Maui Electric has no firm power PPAs.
Fuel oil usage and supply. The rate schedules of the Utilities include ECACs under which electric rates (and consequently the
revenues of the electric utility subsidiaries generally) are adjusted for changes in the weighted-average price paid for fuel oil
and certain components of purchased power, and the relative amounts of company-generated power and purchased power. See
discussion of rates and issues relating to the ECAC below under “Rates,” and “Electric utility—Certain factors that may affect
future results and financial condition—Regulation of electric utility rates” and “Electric utility—Material estimates and critical
accounting policies–Revenues” in HEI’s MD&A.
Hawaiian Electric’s steam generating units consume low sulfur fuel oil (LSFO) and Hawaiian Electric’s combustion
turbine peaking units consume diesel, except for Hawaiian Electric's Campbell Industrial Park generating facility which
operates exclusively on B99 grade biodiesel.
Hawaii Electric Light’s and Maui Electric’s steam generating units burn industrial fuel oil (IFO) and Hawaii Electric
Light’s and Maui Electric’s Maui combustion turbine generating units burn diesel. Hawaii Electric Light’s and Maui Electric’s
Maui, Molokai, and Lanai diesel engine generating units burn ultra-low-sulfur diesel. All of the fuel purchased for the
Utilities(except for fuel purchased for Lanai) is purchased under the new fuel supply contracts with Island Energy Services,
LLC (previously with Chevron Products Company), which began on January 1, 2017 and will terminate at the end of 2019.
See the fuel oil commitments information set forth in the “Fuel contracts” section in Note 3 of the Consolidated Financial
Statements.
The following table sets forth the average cost of fuel oil used by Hawaiian Electric, Hawaii Electric Light and Maui
Electric to generate electricity in 2017, 2016 and 2015:
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Consolidated
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
2017
2016
2015
67.96
51.30
71.86
1,087.1
815.2
1,144.8
68.02
53.27
79.03
1,125.2
876.9
1,307.3
72.29
62.21
84.38
1,214.6
1,048.6
1,425.7
68.78
53.49
74.71
1,114.3
862.3
1,206.5
The average per-unit cost of fuel oil consumed to generate electricity for Hawaiian Electric, Hawaii Electric Light and
Maui Electric reflects a different volume mix of fuel types and grades as follows:
2017
2016
2015
Hawaiian Electric
Hawaii Electric Light
% LSFO % Biodiesel/Diesel
% IFO
% Diesel
Maui Electric
% IFO
% Diesel
95
97
96
5
3
4
43
49
43
57
51
57
23
19
16
77
81
84
In December 2000, Hawaii Electric Light and Maui Electric executed contracts of private carriage with Hawaiian
Interisland Towing, Inc. for the employment of a double-hull tank barge for the shipment of industrial fuel oil (IFO) and diesel
supplies from their fuel suppliers’ facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively,
commencing January 1, 2002. The contracts have been extended through December 31, 2021. In July 2011, the carriage
contracts were assigned to Kirby Corporation (Kirby), which provides refined petroleum and other products for marine
transportation, distribution and logistics services in the U.S. domestic marine transportation industry.
Kirby never takes title to the fuel oil or diesel fuel, but does have custody and control while the fuel is in transit from Oahu.
If there were an oil spill in transit, Kirby is generally contractually obligated to indemnify Hawaii Electric Light and/or Maui
Electric for resulting clean-up costs, fines and damages. Kirby maintains liability insurance coverage for an amount in excess of
$1 billion for oil spill related damage. State law provides a cap of $700 million on liability for releases of heavy fuel oil
transported interisland by tank barge. In the event of a release, Hawaii Electric Light and/or Maui Electric may be responsible
for any clean-up, damages, and/or fines that Kirby and its insurance carrier do not cover.
The prices that Hawaiian Electric, Hawaii Electric Light and Maui Electric pay for purchased energy from certain older
nonutility generators are generally linked to the price of oil. The AES Hawaii energy prices vary primarily with an inflation
index. The energy prices for Kalaeloa, which purchases LSFO from Par Hawaii Refining, LLC (PAR), vary primarily with the
price of Asian crude oil. A portion of PGV energy prices are based on the electric utilities’ respective short-run avoided energy
8
cost rates (which vary with their composite fuel costs), subject to minimum floor rates specified in their approved PPA.
Hamakua Energy energy prices vary primarily with the cost of naphtha.
The Utilities estimate that the net energy they generate or purchase based on fossil fuel oil in 2018 will be comparable to
68% in 2017. Hawaiian Electric generally maintains an average system fuel inventory level equivalent to 47 days of forward
consumption. Hawaii Electric Light and Maui Electric generally maintain an average system fuel inventory level equivalent to
approximately one month’s supply of both MSFO and diesel. The PPAs with AES Hawaii and Hamakua Energy require that
they maintain certain minimum fuel inventory levels.
Rates. Hawaiian Electric, Hawaii Electric Light and Maui Electric are subject to the regulatory jurisdiction of the PUC with
respect to rates, issuance of securities, accounting and certain other matters. See “Regulation” below.
General rate increases require the prior approval of the PUC after public and contested case hearings. Rates for Hawaiian
Electric and its subsidiaries include ECACs and PPACs. Under current law and practices, specific and separate PUC approval is
not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. PURPA
requires the PUC to periodically review the ECACs of electric and gas utilities in the state, and such clauses, as well as the rates
charged by the utilities generally, are subject to change. PUC approval is also required for all surcharges and adjustments before
they are reflected in rates.
See “Electric utility–Most recent rate proceedings,” “Electric utility–Certain factors that may affect future results and
financial condition–Regulation of electric utility rates” and “Electric utility–Material estimates and critical accounting policies–
Revenues” in HEI’s MD&A and “Interim increases” and “Utility projects” under “Commitments and contingencies” in Note 3
of the Consolidated Financial Statements.
Public Utilities Commission and Division of Consumer Advocacy of the Department of Commerce and Consumer
Affairs of the State of Hawaii. Randall Y. Iwase is the Chair of the PUC (for a term that will expire in June 2020) and was
formerly a state legislator, Honolulu city council member, supervising deputy attorney general, and Chair of the Hawaii State
Tax Review Commission. The other commissioners are Lorraine H. Akiba (for a term that will expire in June 2018), who
previously was an attorney in private practice who earlier served as the Director of the State Department of Labor and Industrial
Relations, and James Griffin (for a term that will expire in June 2022), who was previously a faculty member at the Hawaii
Natural Energy Institute before serving as the PUC's Chief of Policy and Research.
The Division of Consumer Advocacy is led by its Executive Director, Dean Nishina, who most recently served as the
division's Public Utilities Administrator.
Competition. See “Electric utility–Certain factors that may affect future results and financial condition–Competition” in HEI’s
MD&A.
Electric and magnetic fields. The generation, transmission and use of electricity produces low-frequency (50Hz-60Hz)
electrical and magnetic fields (EMF). While EMF has been classified as a possible human carcinogen by more than one public
health organization and remains the subject of ongoing studies and evaluations, no definite causal relationship between EMF
and health risks has been clearly demonstrated to date and there are no federal standards in the U.S. limiting occupational or
residential exposure to 50Hz-60Hz EMF. The Utilities are continuing to monitor the ongoing research and continue to
participate in utility industry funded studies on EMF and, where technically feasible and economically reasonable, continue to
pursue a policy of prudent avoidance in the design and installation of new transmission and distribution facilities. Management
cannot predict the impact, if any, the EMF issue may have on the Utilities in the future.
Global climate change and greenhouse gas (GHG) emissions reduction. The Utilities share the concerns of many regarding
the potential effects of global climate changes and the human contributions to this phenomenon, including burning of fossil
fuels for electricity production, transportation, manufacturing and agricultural activities, as well as deforestation. Recognizing
that effectively addressing global climate changes requires commitment by the private sector, all levels of government, and the
public, the Utilities are committed to taking direct action to mitigate GHG emissions from its operations. See “Electric utility
risk–Global climate change and greenhouse gas emissions reduction” under “Item 1A. Risk factors.”
Legislation. See “Electric utility–Legislation and regulation” in HEI’s MD&A.
Commitments and contingencies. See “Selected contractual obligations and commitments” in Hawaiian Electric’s MD&A
and “Electric utility–Certain factors that may affect future results and financial condition–Other regulatory and permitting
contingencies” in HEI’s MD&A, Item 1A. Risk Factors, and Note 3 of the Consolidated Financial Statements for a discussion
of important commitments and contingencies.
Regulation. The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of
Hawaiian Electric and its electric utility subsidiaries. See the previous discussion under “Rates” and the discussions under
9
“Electric utility–Results of operations–Most recent rate proceedings” and “Electric utility–Certain factors that may affect future
results and financial condition–Regulation of electric utility rates” in HEI’s MD&A.
Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a
material adverse effect on consolidated Hawaiian Electric’s and the Company’s results of operations, financial condition or
liquidity.
On September 15, 2014, the State of Hawaii and the U.S. Department of Energy executed a MOU recognizing that Hawaii
is embarking on the next phase of its clean energy future. See "State of Hawaii and U.S. Department of Energy MOU" above.
In 2015, Hawaii’s RPS law was amended to require electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by
December 31, 2015, 2020, 2030, 2040 and 2045 respectively. Energy savings resulting from energy efficiency programs do not
count toward the RPS since 2014 (only electrical generation using renewable energy as a source counts).
Certain transactions between HEI’s electric public utility subsidiaries (Hawaiian Electric, Hawaii Electric Light and Maui
Electric) and HEI and affiliated interests (as defined by statute) are subject to regulation by the PUC. All contracts of $300,000
or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar
services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC
to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such “affiliated contracts” for
capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates,
unless the quotations cannot be obtained without substantial expense. Moreover, all transfers of $300,000 or more of real
property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in
the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract is
unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of
payments under the contract for rate-making purposes. In rate-making proceedings, a utility must also prove the reasonableness
of payments made to affiliated interests under any affiliated contract of $300,000 or more by clear and convincing evidence.
In December 1996, the PUC issued an order in a docket that had been opened to review the relationship between HEI and
Hawaiian Electric and the effects of that relationship on the operations of Hawaiian Electric. The order adopted the report of the
consultant the PUC had retained and ordered Hawaiian Electric to continue to provide the PUC with periodic status reports on
its compliance with the PUC Agreement (pursuant to which HEI became the holding company of Hawaiian Electric). Hawaiian
Electric files such status reports annually. In the order, the PUC also required the Utilities to present a comprehensive analysis
of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the
cost of capital to each utility in future rate cases and remove any such effects from the cost of capital. The Utilities have made
presentations in their subsequent rate cases to support their positions that there was no evidence that would modify the PUC’s
finding that Hawaiian Electric’s access to capital did not suffer as a result of HEI’s involvement in nonutility activities and that
HEI’s diversification did not permanently raise or lower the cost of capital incorporated into the rates paid by Hawaiian
Electric’s utility customers.
The Utilities are not subject to regulation by the FERC under the Federal Power Act, except under Sections 210 through
212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the FERC to order electric
utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities.
Title I of PURPA, which relates to retail regulatory policies for electric utilities, and Title VII of the Energy Policy Act of 1992,
which addresses transmission access, also apply to the Utilities. The Utilities are also required to file various operational reports
with the FERC.
Because they are located in the State of Hawaii, Hawaiian Electric and its subsidiaries are exempt by statute from
limitations set forth in the Powerplant and Industrial Fuel Use Act of 1978 on the use of petroleum as a primary energy source.
See also “HEI–Regulation” above.
Environmental regulation. Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, are subject to
periodic inspections by federal, state and, in some cases, local environmental regulatory agencies, including agencies
responsible for the regulation of water quality, air quality, hazardous and other waste and hazardous materials. These
inspections may result in the identification of items needing corrective or other action. Except as otherwise disclosed in this
report (see “Certain factors that may affect future results and financial condition–Environmental matters” for HEI Consolidated,
the Electric utility and the Bank sections in HEI’s MD&A and Note 3 of the Consolidated Financial Statements, which are
incorporated herein by reference), the Company believes that each subsidiary has appropriately responded to environmental
conditions requiring action and that, as a result of such actions, such environmental conditions will not have a material adverse
effect on the Company or Hawaiian Electric.
10
Water quality controls. The generating stations, substations and other utility facilities operate under federal and state
water quality regulations and permits, including but not limited to the Clean Water Act National Pollution Discharge
Elimination System (governing point source discharges, including wastewater and storm water discharges) and the Safe
Drinking Water Act Underground Injection Control (regulating disposal of wastewater into the subsurface). On February 1,
2018, the Ninth Circuit Court of Appeals ruled that under certain circumstances, discharges from underground injection control
wells may require National Pollution Discharge Elimination System permits. The Utilities are evaluating the impact of this
decision on their facilities.
Oil pollution controls. The Oil Pollution Act of 1990 (OPA) establishes programs that governing actual or threatened
oil releases and imposing strict liability on responsible parties for clean-up costs and damages to natural resources and property.
The federal Environmental Protection Agency (EPA) regulations under OPA require certain facilities that use or store oil to
prepare and implement Spill Prevention, Control and Countermeasures (SPCC) Plans in order to prevent releases of oil to
navigable waters of the U.S. Certain facilities are also required to prepare and implement Facility Response Plans (FRPs) to
ensure prompt and proper response to releases of oil. The utility facilities that are subject to SPCC Plan and FRP requirements
have prepared and implemented SPCC Plans and FRPs.
Air quality controls. The Clean Air Act (CAA) establishes permitting programs to reduce air pollution. The CAA
amendments of 1990, established the federal Title V Operating Permit Program (in Hawaii known as the Covered Source
Permit program) to ensure compliance with all applicable federal and state air pollution control requirements. The 1977 CAA
Amendments established the New Source Review (NSR) permitting program which affect new or modified generating units by
requiring a permit to construct under the CAA and the controls necessary to meet the National Ambient Air Quality Standards
(NAAQS).
Title V operating permits have been issued for all of the Utilities’ affected generating units.
Hazardous waste and toxic substances controls. The operations of the electric utility are subject to EPA regulations
that implement provisions of the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA, also known as Superfund), the Superfund Amendments and
Reauthorization Act (SARA), and the Toxic Substances Control Act (TSCA).
RCRA underground storage tank (UST) regulations require all facilities that use USTs for storing petroleum products to
comply with established leak detection, spill prevention, standards for tank design and retrofits, financial assurance, operator
training, and tank decommissioning and closure requirements. All of the Utilities’ USTs currently meet the applicable
requirements.
The Emergency Planning and Community Right-to-Know Act under SARA Title III requires the Utilities to report
potentially hazardous chemicals present in their facilities in order to provide the public with information so that emergency
procedures can be established to protect the public in the event of hazardous chemical releases. Since January 1, 1998, the
steam electric industry category has been subject to Toxics Release Inventory (TRI) reporting requirements.
The TSCA regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCBs), a compound
found in some transformer and capacitor dielectric fluids. The TSCA regulations also apply to responses to releases of PCBs to
the environment. The Utilities have instituted procedures to monitor compliance with these regulations and have implemented a
program to identify and replace PCB transformers and capacitors in their systems. In April 2010, the EPA issued an Advance
Notice of Proposed Rule Making announcing its intent to reassess PCB regulations. The EPA has ceased activity on the PCB
reassessment.
Hawaii’s Environmental Response Law (ERL), as amended, governs releases of hazardous substances, including oil, to the
environment in areas within the state’s jurisdiction. Responsible parties under the ERL are jointly, severally, and strictly liable
for a release of a hazardous substance. Responsible parties include owners or operators of a facility where a hazardous
substance is located and any person who at the time of disposal of the hazardous substance owned or operated any facility at
which such hazardous substance was disposed.
The Utilities periodically discover leaking oil-containing equipment such as USTs, piping, and transformers. Each
subsidiary reports releases from such equipment when and as required by applicable law and addresses the releases in
compliance with applicable regulatory requirements.
Research and development. The Utilities expensed approximately $3.8 million, $4.2 million and $3.3 million in 2017, 2016
and 2015, respectively, for research and development (R&D). In 2017, 2016 and 2015, the electric utilities’ contributions to the
Electric Power Research Institute (EPRI) accounted for approximately 58%, 52% and 67% of R&D expenses, respectively. The
Utilities continue to collaborate with EPRI, Elemental Excelerator, other utilities, national testing labs, leading edge companies
and various stakeholders to identify and evaluate what new technologies and solutions are being developed, tested, and
11
implemented elsewhere and can be applied to integrate more renewable distributed energy resources onto the utility grid,
modernizing grid infrastructure, and helping the State achieve a 100% clean energy future. The Utilities utilize an expanded
reference of R&D to highlight the demonstration of technologies. Included in the R&D expenses were amounts related to
evaluating, testing, and demonstrating new and emerging technologies, energy storage, demand response, environmental
compliance, power quality, electric and hybrid plug in vehicles and other renewables (e.g., integration of distributed energy
resources onto the utility grid, grid modernization, solar resource evaluation, advanced inverter testing, and modeling of high
PV penetration circuits).
Additional information. For additional information about Hawaiian Electric, see Hawaiian Electric’s MD&A, Hawaiian
Electric’s “Quantitative and Qualitative Disclosures about Market Risk” and Hawaiian Electric’s Consolidated Financial
Statements, including the Notes thereto.
Properties. Hawaiian Electric owns four generating plants on the island of Oahu at Waiau, Kahe, Campbell Industrial Park
(CIP) and Honolulu. Hawaiian Electric currently operates three of the four generation plants; the fourth, in downtown
Honolulu, was deactivated in 2014. These three plants have an aggregate net generating capability of 1,214 MW as of
December 31, 2017. The City and County of Honolulu is seeking to condemn a portion of the Honolulu plant site for its rail
project. The four plants are situated on Hawaiian Electric-owned land having a combined area of 542 acres and three parcels of
land totaling 5.7 acres under leases expiring between December 31, 2018 and June 30, 2021, with options to extend to June 30,
2026. Additionally, Hawaiian Electric has negotiated two leases: 1) a 35 year lease, effective September 1, 2016 with an option
to extend an additional 10 years with the Department of the Army to install, operate, and maintain a 50 MW power generation
plant on 8.13 acres, and 2) a 37 year lease, effective July 1, 2017 with the Secretary of the Navy to install, operate and maintain
a 28 MW (dc) renewable generation site on 102 acres. In addition, Hawaiian Electric owns a total of 132 acres of land on which
substations, transformer vaults, distribution baseyards and the Kalaeloa cogeneration facility are located.
Hawaiian Electric owns buildings and approximately 11.6 acres of land located in Honolulu which house its operating and
engineering departments. It also leases an office building and certain office spaces in Honolulu, and a warehousing center in
Kapolei. The lease for the office building expires in November 2021, with an option to extend through November 2024. Leases
for certain office and warehouse spaces expire on various dates from March 31, 2018 through July 31, 2025, some with options
to extend to various dates through December 31, 2034.
Hawaiian Electric's Barbers Point Tank Farm (BPTF) has three storage tanks with an aggregate of 1 million barrels of
storage for low sulfur fuel oil (LSFO). The BPTF is located in Campbell Industrial Park, on the same property as the CIP
Generating Station, and is the central fuel storage facility where LSFO purchased by Hawaiian Electric is received and stored.
From the BPTF, LSFO is transported via Hawaiian Electric owned underground pipelines to the Kahe and Waiau Power Plants.
Hawaiian Electric also has fuel storage facilities at each of its plant sites with a nominal aggregate capacity of 770,000 barrels
for LSFO storage, 44,000 barrels for diesel storage and 88,000 barrels for biodiesel storage. Hawaiian Electric also owns a fuel
storage facility at Iwilei that was used to provide fuel to the Honolulu Power Plant. The Honolulu Power Plant was deactivated
on January 31, 2014 and any future fuel supplies will be delivered directly to the plant by truck. The removal of the Iwilei fuel
storage facility's tanks and pumping infrastructure was completed in 2017, and the facility is being reconfigured for other
purposes.
Hawaii Electric Light owns and operates four generating plants on the island of Hawaii in Hilo, Waimea, Keahole and
Puna, along with distributed generators at substation sites. These plants have an aggregate net generating capability of 182 MW
as of December 31, 2017 (excluding several small run-of-river hydro units). Hawaii Electric Light's Shipman plant in Hilo was
deactivated in 2014 and retired in 2015. The plants (including a baseyard on the same parcel as the Hilo plant) are situated on
Hawaii Electric Light-owned land having a combined area of approximately 44 acres. The distributed generators are located
within Hawaii Electric Light-owned substation sites having a combined area of approximately 4 acres. Hawaii Electric Light
also owns fuel storage facilities at these sites with a usable storage capacity of 48,000 barrels of medium sulfur fuel oil (MSFO)
and 81,802 barrels of diesel. There are an additional 19,200 barrels of diesel and 22,770 barrels of MSFO storage capacity for
Hawaii Electric Light-owned fuel off-site at Island Energy Services, LLC (Island Energy)-owned terminalling facilities
(previously Chevron-owned). Hawaii Electric Light pays a storage fee to Island Energy and has no other interest in the
property, tanks or other infrastructure situated on their property. Hawaii Electric Light also owns 6 acres of land in Kona, which
is used for a baseyard, and one acre of land in Hilo, which houses its accounting, customer services and administrative offices.
Hawaii Electric Light also leases 3.7 acres of land for its baseyard in Hilo under a lease expiring in 2030. In addition, Hawaii
Electric Light owns a total of approximately 100 acres of land, and leases a total of approximately 8.5 acres of land, on which
hydro facilities, substations and switching stations, microwave facilities and transmission lines are located. The deeds to the
sites located in Hilo contain certain restrictions, but the restrictions do not materially interfere with the use of the sites for
public utility purposes.
On 37.7 acres of its land, Maui Electric: (1) owns and operates two generating plants on the island of Maui, at Kahului and
Maalaea, with an aggregate net generating capability of 246 MW as of December 31, 2017, (2) has offices (administrative,
12
engineering and distribution departments) in Kahului and (3) owns fuel oil storage facilities with a total maximum usable
capacity of 81,272 barrels of MSFO and 94,586 barrels of diesel. There are an additional 56,358 barrels of diesel oil storage
capacity off-site at Aloha Petroleum, Ltd. (Aloha Petroleum)-owned terminalling facilities, for which Maui Electric pays
storage fees. Maui Electric also owns two, 1 MW stand-by diesel generators and a 6,000 gallon fuel storage tank in Hana and
65.7 acres of undeveloped land at Waena.
Maui Electric also owns and operates smaller distribution systems, generation systems (with an aggregate net capability of
22 MW as of December 31, 2017) and fuel storage facilities on the islands of Lanai and Molokai, primarily on its own land.
Other properties. The Utilities own overhead transmission and distribution lines, underground cables, poles (some jointly)
and metal high voltage towers. Electric lines are located over or under public and nonpublic properties. Lines are added when
needed to serve increased loads and/or for reliability reasons. In some design districts on Oahu, lines must be placed
underground. Under Hawaii law, the PUC generally must determine whether new 46 kilovolt (kV), 69 kV or 138 kV lines can
be constructed overhead or must be placed underground.
See “Hawaiian Electric and subsidiaries and service areas” above for a discussion of the nonexclusive franchises of
Hawaiian Electric and subsidiaries. Most of the leases, easements and licenses for Hawaiian Electric’s, Hawaii Electric Light’s
and Maui Electric’s lines have been recorded.
See “Generation statistics” above and “Limited insurance” in HEI’s MD&A for a further discussion of some of the electric
utility properties.
Bank
General. ASB was granted a federal savings bank charter in January 1987. Prior to that time, ASB had operated since 1925 as
the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah. As of December 31, 2017, ASB was one
of the largest financial institutions in the State of Hawaii based on total assets of $6.8 billion and deposits of $5.9 billion. In
2017, ASB’s revenues and net income amounted to approximately 12% and 41% of HEI’s consolidated revenues and net
income, respectively, compared to approximately 12% and 23% (impacted by the merger termination fee and other impacts at
HEI corporate) in 2016 and approximately 10% and 34% in 2015, respectively.
At the time of HEI’s acquisition of ASB in 1988, HEI agreed with the OTS’ predecessor regulatory agency that ASB’s
regulatory capital would be maintained at a level of at least 6% of ASB’s total liabilities, or at such greater amount as may be
required from time to time by regulation. Under the agreement, HEI’s obligation to contribute additional capital to ensure that
ASB would have the capital level required by the OTS was limited to a maximum aggregate amount of approximately
$65.1 million. As of December 31, 2017, as a result of certain HEI contributions of capital to ASB, HEI’s maximum obligation
under the agreement to contribute additional capital has been reduced to approximately $28.3 million. ASB is subject to OCC
regulations on dividends and other distributions and ASB must receive a letter from the FRB communicating the OCC's and
FRB's non-objection to the payment of any dividend ASB proposes to declare and pay to ASB Hawaii and HEI.
The following table sets forth selected data for ASB (average balances calculated using the average daily balances):
Years ended December 31
Common equity to assets ratio
2017
2016
2015
Average common equity divided by average total assets
9.10%
9.34%
9.53%
Return on assets
Net income divided by average total assets
Return on common equity
Net income divided by average common equity
1.02
11.20
0.92
9.90
0.95
9.93
Asset/liability management. See HEI’s “Quantitative and Qualitative Disclosures about Market Risk.”
Consolidated average balance sheet and interest income and interest expense. See “Bank—Results of operations—
Average balance sheet and net interest margin” in HEI’s MD&A.
The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average
interest rate multiplied by prior year average balance) and (2) changes in volume (change in average balance multiplied by prior
period weighted-average interest rate). Any remaining change is allocated to the above two categories on a prorata basis.
13
(in thousands)
Interest income
Interest-earning deposits
FHLB stock
Investment securities
Taxable
Non-taxable
Total investment securities
Loans
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial
Consumer
Total loans
Total increase in interest income
Interest expense
Savings
Interest-bearing checking
Money market
Time certificates
Advances from Federal Home Loan Bank
Securities sold under agreements to repurchase
Total decrease (increase) in interest expense
Increase in net interest income
2017 vs. 2016
2016 vs. 2015
Rate
Volume
Total
Rate
Volume
Total
$
488
$
27
$
515
$
24
(7)
17
228
192
$
(169) $
(148)
1,691
3
1,694
(1,488)
1,234
781
13
2,395
1,134
4,069
6,275
—
(56)
13
(928)
267
1,433
729
7,008
624
7,632
148
632
971
(120)
(4,733)
6,514
3,412
11,064
(165)
(9)
21
8,699
627
9,326
(1,340)
1,866
1,752
(107)
(2,338)
7,648
7,481
17,339
(165)
(65)
34
(1,369)
(2,297)
648
744
(130)
915
2,177
599
(1,018)
14
(1,004)
(2,103)
1,037
686
(77)
2,538
1,908
3,989
3,405
(103)
—
(5)
(589)
21
(285)
(961)
59
44
3,943
28
3,971
(1,659)
9,382
1,738
17
461
5,053
14,992
19,066
(145)
(34)
3
4,961
14
4,975
444
8,345
1,052
94
(2,077)
3,145
11,003
15,661
(42)
(34)
8
(1,054)
(1,643)
(35)
689
(468)
(14)
404
(1,429)
$
7,004
$
10,934
$
17,938
$
2,444
$
15,193
$
17,637
See “Bank—Results of operations” in HEI’s MD&A for an explanation of significant changes in earning assets and costing
liabilities.
Noninterest income. In addition to net interest income, ASB has various sources of noninterest income, including fee income
from credit and debit cards, fee income from deposit liabilities, mortgage banking income and other financial products and
services. See “Bank—Results of operations” in HEI’s MD&A for an explanation of significant changes in noninterest income.
14
Lending activities.
General. The following table sets forth the composition of ASB’s loans receivable held for investment:
December 31
2017
2016
2015
2014
2013
(dollars in thousands)
Real estate: 1
Residential 1-4
family
Commercial real
estate
Home equity line of
credit
Residential land
Commercial
construction
Residential
construction
Total real estate
Commercial
Consumer
Total loans
Balance
% of
total
Balance
% of
total
Balance
% of
total
Balance
% of
total
Balance
% of
total
$ 2,118,047
45.3
$
2,048,051
43.2
$
2,069,665
44.8
$
2,044,205
46.0
$
2,006,007
48.2
733,106
15.7
800,395
16.9
690,561
14.9
531,917
12.0
440,443
10.6
913,052
15,797
19.6
0.3
863,163
18,889
18.2
0.4
846,294
18,229
18.3
0.4
818,815
16,240
18.4
0.4
739,331
16,176
17.8
0.4
108,273
2.3
126,768
2.7
100,796
2.2
96,438
2.2
52,112
1.3
14,910
3,903,185
544,828
223,564
0.3
83.5
11.7
4.8
16,080
3,873,346
692,051
178,222
0.3
81.7
14.6
3.7
14,089
3,739,634
758,659
123,775
0.3
80.9
16.4
2.7
18,961
3,526,576
791,757
122,656
0.4
79.4
17.8
2.8
12,774
3,266,843
783,388
108,722
0.3
78.6
18.8
2.6
4,671,577
100.0
4,743,619
100.0
4,622,068
100.0
4,440,989
100.0
4,158,953
100.0
Less: Deferred fees and
discounts
Allowance for
loan losses
(809)
(53,637)
(4,926)
(55,533)
(6,249)
(50,038)
(6,338)
(45,618)
(8,724)
(40,116)
Total loans, net
$ 4,617,131
$
4,683,160
$
4,565,781
$
4,389,033
$
4,110,113
1
Includes renegotiated loans.
The decrease in the loans receivable balance in 2017 was primarily due to decreases in the commercial, commercial real
estate, and commercial construction loan portfolios, partly offset by growth in the residential 1-4 family, home equity lines of
credit (HELOC), and consumer loan portfolios. The decrease in the commercial loan portfolio was primarily due to the strategic
reductions in the portfolio, including a $75 million reduction in ASB's nationally syndicated loan portfolio. The decrease in the
commercial real estate loan portfolio was primarily due to paydown of a large commercial real estate credit. The growth in the
residential 1-4 family, HELOC and consumer loan portfolios were consistent with ASB's loan growth strategy.
The increase in the loans receivable balance in 2016 was primarily due to growth in the commercial real estate, consumer,
commercial construction and HELOC loan portfolios as a result of demand for these loan types, partly offset by a decrease in
the commercial and residential 1-4 family loan portfolios. The growth in the commercial real estate, consumer, commercial
construction and HELOC loan portfolios was consistent with ASB's loan growth strategy. The decrease in the commercial loan
portfolio was due to the strategic reduction of ASB's nationally syndicated loan portfolio by $93 million. The decrease in the
residential loan portfolio was due to ASB's decision to sell a portion of its loan production with low interest rates to control its
interest rate risk.
The increase in the loans receivable balance in 2015 was primarily due to growth in commercial real estate, HELOC and
residential 1-4 family loan portfolios, partly offset by a decrease in the commercial loan portfolio. The growth in the
commercial real estate, HELOC and residential loan portfolios was driven by demand for this loan type and was consistent with
ASB's loan growth strategy.
The increase in the loans receivable balance in 2014 was primarily due to growth in commercial real estate, HELOC,
commercial construction and residential 1-4 family loan portfolios. The growth in the commercial real estate and commercial
construction loan portfolios were driven by demand for these loan types as the Hawaii economy continues to improve. The
growth in the HELOC and residential loan portfolios were consistent with ASB’s mix target and loan growth strategy.
15
The following table summarizes loans receivable held for investment based upon contractually scheduled principal
payments allocated to the indicated maturity categories:
December 31
Due
(in millions)
Commercial – Fixed
Commercial – Adjustable
Total commercial
Commercial construction – Fixed
Commercial construction – Adjustable
Total commercial construction
Residential construction – Fixed
Residential construction – Adjustable
Total residential construction
Total loans – Fixed
Total loans – Adjustable
Total loans
2017
In
1 year
or less
After 1 year
through
5 years
After
5 years
Total
$
53
$
153
206
—
59
59
15
—
15
68
212
280
$
$
121
172
293
—
22
22
—
—
—
121
194
315
$
$
18
28
46
—
27
27
—
—
—
18
55
73
$
$
192
353
545
—
108
108
15
—
15
207
461
668
Origination, purchase and sale of loans. Generally, residential and commercial real estate loans originated by ASB are
collateralized by real estate located in Hawaii. For additional information, including information concerning the geographic
distribution of ASB’s mortgage-related securities portfolio and the geographic concentration of credit risk, see Note 13 to the
Consolidated Financial Statements. The demand for loans is primarily dependent on the Hawaii real estate market, business
conditions, interest rates and loan refinancing activity.
Residential mortgage lending. ASB originates fixed rate and adjustable rate loans secured by single family residential
property, including investor-owned properties, with maturities of up to 30 years. ASB’s general policy is to require private
mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase
price at origination. For non-owner-occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of
the appraised value or purchase price at origination.
Construction and development lending. ASB provides fixed rate loans for the construction of one-to-four unit residential
and commercial properties. Construction loan projects are typically short term in nature. Construction and development
financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate.
Accordingly, construction and development loans are generally priced higher than loans collateralized by completed structures.
ASB’s underwriting, monitoring and disbursement practices with respect to construction and development financing are
designed to ensure sufficient funds are available to complete construction projects. See “Loan portfolio risk elements” and
“Multifamily residential and commercial real estate lending” below.
Multifamily residential and commercial real estate lending. ASB provides permanent financing and construction and
development financing collateralized by multifamily residential properties (including apartment buildings) and collateralized by
commercial and industrial properties (including office buildings, shopping centers and warehouses) for its own portfolio as well
as for participation with other lenders. Commercial real estate lending typically involves long lead times to originate and fund.
As a result, production results can vary significantly from period to period.
Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans collateralized by deposits are
limited to 90% of the available account balance. ASB offers home equity lines of credit, clean energy loans, secured and
unsecured VISA cards (through a third party issuer), checking account overdraft protection and other general purpose consumer
loans.
Commercial lending. ASB provides both secured and unsecured commercial loans to business entities. This lending
activity is designed to diversify ASB’s asset structure, shorten maturities, improve rate sensitivity of the loan portfolio and
attract commercial checking deposits. ASB offers commercial loans with terms up to ten years.
Loan origination fee and servicing income. In addition to interest earned on residential mortgage loans, ASB receives
income from servicing loans, for late payments and from other related services. Servicing fees are received on loans originated
and subsequently sold by ASB where ASB acts as collection agent on behalf of third-party purchasers.
16
ASB charges the borrower at loan settlement a loan origination fee. See “Loans receivable” in Note 1 of the Consolidated
Financial Statements.
Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the
delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a
collection action, including foreclosure proceedings in the case of real estate secured loans. In a foreclosure action, the property
collateralizing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If
ASB is the successful bidder, the property is classified as real estate owned until it is sold. As of December 31, 2017, 2016 and
2015, ASB had $0.1 million, $1.2 million and $1.0 million, respectively, of real estate acquired in settlement of loans.
In addition to delinquent loans, other significant lending risk elements include: (1) loans which accrue interest and are 90
days or more past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans
on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower
to service the obligation under the original terms of the agreement (troubled debt restructured loans). ASB loans that were 90
days or more past due on which interest was being accrued as of December 31, 2017, 2016, 2015, 2014 and 2013 were
immaterial or nil. The following table sets forth certain information with respect to nonaccrual and troubled debt restructured
loans:
December 31
(dollars in thousands)
Nonaccrual loans—
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Total nonaccrual loans
Troubled debt restructured loans not included above—
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
2017
2016
2015
2014
2013
$
12,598
$ 11,154
$
20,554
$ 19,253
$
19,679
—
4,466
841
—
—
223
3,080
878
—
—
17,905
15,335
3,069
2,617
6,708
1,282
1,188
2,254
970
—
—
24,966
20,174
895
5,112
1,087
720
—
—
26,172
10,053
661
4,439
2,060
3,161
—
—
29,339
18,781
401
$
23,591
$ 23,325
$
46,035
$ 36,886
$
48,521
$
10,982
$ 14,450
$
13,962
$ 13,525
$
9,744
1,016
6,584
425
—
—
19,007
1,741
66
1,346
4,934
2,751
—
—
23,481
14,146
10
—
2,467
4,713
—
—
21,142
1,104
—
—
480
7,130
—
—
21,135
2,972
—
—
171
7,476
—
—
17,391
1,649
—
Total troubled debt restructured loans
$
20,814
$ 37,637
$
22,246
$ 24,107
$
19,040
In 2017, nonaccrual loans increased slightly by $0.3 million primarily due to higher nonaccrual residential 1-4 family,
HELOC and consumer loans of $1.4 million, $1.4 million and $1.3 million, respectively. Nonaccrual commercial loans
decreased by $3.6 million. ASB evaluates a restructured loan transaction to determine if the borrower is in financial difficulty
and if the restructured terms are considered concessions—typically terms that are out of market, beyond normal or reasonable
standards, or otherwise not available to a non-troubled borrower in the normal marketplace. A loan classified as TDR must meet
both criteria of financial difficulty and concession. Accruing TDR loans decreased by $16.8 million in 2017 primarily due to
decreases of $12.4 million, $3.5 million, and $2.3 million of commercial, residential 1-4 family, and residential land loans,
respectively, classified as TDRs.
17
In 2016, nonaccrual loans decreased $22.7 million primarily due to upgrades of specific commercial and commercial real
estate loans, payoff of a troubled commercial loan and a segment of residential mortgages transferred to held-for-sale.
Nonaccrual commercial and residential loans decreased by $13.5 million and $9.4 million, respectively. Accruing TDR loans
increased $15.4 million in 2016 primarily due to increases of $13.0 million and $2.5 million of commercial and HELOC loans,
respectively, classified as TDR. The increase in commercial loans classified as TDR was primarily due to two commercial
credits being classified as TDR.
In 2015, nonaccrual loans increased $9.1 million primarily due to higher nonaccrual commercial loans of $10.1 million.
TDR loans decreased $1.9 million in 2015 primarily due to decreases of $2.4 million and $1.9 million of residential land and
commercial loans, respectively, classified as TDR. HELOC loans classified as TDR increased by $2.0 million.
In 2014, nonaccrual loans decreased $11.6 million primarily due to the payoff of commercial loans that were on nonaccrual
status and repayments in the residential land portfolio. TDR loans increased $5.1 million in 2014 primarily due to increases of
$3.8 million and $1.3 million of residential 1-4 and commercial loans, respectively, classified as TDR.
Impact of nonperforming loans on interest income. The following table presents the gross interest income for both
nonaccrual and restructured loans that would have been recognized if such loans had been current in accordance with their
original contractual terms, and had been outstanding throughout the period or since origination if held for only part of the
period. The table also presents the interest income related to these loans that was actually recognized for the period.
(dollars in millions)
Gross amount of interest income that would have been recorded if the loans had been current in accordance with
original contractual terms, and had been outstanding throughout the period or since origination, if held for only part
of the period 1
Interest income actually recognized
Total interest income foregone
Year ended
December 31, 2017
$
$
2
1
1
1 Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status.
Allowance for loan losses. See “Allowance for loan losses” in Note 1 of the Consolidated Financial Statements.
18
The following table presents the changes in the allowance for loan losses:
(dollars in thousands)
Allowance for loan losses, January 1
Provision for loan losses
$
2017
55,533
10,901
$
2016
50,038
16,763
2015
2014
2013
$
45,618
$
40,116
$
41,985
6,275
6,126
1,507
Charge-offs
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Total charge-offs
Recoveries
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Total recoveries
Net charge-offs
Allowance for loan losses, December 31
$
Ratio of allowance for loan losses to loans receivable held
for investment
Ratio of provision for loan losses during the year to
average total loans
Ratio of net charge-offs during the year to average total
loans
826
—
14
210
—
—
1,050
4,006
11,757
16,813
157
—
308
482
—
—
947
1,852
1,217
4,016
12,797
53,637
$
639
—
112
138
—
—
889
5,943
7,413
14,245
421
—
59
461
—
—
941
1,093
943
2,977
11,268
55,533
356
—
205
—
—
—
561
1,074
4,791
6,426
226
—
80
507
—
—
813
2,773
985
4,571
1,855
987
—
196
81
—
—
1,264
1,872
2,414
5,550
1,162
—
782
485
—
—
2,429
3,056
2,717
8,202
1,180
1,881
—
752
469
—
—
2,401
1,636
889
4,926
624
—
358
868
—
—
3,107
1,089
630
4,826
3,376
$
50,038
$
45,618
$
40,116
1.15%
0.23%
0.27%
1.17%
0.36%
0.24%
1.08%
0.14%
0.04%
1.03%
0.14%
0.01%
0.97%
0.04%
0.09%
19
The following table sets forth the allocation of ASB’s allowance for loan losses and the percentage of loans in each
category to total loans:
December 31
(dollars in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Unallocated
Total allowance for loan
losses
December 31
(dollars in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Unallocated
2017
Allowance
to loan
receivable
%
Loan
receivable
% of
total
Allow-
ance
balance
2016
Allowance
to loan
receivable
%
Loan
receivable
% of
total
Allow-
ance
balance
2015
Allowance
to loan
receivable
%
Loan
receivable
% of
total
0.14
2.15
0.82
5.67
4.31
0.08
0.81
1.99
4.91
1.15
45.3
15.7
19.6
0.3
2.3
0.3
83.5
11.7
4.8
100.0
$ 2,873
16,004
5,039
1,738
6,449
12
32,115
16,618
6,800
55,533
—
0.14
2.00
0.58
9.20
5.09
0.07
0.83
2.40
3.82
1.17
43.2
16.9
18.2
0.4
2.7
0.3
81.7
14.6
3.7
100.0
$ 4,186
11,342
7,260
1,671
4,461
13
28,933
17,208
3,897
50,038
—
$ 55,533
$ 50,038
0.20
1.64
0.86
9.17
4.43
0.09
0.77
2.27
3.15
1.08
44.8
14.9
18.3
0.4
2.2
0.3
80.9
16.4
2.7
100.0
Allow-
ance
balance
$ 2,902
15,796
7,522
896
4,671
12
31,799
10,851
10,987
53,637
—
$ 53,637
2014
Allowance
to loan
receivable
%
Allowance
balance
Loan
receivable
% of
total
Allowance
balance
2013
Allowance
to loan
receivable
%
Loan
receivable
% of
total
$
4,662
8,954
6,982
1,875
5,471
28
27,972
14,017
3,629
45,618
—
0.23
1.68
0.85
11.55
5.67
0.15
0.79
1.77
2.96
1.03
$
46.0
12.0
18.4
0.4
2.2
0.4
79.4
17.8
2.8
100.0
0.28
1.15
0.71
11.23
4.60
0.15
0.61
2.02
2.18
0.92
48.2
10.6
17.8
0.4
1.3
0.3
78.6
18.8
2.6
100.0
5,534
5,059
5,229
1,817
2,397
19
20,055
15,803
2,367
38,225
1,891
40,116
Total allowance for loan losses
$
45,618
$
In 2017, ASB's allowance for loan losses decreased by $1.9 million primarily due to lower loan loss reserves required for
the commercial, commercial construction, and commercial real estate loan portfolios as a result of a decrease in the portfolio
balances and improving credit trends, partly offset by additional loan loss reserves for the consumer and HELOC loan
portfolios. Total delinquencies of $23.6 million at December 31, 2017 was a slight increase of $0.5 million compared to total
delinquencies of $23.1 million at December 31, 2016 primarily due to increases in delinquent commercial and consumer loans,
offset by decreases in delinquent residential 1-4 family and commercial real estate loans. The ratio of delinquent loans to total
loans increased slightly from 0.49% of total loans outstanding at December 31, 2016 to 0.51% of total loans outstanding at
December 31, 2017. Net charge-offs for 2017 were $12.8 million, an increase of $1.5 million compared to $11.3 million for
2016 primarily due to an increase in consumer loan portfolio charge-offs as a result of ASB's strategic expansion of its
unsecured consumer loan product offering with risk-based pricing. ASB's provision for loan losses was $10.9 million, a
decrease of $5.9 million compared to the provision for loan losses of $16.8 million for 2016. The decrease was primarily due to
the release of reserves for commercial real estate and commercial loan portfolios due to lower outstanding balances and
improved credit quality, partly offset by an increase in loss reserves for the consumer loan portfolio.
20
In 2016, ASB's allowance for loan losses increased by $5.5 million primarily due to growth in the commercial real estate
and consumer loan portfolios and increases in reserves for the commercial real estate and unsecured consumer loan portfolios.
Total delinquencies of $23.1 million at December 31, 2016 was $3.0 million lower than total delinquencies of $26.1 million at
December 31, 2015 primarily due to the movement of $6 million of residential loans to held-for-sale. The ratio of delinquent
loans to total loans decreased from 0.57% of total loans outstanding at December 31, 2015 to 0.49% of total loans outstanding
at December 31, 2016. Net charge-offs for 2016 were $11.3 million, an increase of $9.4 million compared to $1.9 million for
2015 primarily due to charge-offs of specific commercial loans and an increase in consumer loan charge-offs as a result of the
strategic expansion of ASB's unsecured consumer loan product offering with risk-based pricing. ASB's provision for loan losses
was $16.8 million for 2016, an increase of $10.5 million compared to the provision for loan losses of $6.3 million for 2015. The
increase in provision for loan losses was driven by growth in the commercial real estate and consumer loan portfolios as well as
specific reserves for a few commercial loans.
In 2015, ASB's allowance for loan losses increased by $4.4 million primarily due to growth in the commercial real estate
loan portfolio ($159 million or 29.8% growth in outstanding balances) and increases in reserves for commercial loans. Overall
loan quality remained strong as total delinquencies of $26.1 million at December 31, 2015 was a slight increase of $0.6 million
compared to total delinquencies of $25.5 million at December 31, 2014 primarily due to an increase in delinquent consumer
loans. The ratio of delinquent loans to total loans decreased slightly from 0.58% of total loans outstanding at December 31,
2014 to 0.57% of total loans outstanding at December 31, 2015. Net charge-offs for 2015 were $1.9 million, an increase of $1.3
million compared to $0.6 million for 2014 primarily due to an increase in consumer loan charge-offs as result of the strategic
expansion of ASB's unsecured consumer loan product offering with risk-based pricing. ASB's provision for loan losses was
$6.3 million for 2015, an increase of $0.2 million compared to the provision for loan losses of $6.1 million for 2014.
In 2014, ASB’s allowance for loan losses increased by $5.5 million primarily due to growth in the loan portfolio ($282
million or 6.8% growth in outstanding balances) and increases in the loss rates of loan portfolios with higher risk such as
commercial real estate and unsecured personal loans. Overall loan quality continued to improve as total delinquencies of $25.5
million at December 31, 2014 was a decrease of $8.3 million compared to total delinquencies of $33.8 million at December 31,
2013 due to a decrease in delinquent commercial, commercial real estate and residential land loans. The ratio of delinquent
loans to total loans decreased from 0.81% of total loans outstanding at December 31, 2013 to 0.58% of total loans outstanding
at December 31, 2014. Net charge-offs for 2014 were $0.6 million, a decrease of $2.8 million compared to $3.4 million for
2013 primarily due to a decrease in commercial, HELOC and residential land loan charge-offs as a result of the strong
economic growth in Hawaii and partially due to the sale of the credit card portfolio in 2013. ASB’s provision for loan losses
was $6.1 million for 2014, an increase of $4.6 million compared to provision for loan losses of $1.5 million for 2013 primarily
due to growth in the loan portfolio.
See "Bank—Material estimates and critical accounting policies—Allowance for loan losses" in HEI's MD&A for a
discussion of allowance for loan losses.
Investment activities. Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations,
mortgage-related securities, stock of the FHLB of Des Moines and a mortgage revenue bond. ASB owns mortgage-related
securities issued by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC)
and Government National Mortgage Association (GNMA). The weighted-average yield on investments during 2017, 2016 and
2015 was 2.18%, 1.99% and 2.06%, respectively. ASB did not maintain a portfolio of securities held for trading during 2017,
2016 and 2015.
As of December 31, 2017, ASB had $44.5 million of investment securities that were purchased and classified as held-to-
maturity. There were no investment securities classified as held-to-maturity as of December 31, 2016 and 2015. The investment
securities were classified as held-to-maturity to enhance the bank's capital management in a rising rate environment. ASB
considers the held-to-maturity classification of these investment securities to be appropriate as the bank has the positive intent
and ability to hold these securities to maturity.
As of December 31, 2017, 2016 and 2015, ASB’s stock in FHLB amounted to $10 million, $11 million and $11 million,
respectively. The amount that ASB is required to invest in FHLB stock is determined by FHLB requirements. With the merger
of the FHLB of Seattle and the FHLB of Des Moines in the second quarter of 2015, all of ASB's excess stock was repurchased.
The amount of stock repurchased in 2017, 2016 and 2015 was nil, nil and $59 million, respectively. See “Stock in FHLB” in
HEI’s MD&A. Also, see “Regulation–Federal Home Loan Bank System” below.
ASB does not have any exposure to securities backed by subprime mortgages. See “Investment securities” in Note 4 of the
Consolidated Financial Statements for a discussion of other-than-temporarily impaired securities.
21
The following table summarizes the current amortized cost of ASB’s investment portfolio (excluding stock of the FHLB of
Des Moines, which has no contractual maturity) and weighted average yields as of December 31, 2017. Mortgage-related
securities are shown separately because they are typically paid in monthly installments over a number of years.
In 1 year
or less
After 1 year
through 5
years
After 5 years
through 10
years
After
10 years
Mortgage-
Related
Securities
Total1
(dollars in millions)
U.S. Treasury and federal agency obligations
$
5
$
Mortgage-related securities - FNMA, FHLMC and
GNMA
Mortgage revenue bond2
—
—
5
$
$
87
—
—
87
$
$
80
—
—
80
$
14
$
—
$ 186
—
15
29
$
1,265
—
1,265
15
$
1,265
$1,466
Weighted average yield
1.63%
1.85%
2.30%
3.31%
2.24%
2.24%
1 As of December 31, 2017, no investment exceeded 10% of shareholder's equity.
2 Weighted average yield on the mortgage revenue bond is computed on a tax equivalent basis using a federal statutory tax rate of 35%.
Deposits and other sources of funds.
General. Deposits traditionally have been the principal source of ASB’s funds for use in lending, meeting liquidity
requirements and making investments. ASB also derives funds from the receipt of interest and principal on outstanding loans
receivable and mortgage-related securities, borrowings from the FHLB of Des Moines, securities sold under agreements to
repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit
flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities. Advances from the
FHLB and securities sold under agreements to repurchase continue to be a source of funds, but they are a higher cost source
than deposits.
Deposits. ASB’s deposits are obtained primarily from residents of Hawaii. Net deposit inflow or outflow, measured as the
year-over-year difference in year-end deposits, was an inflow of $342 million in 2017, compared to an inflow of $524 million in
2016 and $402 million in 2015.
The following table presents the average deposits and average rates by type of deposit. Average balances have been
calculated using the average daily balances.
Years ended December 31
(dollars in thousands)
Interest-bearing deposit liabilities
Average
balance
2017
% of
total
interest-
bearing
deposits
Weighted
average
rate %
Average
balance
2016
% of
total
interest-
bearing
deposits
Weighted
average
rate %
Average
balance
2015
% of
total
interest-
bearing
deposits
Weighted
average
rate %
$ 2,278,396
56.7%
0.07% $ 2,117,186
57.5%
0.07% $ 1,980,151
58.6%
0.06%
902,678
142,068
696,799
22.5
3.5
17.3
0.03
0.12
1.10
839,339
160,700
565,135
22.8
4.4
15.3
0.02
0.13
0.95
782,811
164,568
449,179
23.2
4.9
13.3
0.02
0.12
0.83
$ 4,019,941
100.0%
0.24% $ 3,682,360
100.0%
0.19% $ 3,376,709
100.0%
0.16%
Savings
Checking
Money market
Certificate
Total interest-bearing
deposit liabilities
Total noninterest-bearing
demand deposit liabilities
Total deposit liabilities
$ 5,692,721
1,672,780
1,559,132
$ 5,241,492
1,426,962
$ 4,803,671
22
The following table presents the amount of time certificates of deposit of $100,000 or more, segregated by time remaining
until maturity:
(in thousands)
Three months or less
Greater than three months through six months
Greater than six months through twelve months
Greater than twelve months
Amount
163,207
84,595
32,723
152,872
433,397
$
$
Deposit-insurance premiums and regulatory developments. For a discussion of changes to the deposit insurance
system, premiums and Financing Corporation assessments, see “Regulation–Deposit insurance coverage” below.
Other borrowings. See “Other borrowings” in Note 4 of the Consolidated Financial Statements. ASB may obtain advances
from the FHLB of Des Moines provided that certain standards related to creditworthiness have been met. Advances are
collateralized by a blanket pledge of certain notes held by ASB and the mortgages securing them. To the extent that advances
exceed the amount of mortgage loan collateral pledged to the FHLB of Des Moines, the excess must be covered by qualified
marketable securities held under the control of and at the FHLB of Des Moines or at an approved third-party custodian. FHLB
advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in
the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs
offered from time to time by the FHLB of Des Moines.
The decrease in other borrowings in 2017 was due to the payoff of a maturing FHLB advance, offset by an increase in
business repurchase agreements. The decrease in other borrowings in 2016 was due to a decrease in public and business
repurchase agreements and the maturity of a repurchase agreement with a broker/dealer. The increase in other borrowings in
2015 compared to 2014 was due to an increase in public repurchase agreements. The increase in other borrowings in 2014
compared to 2013 was due to an increase in repurchase agreements with the State of Hawaii.
Competition. See “Bank—Executive overview and strategy” and “Bank—Certain factors that may affect future results and
financial condition—Competition” in HEI’s MD&A.
The banking industry in Hawaii is highly competitive. At December 31, 2017, there were 8 financial institutions insured by
the FDIC headquartered in the State of Hawaii. While ASB is one of the largest financial institutions in Hawaii, based on total
assets, ASB faces vigorous competition for deposits and loans from two larger banking institutions based in Hawaii and from
smaller institutions that heavily promote their services in niche areas, such as providing financial services to small and medium-
sized businesses, as well as national financial services organizations. Competition for loans and deposits comes primarily from
other savings institutions, commercial banks, credit unions, securities brokerage firms, money market and mutual funds and
other investment alternatives. ASB faces additional competition in seeking deposit funds from various types of corporate and
government borrowers, including insurance companies. Competition for origination of mortgage loans comes primarily from
mortgage banking and brokerage firms, commercial banks, other savings institutions, insurance companies and real estate
investment trusts.
To remain competitive and continue building core franchise value, ASB continues to develop and introduce new products
and services to meet the needs of its consumer and commercial customers. Additionally, the banking industry is constantly
changing and ASB is making the investment in its people and technology necessary to adapt and remain competitive. ASB
competes for deposits primarily on the basis of the variety of types of savings and checking accounts it offers at competitive
rates, the quality of the services it provides, the convenience of its branch locations and business hours, and convenient
automated teller machines. The primary factors in ASB’s competition for mortgage and other loans are the competitive interest
rates and loan origination fees it charges, the wide variety of loan programs it offers and the quality and efficiency of the
services it provides to borrowers and the business community.
Regulation. ASB, a federally chartered savings bank, and its holding companies are subject to the regulatory supervision of the
OCC and FRB, respectively, and in certain respects, the FDIC. See “HEI–Regulation” above and “Bank–Certain factors that
may affect future results and financial condition–Regulation” in HEI’s MD&A. In addition, ASB must comply with FRB
reserve requirements.
Deposit insurance coverage. The Federal Deposit Insurance Act, as amended, and regulations promulgated by the FDIC,
governs insurance coverage of deposit accounts. In July 2010, the Dodd-Frank Act permanently raised the current standard
maximum deposit insurance amount to $250,000. Generally, the amount of all deposits held by a depositor in the same capacity
(even if held in separate accounts) is aggregated for purposes of applying the insurance limit.
23
See “Federal Deposit Insurance Corporation assessment” in Note 4 of the Consolidated Financial Statements for a
discussion of FDIC deposit insurance assessment rates. Financing Corporation will continue to impose an assessment on
average total assets minus average tangible equity to service the interest on Financing Corporation bond obligations. As of
December 31, 2017, ASB’s annual Financing Corporation assessment was 0.52 cents per $100 of average total assets minus
average tangible equity.
Federal thrift charter. See “Bank–Certain factors that may affect future results and financial condition—Regulation—
Unitary savings and loan holding company” in HEI’s MD&A, including the discussion of previously proposed legislation that
would abolish the charter.
Recent legislation and issuances. See “Bank–Legislation and regulation” in HEI’s MD&A.
Capital requirements. The OCC has set four capital requirements for financial institutions. As of December 31, 2017, ASB
was in compliance with all of the minimum capital requirements with a Tier 1 leverage ratio of 8.6% (compared to a 4.0%
requirement), a common equity Tier 1 ratio of 13.0% (compared to a 4.5% requirement), a Tier 1 capital ratio of 13.0%
(compared to a 6.0% requirement) and a total capital ratio of 14.2% (compared to a 8.0% requirement).
In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, a financial
institution must hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater
than 2.5% of total risk-weighted assets (capital conservation buffer) which is phased-in through 2019. As of December 31,
2017, ASB met the applicable capital requirements, including the fully phased-in capital conservation buffer.
See “Bank-Legislation and regulation” in HEI’s MD&A for the final capital rules under the Basel III regulatory capital
framework.
Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI
and its direct and indirect subsidiaries. For example, ASB is prohibited from making any loan or other extension of credit to an
entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the FRB has determined to be
permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between
ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any
investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB.
Financial Derivatives and Interest Rate Risk. ASB is subject to OCC rules relating to derivatives activities, such as interest
rate swaps, interest rate lock commitments and forward commitments. See “Derivative financial instruments” in Note 4 of the
Consolidated Financial Statements for a description of interest rate lock commitments and forward commitments used by ASB.
Currently ASB does not use interest rate swaps to manage interest rate risk (IRR), but may do so in the future. Generally
speaking, the OCC rules permit financial institutions to engage in transactions involving financial derivatives to the extent these
transactions are otherwise authorized under applicable law and are safe and sound. The rules require ASB to have certain
internal procedures for handling financial derivative transactions, including involvement of the ASB Board of Directors.
With the transfer of the regulatory jurisdiction from the OTS to the OCC, ASB has adopted terminology and IRR
assessment, measurement and management practices consistent with OCC guidelines. Management believes ASB’s IRR
processes are aligned with the Interagency Advisory on Interest Rate Risk Management and appropriate with earnings and
capital levels, balance sheet complexity, business model and risk tolerance.
Liquidity. OCC regulations require ASB to maintain sufficient liquidity to ensure safe and sound operations. ASB’s
principal sources of liquidity are customer deposits, borrowings, the maturity and repayment of portfolio loans and securities
and the sale of loans into secondary market channels. ASB’s principal sources of borrowings are advances from the FHLB of
Des Moines and securities sold under agreements to repurchase from broker/dealers. ASB is approved by the FHLB of Des
Moines to borrow an amount of up to 35% of assets to the extent it provides qualifying collateral and holds sufficient FHLB of
Des Moines stock. As of December 31, 2017, ASB’s unused FHLB of Des Moines borrowing capacity was approximately
$1.8 billion. ASB utilizes growth in deposits, advances from the FHLB of Des Moines and securities sold under agreements to
repurchase to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and make
investments. As of December 31, 2017, ASB had loan commitments, undisbursed loan funds and unused lines and letters of
credit of $1.8 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while
maintaining liquidity at satisfactory levels.
Supervision. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), the federal
banking agencies promulgated regulations which apply to the operations of ASB and its holding companies. Such regulations
address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with
affiliates and loans to insiders.
24
Prompt corrective action. The FDICIA establishes a statutory framework that is triggered by the capital level of a financial
institution and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OCC
rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the
categories of “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically
undercapitalized.”
A financial institution that is “undercapitalized” or “significantly undercapitalized” is subject to additional mandatory
supervisory actions and a number of discretionary actions if the OCC determines that any of the actions is necessary to resolve
the problems of the association at the least possible long-term cost to the Deposit Insurance Fund. A financial institution that is
“critically undercapitalized” must be placed in conservatorship or receivership within 90 days, unless the OCC and the FDIC
concur that other action would be more appropriate. As of December 31, 2017, ASB was “well-capitalized.”
Interest rates. FDIC regulations restrict the ability of financial institutions that are undercapitalized to offer interest rates
on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 2017, ASB was
“well capitalized” and thus not subject to these interest rate restrictions.
Qualified thrift lender test. In order to satisfy the QTL test, ASB must maintain 65% of its assets in “qualified thrift
investments” on a monthly average basis in 9 out of the previous 12 months. Failure to satisfy the QTL test would subject ASB
to various penalties, including limitations on its activities, and would also bring into operation restrictions on the activities that
may be engaged in by HEI, ASB Hawaii and their other subsidiaries, which could effectively result in the required divestiture
of ASB. At all times during 2017, ASB was in compliance with the QTL test. See “HEI Consolidated–Regulation.”
Federal Home Loan Bank System. ASB is a member of the FHLB System, which consists of 11 regional FHLBs, and
ASB’s regional bank is the FHLB of Des Moines. The FHLB System provides a central credit facility for member institutions.
Historically, the FHLBs have served as the central liquidity facilities for savings associations and sources of long-term funds for
financing housing. At such time as an advance is made to ASB or renewed, it must be collateralized by collateral from one of
the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing
a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof;
(3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a
security interest can be perfected. The aggregate amount of outstanding advances collateralized by such other real estate-related
collateral may not exceed 300% of ASB’s capital.
As mandated by the Gramm Act, the Federal Housing Finance Board (Board) regulations require each FHLB to maintain
three capital ratios: (1) risk-based capital greater than or equal to the sum of its credit, market and operational risk capital
requirements; (2) a minimum capital-to-assets ratio of 4%; and (3) a minimum total capital leverage ratio of 5% of total assets.
At September 30, 2017, the FHLB of Des Moines was in compliance with all three of the regulatory capital requirements.
ASB's required holding in the stock of the FHLB is both membership and activity-based. Membership is based on a percentage
of total assets (0.12%) while the portion related to activity is based on a percentage of outstanding activity, mainly advances
(4%). As of December 31, 2017, ASB was required and owned capital stock in the FHLB of Des Moines in the amount of
$10 million. See “Stock in FHLB” in HEI’s MD&A section for recent developments regarding the FHLB of Des Moines.
Community Reinvestment. The Community Reinvestment Act (CRA) requires financial institutions to help meet the credit
needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The
OCC will consider ASB’s CRA record in evaluating an application for a new deposit facility, including the establishment of a
branch, the relocation of a branch or office, or the acquisition of an interest in another bank. ASB currently holds an
“outstanding” CRA rating.
Other laws. ASB is subject to federal and state consumer protection laws which affect deposit and lending activities, such
as the Truth in Lending Act (TILA), the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act (RESPA), the Home Mortgage Disclosure Act and several federal and state financial privacy acts intended to
protect consumers’ personal information and prevent identity theft, such as the Gramm Act and the Fair and Accurate
Transactions Act. ASB is also subject to federal laws regulating certain of its lending practices, such as the Flood Disaster
Protection Act, and laws requiring reports to regulators of certain customer transactions, such as the Currency and Foreign
Transactions Reporting Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act. ASB’s
relationship with Cetera Investment Services LLC and Cetera Investment Advisers LLC is also governed by regulations
adopted by the FRB under the Gramm Act, which regulate “networking” relationships under which a financial institution refers
customers to a broker-dealer for securities services and employees of the financial institution are permitted to receive a nominal
fee for the referrals. These laws may provide for substantial penalties in the event of noncompliance.
The TILA-RESPA Integrated Disclosure rule became effective on October 3, 2015. The rule requires easier-to-use
mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The Dodd-Frank Wall Street Reform
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and Consumer Protection Act (the Dodd Frank Act) mandated that the Bureau of Consumer Financial Protection (the Bureau)
establish a single disclosure scheme for use by lenders and creditors in complying with the disclosure requirements of both
RESPA and TILA. The Dodd-Frank Act amended RESPA to require that the Bureau publish a single, integrated disclosure for
mortgage loan transactions. The first new form - the Loan Estimate - is designed to provide disclosures that will be helpful to
consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form is
provided to consumers within three business days after they submit a loan application. The second form - the Closing
Disclosure - is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the
transaction. This form is provided to consumers three business days before they close on the loan. The rule applies to most
closed-end consumer mortgages.
ASB believes that it currently is in compliance with these laws and regulations in all material respects.
Proposed legislation. See the discussion of proposed legislation in “Bank–Legislation and regulation” in HEI’s MD&A.
Environmental regulation. ASB may be subject to the provisions of Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), Hawaii Environmental Response Law (ERL) and regulations promulgated
thereunder, which impose liability for environmental cleanup costs on certain categories of responsible parties. CERCLA and
ERL exempt persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not
participate in the management of the facility. Although there may be some risk of liability for ASB for environmental cleanup
costs in the event ASB forecloses on, and becomes the owner of, property with environmental problems, the Company believes
the risk is not as great for ASB as it may be for other depository institutions that have a larger portfolio of commercial loans.
Additional information. For additional information about ASB, see the sections under “Bank” in HEI’s MD&A, HEI’s
“Quantitative and Qualitative Disclosures about Market Risk” and HEI's Consolidated Financial Statements, including Note 4
thereto.
Properties. ASB owns or leases several office buildings in downtown Honolulu, owns land and an operations center in the
Mililani Technology Park on the island of Oahu and owns land on which a number of its branches are located.
The following table sets forth the number of bank branches owned and leased by ASB by island:
December 31, 2017
Oahu
Maui
Hawaii
Kauai
Molokai
Number of branches
Leased
Owned
Total
8
3
3
2
—
16
26
3
2
1
1
33
34
6
5
3
1
49
During 2017, two branches were closed on Oahu and one branch on Maui. ASB had other branches in close proximity to
the closed branches and customer accounts were consolidated into those branches.
As of December 31, 2017, the net book value (NBV) of branches and office facilities was $75 million ($68 million NBV of
the land and improvements for the branches and office facilities owned by ASB and $7 million represents the NBV of ASB’s
leasehold improvements) compared to the NBV of branches and office facilities of $68 million ($62 million NBV of the land
and improvements for the branches and office facilities owned by ASB and $6 million represents the NBV of ASB’s leasehold
improvements) as of December 31, 2016. The leases expire on various dates through February 2033, but many of the leases
have extension provisions.
As of December 31, 2017, ASB owned 113 automated teller machines.
Construction of New Headquarters. In the first quarter of 2017, ASB began construction of its new headquarters in
downtown Honolulu. The project will cost an estimated $100 million and is expected to take twenty months to complete. The
headquarters will have approximately 370,000 square feet of space on eleven floors and consolidate five separate offices into
one building where approximately 600 employees will work.
ITEM 1A.
RISK FACTORS
The businesses of HEI and its subsidiaries involve numerous risks which, if realized, could have a material and adverse
effect on the Company’s financial statements. For additional information for certain risk factors enumerated below and other
risks of the Company and its operations, see “Cautionary Note Regarding Forward-Looking Statements” above and HEI’s
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MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk”, the Notes to the Consolidated Financial
Statements, Hawaiian Electric’s MD&A and Hawaiian Electric’s “Quantitative and Qualitative Disclosures About Market
Risk.”
Holding Company and Company-Wide Risks.
HEI is a holding company that derives its income from its operating subsidiaries and depends on the ability of those
subsidiaries to pay dividends or make other distributions to HEI and on its own ability to raise capital. HEI is a legal entity
separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, HEI’s cash
flows and consequent ability to service its obligations and pay dividends on its common stock is dependent upon its receipt of
dividends or other distributions from its operating subsidiaries and its ability to issue common stock or other equity securities
and to incur additional debt. The ability of HEI’s subsidiaries to pay dividends or make other distributions to HEI, in turn, is
subject to the risks associated with their operations and to contractual and regulatory restrictions, including:
•
•
•
•
•
the provisions of an HEI agreement with the PUC, which could limit the ability of HEI’s principal electric public
utility subsidiary, Hawaiian Electric, to pay dividends to HEI in the event that the consolidated common stock equity
of the Utilities falls below 35% of total capitalization of the electric utilities;
the provisions of an HEI agreement entered into with federal bank regulators in connection with its acquisition of its
bank subsidiary, ASB, which require HEI to contribute additional capital to ASB (up to a maximum amount of
additional capital of $28.3 million as of December 31, 2017) upon request of the regulators in order to maintain ASB’s
regulatory capital at the level required by regulation;
the minimum capital and capital distribution regulations of the OCC that are applicable to ASB and capital regulations
that become applicable to HEI and ASB Hawaii;
the receipt of a letter from the FRB communicating to the OCC and FRB's non-objection to the payment of any
dividend ASB proposes to declare and pay to ASB Hawaii and HEI; and
the provisions of preferred stock resolutions and debt instruments of HEI and its subsidiaries.
The Company is subject to risks associated with the Hawaii economy (in the aggregate and on an individual island basis),
volatile U.S. capital markets and changes in the interest rate and credit market environment that have and/or could result in
higher retirement benefit plan funding requirements, declines in ASB’s interest rate margins and investment values, higher
delinquencies and charge-offs in ASB’s loan portfolio and restrictions on the ability of HEI or its subsidiaries to borrow money
or issue securities. The two largest components of Hawaii’s economy are tourism and the federal government (including the
military). Because the core businesses of HEI’s subsidiaries are providing local public electric utility services (through
Hawaiian Electric and its subsidiaries) and banking services (through ASB) in Hawaii, the Company’s operating results are
significantly influenced by Hawaii’s economy, which in turn is influenced by economic conditions in the mainland U.S.
(particularly California) and Asia (particularly Japan) as a result of the impact of those conditions on tourism, by the impact of
interest rates on the construction and real estate industries and by the impact of world conditions on federal government
spending in Hawaii.
If Fitch, Moody's or S&P were to downgrade HEI’s or Hawaiian Electric’s long-term debt ratings because of past adverse
effects, or if future events were to adversely affect the availability of capital to the Company, HEI’s and Hawaiian Electric’s
ability to borrow and raise capital could be constrained and their future borrowing costs would likely increase with resulting
reductions in HEI’s consolidated net income in future periods. Further, if HEI’s or Hawaiian Electric’s commercial paper
ratings were to be downgraded, HEI and Hawaiian Electric might not be able to sell commercial paper and might be required to
draw on more expensive bank lines of credit or to defer capital or other expenditures.
Changes in the U.S. capital markets can also have significant effects on the Company. For example, pension funding
requirements are affected by the market performance of the assets in the master pension trust maintained for pension plans, and
by the discount rate used to estimate the service and interest cost components of net periodic pension cost and value obligations.
The Utilities’ pension tracking mechanisms help moderate pension expense; however, the significant decline in 2008 in the
value of the Company’s defined benefit pension plan assets resulted in a substantial gap between the projected benefit
obligations under the plans and the value of plan assets, resulting in increases in funding requirements. The increases have
moderated in recent years as investment performance has improved.
Because the earnings of ASB depend primarily on net interest income, interest rate risk is a significant risk of ASB’s
operations. HEI and the Utilities are also exposed to interest rate risk primarily due to their periodic borrowing requirements,
the discount rate used to determine pension funding requirements and the possible effect of interest rates on the electric utilities’
rates of return. Interest rates are sensitive to many factors, including general economic conditions and the policies of
government and regulatory authorities. HEI cannot predict future changes in interest rates, nor be certain that interest rate risk
management strategies it or its subsidiaries have implemented will be successful in managing interest rate risk.
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Interest rate risk also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and
decreases in prevailing interest rates generally translate into decreases and increases in the fair values of those instruments,
respectively. Disruptions in the credit markets, a liquidity crisis in the banking industry or increased levels of residential
mortgage delinquencies and defaults may result in decreases in the fair value of ASB’s investment securities and an impairment
that is other-than-temporary, requiring ASB to write down its investment securities. As of December 31, 2017, ASB’s
investment in U.S. Treasury, federal agency obligations, and mortgage-related securities have an implicit guarantee from the
U.S. government.
HEI and Hawaiian Electric and their subsidiaries may incur higher retirement benefits expenses and have and will likely
continue to recognize substantial liabilities for retirement benefits. Retirement benefits expenses and cash funding
requirements could increase in future years depending on numerous factors, including the performance of the U.S. equity
markets, trends in interest rates and health care costs, plan amendments, new laws relating to pension funding and changes in
accounting principles. For the Utilities, however, retirement benefits expenses, as adjusted by the pension and postretirement
benefits other than pensions (OPEB) tracking mechanisms, have been an allowable expense for rate-making purposes.
The Company is subject to the risks associated with the geographic concentration of its businesses and current lack of
interconnections that could result in service interruptions at the Utilities or higher default rates on loans held by ASB. The
business of the Utilities is concentrated on the individual islands they serve in the State of Hawaii. Their operations are more
vulnerable to service interruptions than are many U.S. mainland utilities because none of the systems of the Utilities are
interconnected with the systems on the other islands they serve. Because of this lack of interconnections, it is necessary to
maintain higher generation reserve margins than are typical for U.S. mainland utilities to help ensure reliable service. Service
interruptions, including in particular extended interruptions that could result from a natural disaster or terrorist activity, could
adversely impact the KWH sales of some or all of the Utilities.
Substantially all of ASB’s consumer loan customers are Hawaii residents. A significant portion of the commercial loan
customers are located in Hawaii. While a majority of customers are on Oahu, ASB also has customers on the neighbor islands
(whose economies have been weaker than Oahu during the recent economic downturn). Substantially all of the real estate
underlying ASB’s residential and commercial real estate loans are located in Hawaii. These assets may be subject to a greater
risk of default than other comparable assets held by financial institutions with other geographic concentrations in the event of
adverse economic, political or business developments or natural disasters affecting Hawaii and the ability of ASB’s customers
to make payments of principal and interest on their loans.
Increasing competition and technological advances could cause HEI’s businesses to lose customers or render their
operations obsolete. The banking industry in Hawaii, and certain aspects of the electric utility industry, are competitive. The
success of HEI’s subsidiaries in meeting competition and responding to technological advances will continue to have a direct
impact on HEI’s consolidated financial performance. For example:
• ASB, one of the largest financial institutions in the state, is in direct competition for deposits and loans not only with
two larger institutions that have substantial capital, technology and marketing resources, but also with smaller Hawaii
institutions and other U.S. institutions, including credit unions, mutual funds, mortgage brokers, finance companies
and investment banking firms. Larger financial institutions may have greater access to capital at lower costs, which
could impair ASB’s ability to compete effectively. Significant advances in technology could render the operations of
ASB less competitive or obsolete.
• The Utilities face competition from IPPs; customer self-generation, with or without cogeneration; customer energy
storage; and the potential formation of community-based, cooperative ownership or municipality structures for
electrical service on all islands it serves. With the exception of certain identified projects, the Utilities are required to
use competitive bidding to acquire a future generation resource unless the PUC finds competitive bidding to be
unsuitable. The PUC set policies for distributed generation (DG) interconnection agreements and standby rates. The
results of competitive bidding, competition from IPPs, customer self-generation, and potential cooperative ownership
or municipality structures for electric utility service, and the rate at which technological developments facilitating
nonutility generation of electricity, combined heat and power technology, off-grid microgrids, and customer energy
storage may adversely affect the Utilities and the results of their operations.
• New technological developments, such as the commercial development of energy storage and microgrids, may render
the operations of the Utilities less competitive or outdated.
The Company may be subject to information technology and operational system failures, network disruptions, cyber
attacks and breaches in data security that could adversely affect its businesses and reputation.
Utilities. The Utilities rely on evolving and increasingly complex operational and information systems, networks and
other technologies, which are interconnected with the systems and network infrastructure owned by third parties to support a
variety of business processes and activities, including procurement and supply chain, invoicing and collection of payments,
customer relationship management, human resource management, the acquisition, generation and delivery of electrical service
28
to customers, and to process financial information and results of operations for internal reporting purposes and to comply with
regulatory financial reporting and legal and tax requirements. The Utilities use their systems and infrastructure to create, collect,
store, and process sensitive information, including personal information regarding customers, employees and their dependents,
retirees, and other individuals. Despite the Utilities security measures, all of their systems are vulnerable to disability, failures
or unauthorized access caused by natural disasters, cyber security incidents, security breaches, user error, unintentional defects
created by system changes, military or terrorist actions, power or communication failures or similar events. Any such failure
could have a material adverse impact on the Utilities ability to process transactions and provide service, as well the Utilities’
financial condition and results of operations. Further, a data breach involving theft, improper disclosure, or other unauthorized
access to or acquisition of confidential information could subject the Utilities to penalties for violation of applicable privacy
laws, claims by third parties, and enforcement actions by government agencies. It could also reduce the value of proprietary
information, and harm the reputation of the Utilities.
As noted by the U.S. Department of Homeland Security, the utility industry is continuing to experience an increase in the
frequency and sophistication of cyber security incidents. The Utilities’ systems have been, and will likely continue to be, a
target of attacks. Further, the Utilities’ operational networks may be subject to new cyber security risks due to modernizing and
interconnecting existing infrastructure with new technologies and control systems, including those owned by third parties.
Although the Utilities have not experienced a material cyber security breach to date, such incidents may occur and may have a
material adverse effect on the Utilities in the future. In order to address cyber security risks to their information systems, the
Utilities maintain security measures designed to protect their information technology systems, network infrastructure and other
assets. The Utilities actively monitor developments in the area of cyber security and are involved in various related government
and industry groups, and brief the Board quarterly on relevant cyber security issues. Although the Utilities continue to make
investments in their cyber security program, including personnel, technologies, cyber insurance and training of Utilities
personnel, there can be no assurance that these systems or their expected functionality will be implemented, maintained, or
expanded effectively; nor can security measures completely eliminate the possibility of a cyber security breach. The Utility
maintains cyber liability insurance that covers certain damages caused by cyber incidents. However, there is no guarantee that
adequate insurance will continue to be available at rates the Utility believes are reasonable or that the costs of responding to and
recovering from a cyber incident will be covered by insurance or recoverable in rates. If the Utilities’ cyber security measures
were to be breached, the Utilities could suffer financial loss, business disruptions, liability to customers, regulatory intervention
or damage to their reputation.
Due to the size, scope and complexity of the Utilities’ business, the development and maintenance of information
technology systems to process and track information is critical and challenging. The Utilities often rely on third-party vendors
to host, maintain, modify, and update its systems and these third-party vendors could cease to exist, fail to establish adequate
processes to protect the Utilities systems and information, or experience internal or external security incidents. In addition, the
Utilities are pursuing complex business transformation initiatives, which include establishing common processes across
Hawaiian Electric, Hawaii Electric Light and Maui Electric and the upgrade or replacement of existing systems. Significant
system changes increase the risk of system interruptions. Although the Utilities maintain change control processes to mitigate
this risk, system interruptions may occur. Further, delay or failure to complete the integration of information systems and
processes may result in delays in regulatory cost recovery, increased service interruptions of aging legacy systems, or the failure
to realize the cost savings anticipated to be derived from these initiatives.
The Utilities are in the process of replacing their existing ERP system. Although the Utilities have in place measures,
including redundant systems and recovery capabilities to mitigate system interruptions to their systems, until the new system is
put into service the Utilities face elevated operational risk from reliance on old and no longer fully supported software,
including the possibility of increased frequency, duration and impact of interruptions.
The Utilities have disaster recovery plans in place to protect their businesses from information technology service
interruptions. The disaster recovery plans, however, may not be successful in preventing the loss of customer data, service
interruptions and disruptions to operations or damage to important facilities. If any of these systems fail to operate properly or
becomes disabled and the Utilities’ disaster recovery plans do not effectively resolve the issues in a timely manner, the Utilities
could suffer financial loss, business disruptions, liability to customers, regulatory intervention or damage to their reputations.
ASB. ASB is highly dependent on its ability to process, on a daily basis, a large number of transactions and relies
heavily on communication and information systems, including those of third party vendors and other service providers.
Communication and information system failures can result from a variety of risks including, but not limited to, events that are
wholly or partially out of ASB’s control, such as communication line integrity, weather, terrorist acts, natural disasters,
accidental disasters, unauthorized breaches of security systems, energy delivery systems, cyber-attacks and other events.
ASB is under continuous threat of loss due to cyber-attacks, especially as ASB continues to expand customer capabilities to
utilize the Internet and other remote channels to transact business. Two of the most significant cyber-attack risks that ASB faces
are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals extract funds directly from
29
customers’ or ASB's accounts using fraudulent schemes that may include Internet-based funds transfers. ASB has been subject
to e-fraud incidents historically. Loss of sensitive customer data are attempts to steal sensitive customer data, such as account
numbers and social security numbers, through unauthorized access to computer systems, including computer hacking. Such
attacks are less frequent, but could present significant reputational, legal and regulatory costs if successful. Intrusion detection
and prevention systems, anti-virus software, firewalls and other general information technology controls have been put in place
to detect and prevent cyber-attacks or information system breaches. A disaster recovery plan has been developed in the event of
a natural disaster, security breach, military or terrorist action, power or communication failure or similar event. The disaster
recovery plan, however, may not be successful in preventing the loss of customer data, service interruptions, disruptions to
operations or damage to important facilities. Although ASB devotes significant resources to maintain and regularly upgrade its
systems and processes that are designed to protect the security of ASB’s computer systems, software, networks and other
technology assets and the confidentiality, integrity and availability of information belonging to ASB and its customers, there
can be no assurance that such failures, interruptions or security breaches will not occur or, if they do occur, that they will be
adequately corrected by ASB or its vendors.
To date, ASB has not experienced any material losses relating to cyber-attacks or other information security breaches, but
there can be no assurance that ASB will not suffer such losses in the future. If any of these systems fail to operate properly or
become disabled even for a brief period of time, ASB could suffer financial loss, business disruptions, liability to customers,
regulatory intervention or damage to its reputation, any of which could have a material adverse effect on ASB’s financial
condition and results of operations.
HEI’s businesses could suffer losses that are uninsured due to a lack of affordable insurance coverage, unavailability of
insurance coverage or limitations on the insurance coverage the Company does have. In the ordinary course of business, HEI
and its subsidiaries purchase insurance coverages (e.g., property and liability coverages) to protect against loss of, or damage to,
their properties and against claims made by third parties and employees for property damage or personal injuries. However, the
protection provided by such insurance is limited in significant respects and, in some instances, there is no coverage. Certain of
the insurance has substantial deductibles or has limits on the maximum amounts that may be recovered. For example, the
Utilities’ overhead and underground transmission and distribution systems (with the exception of substation buildings and
contents) have a replacement value roughly estimated at $7 billion and are largely not insured against loss or damage because
the amount of transmission and distribution system insurance available is limited and the premiums are cost prohibitive.
Similarly, the Utilities have no business interruption insurance as the premiums for such insurance would be cost prohibitive,
particularly since the Utilities are not interconnected to other systems. If a hurricane or other uninsured catastrophic natural
disaster were to occur, and if the PUC were not to allow the affected Utilities to recover from ratepayers restoration costs and
revenues lost from business interruption, the lost revenues and repair expenses could result in a significant decrease in HEI’s
consolidated net income or in significant net losses for the affected periods.
ASB generally does not obtain credit enhancements, such as mortgagor bankruptcy insurance, but does require standard
hazard and hurricane insurance and may require flood insurance for certain properties. ASB is subject to the risks of borrower
defaults and bankruptcies, special hazard losses not covered by the required insurance and the insurance company’s inability to
pay claims on existing policies.
Increased federal and state environmental regulation will require an increasing commitment of resources and funds and
could result in construction delays or penalties and fines for non-compliance. HEI and its subsidiaries are subject to federal,
state and local environmental laws and regulations relating to air quality, water quality, hazardous substances, waste
management, natural resources and health and safety, which regulate, among other matters, the operation of existing facilities,
the construction and operation of new facilities and the proper cleanup and disposal of hazardous and toxic wastes and
substances. HEI or its subsidiaries are currently involved in investigatory or remedial actions at current, former or third-party
sites and there is no assurance that the Company will not incur material costs relating to these sites. In addition, compliance
with these legal requirements requires the Utilities to commit significant resources and funds toward, among other things,
environmental monitoring, installation of pollution control equipment and payment of emission fees. These laws and
regulations, among other things, require that certain environmental permits be obtained in order to construct or operate certain
facilities, and obtaining such permits can entail significant expense and cause substantial construction delays. Also, these laws
and regulations may be amended from time to time, including amendments that increase the burden and expense of compliance.
For example, emission and/or discharge limits may be tightened, more extensive permitting requirements may be imposed and
additional substances may become regulated. In addition, significant regulatory uncertainty exists regarding the impact of
federal or state greenhouse gas (GHG) emission limits and reductions.
If HEI or its subsidiaries fail to comply with environmental laws and regulations, even if caused by factors beyond their
control, that failure may result in civil or criminal penalties and fines or the cessation of operations.
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Adverse tax rulings or developments could result in significant increases in tax payments and/or expense. Governmental
taxing authorities could challenge a tax return position taken by HEI or its subsidiaries and, if the taxing authorities prevail,
HEI’s consolidated tax payments and/or expense, including applicable penalties and interest, could increase significantly.
The Company could be subject to the risk of uninsured losses in excess of its accruals for litigation matters. HEI and its
subsidiaries are involved in routine litigation in the ordinary course of their businesses, most of which is covered by insurance
(subject to policy limits and deductibles). However, other litigation may arise that is not routine or involves claims that may not
be covered by insurance. Because of the uncertainties associated with litigation, there is a risk that litigation against HEI or its
subsidiaries, even if vigorously defended, could result in costs of defense and judgment or settlement amounts not covered by
insurance and in excess of reserves established in HEI’s consolidated financial statements.
Changes in accounting principles and estimates could affect the reported amounts of the Company’s assets and liabilities
or revenues and expenses. HEI’s consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the U.S. Changes in accounting principles (including the possible adoption of International Financial
Reporting Standards or new U.S. accounting standards), or changes in the Company’s application of existing accounting
principles, could materially affect the financial statement presentation of HEI’s or the Utilities’ consolidated results of
operations and/or financial condition. Further, in preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change include the amounts reported for electric utility
revenues; allowance for loan losses; income taxes; investment securities, property, plant and equipment; regulatory assets and
liabilities; derivatives; goodwill; pension and other postretirement benefit obligations; and contingencies and litigation.
The Utilities' financial statements reflect assets and costs based on cost-based rate-making regulations. Continued
accounting in this manner requires that certain criteria relating to the recoverability of such costs through rates be met. If events
or circumstances should change so that the criteria are no longer satisfied, the Utilities’ expect that their regulatory assets
(amounting to $869 million as of December 31, 2017), net of regulatory liabilities (amounting to $881 million as of
December 31, 2017), would be charged to the statement of income in the period of discontinuance. As a result of the 2017 Tax
Cuts and Jobs Act (Tax Act), the Utilities were required to adjust their deferred tax assets and liabilities for the lower federal
income tax rate, resulting in excess accumulated deferred income tax balances (ADIT). To the extent the ADIT was related to
items included in regulatory rate base or ratemaking, the related net excess ADIT ($285 million) was reclassified to a regulatory
liability that will be returned to customers through rates. The rate of the return to customers will be determined with the
approval of the PUC.
Changes in accounting principles can also impact HEI’s consolidated financial statements. For example, if management
determines that a PPA requires the consolidation of the IPP in the financial statements, the consolidation could have a material
effect on Hawaiian Electric’s and HEI’s 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. Also, if management determines that a PPA requires the classification of the agreement as a capital
lease, a material effect on HEI’s consolidated balance sheet may result, including the recognition of significant capital assets
and lease obligations.
Changes in the accounting principles for expected credit losses were issued by the FASB to replace existing impairment
models, including replacing an “incurred loss” model for loans with a “current expected credit loss” model based on historical
experience, current conditions and reasonable and supportable forecasts. The changes also require 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. The Company plans to adopt the accounting principle
changes in the first quarter of 2020 and has not yet determined the impact of the adoption. The new impairment model could
have a material adverse impact on ASB’s results of operations.
Electric Utility Risks.
Actions of the PUC are outside the control of the Utilities and could result in inadequate or untimely rate increases, in rate
reductions or refunds or in unanticipated delays, expenses or writedowns in connection with the construction of new projects.
The rates the Utilities are allowed to charge for their services and the timeliness of permitted rate increases are among the most
important items influencing the Utilities’ results of operations, financial condition and liquidity. The PUC has broad discretion
over the rates that the Utilities charge their customers. As part of the decoupling mechanism that the Utilities have
implemented, each of the Utilities will file a rate case once every three years. Any adverse decision by the PUC concerning the
level or method of determining electric utility rates, the items and amounts that may be included in rate base, the returns on
equity or rate base found to be reasonable, the potential consequences of exceeding or not meeting such returns, or any
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prolonged delay in rendering a decision in a rate or other proceeding could have a material adverse effect on Hawaiian
Electric’s consolidated results of operations, financial condition and liquidity.
To improve the timing and certainty of the recovery of their costs, the Utilities have proposed and/or received approval of
various cost recovery mechanisms including an ECAC, a PPAC, and pension and OPEB tracking mechanisms, as well as a
decoupling mechanism, a major project interim recovery (MPIR) adjustment mechanism, and a renewable energy infrastructure
program (REIP) surcharge. A change in, or the elimination of, any of these cost recovery mechanisms, including in the current
proceeding in which the PUC is examining the decoupling mechanism, could have a material adverse effect on the Utilities.
The Utilities could be required to refund to their customers, with interest, revenues that have been or may be received
under interim rate orders in their rate case proceedings and other proceedings, if and to the extent they exceed the amounts
allowed in final orders.
Many public utility projects require PUC approval and various permits (e.g., environmental and land use permits) from
other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits, or any
adverse decision or policy made or adopted, or any prolonged delay in rendering a decision, by an agency with respect to such
approvals and permits, can result in significantly increased project costs or even cancellation of projects. In the event a project
does not proceed, or if the PUC disallows cost recovery for all or part of a project, or if project costs exceed caps imposed by
the PUC in its approval of the project, project costs may need to be written off in amounts that could result in significant
reductions in Hawaiian Electric’s consolidated net income. For example, in January 2013, the Utilities and the Consumer
Advocate signed a settlement agreement to write off $40 million of costs in lieu of conducting PUC-ordered regulatory audits
of the CIP CT-1 and the CIS projects.
Energy cost adjustment clauses. The rate schedules of each of the Utilities include ECACs under which electric rates
charged to customers are automatically adjusted for changes in the weighted-average price paid for fuel oil and certain
components of purchased power, and the relative amounts of company-generated power and purchased power.
ECACs are subject to periodic review by the PUC. In the most recent rate cases, the PUC allowed the current ECAC to
continue. In the decoupling reexamination proceeding in 2014 through 2016, the PUC considered potential modifications to the
ECAC. In April 2017, the PUC issued an order in the decoupling reexamination proceeding acknowledging the complex issues
relating to changing the ECAC mechanisms and indicating it will consider these issues in the Utilities’ pending rate cases.
All of the Utilities have proposed modifications to their respective ECAC provisions in their open rate cases. Hawaii
Electric Light has proposed an expansion of the range of fuel usage efficiencies under which fuel costs would be fully passed
through to customers. Hawaiian Electric has also proposed such an expansion of the range of fuel efficiencies for low sulfur
fuel oil, which accounts for about 97% of its generation fuel usage, and has proposed to fully pass through to customers the
costs of diesel fuel and biodiesel fuel that represent the balance of the generation fuel usage. Maui Electric has proposed to
retain the existing range of fuel usage efficiencies at all three islands. All of the Utilities have proposed an additional trigger
that would allow a re-establishment of fuel usage efficiency targets under certain conditions. Blue Planet Foundation, a party to
the Hawaiian Electric rate case has recommended allowing only a partial pass-through of fuel costs with a sharing of cost above
or below the allowed levels. See "Most recent rate proceedings" in Note 3 of the Consolidated Financial Statements.
A change in, or the elimination of, the ECAC could have a material adverse effect on the Utilities.
Electric utility operations are significantly influenced by weather conditions. The Utilities’ results of operations can be
affected by the weather. Weather conditions, particularly temperature and humidity, directly influence the demand for
electricity. In addition, severe weather and natural disasters, such as hurricanes, earthquakes, tsunamis and lightning storms,
which may become more severe or frequent as a result of global climate changes, can cause outages and property damage and
require the Utilities to incur significant additional expenses that may not be recoverable.
Electric utility operations may be significantly influenced by climate change. While the timing, extent and ultimate effects
of climate change cannot be determined with any certainty, climate change is predicted to result in sea level rise, which could
potentially impact coastal and other low-lying areas (where much of the Utilities’ electric infrastructure is sited), and could
cause erosion of beaches, saltwater intrusion into aquifers and surface ecosystems, higher water tables and increased flooding
and storm damage due to heavy rainfall. The effects of climate change on the weather (for example, floods or hurricanes), sea
levels, and water availability and quality have the potential to materially adversely affect the results of operations, financial
condition and liquidity of the Utilities. For example, severe weather could cause significant harm to the Utilities’ physical
facilities.
Electric utility operations depend heavily on third-party suppliers of fuel and purchased power. The Utilities rely on fuel
oil suppliers and shippers and IPPs to deliver fuel oil and power, respectively, in accordance with contractual agreements.
Approximately 69% of the net energy generated or purchased by the Utilities in 2017 was generated from the burning of fossil
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fuel oil, and purchases of power by the Utilities provided about 46% of their total net energy generated and purchased for the
same period. Failure or delay by oil suppliers and shippers to provide fuel pursuant to existing contracts, or failure by a major
IPP to deliver the firm capacity anticipated in its PPA, could disrupt the ability of the Utilities to deliver electricity and require
the Utilities to incur additional expenses to meet the needs of their customers that may not be recoverable. In addition, as the
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. Also, as these contractual agreements end, the Utilities may not be able to purchase fuel
and power on terms equivalent to the current contractual agreements.
Electric utility generating facilities are subject to operational risks that could result in unscheduled plant outages,
unanticipated and/or increased operation and maintenance expenses and increased power purchase costs. Operation of
electric generating facilities involves certain risks which can adversely affect energy output and efficiency levels. Included
among these risks are facility shutdowns or power interruptions due to insufficient generation or a breakdown or failure of
equipment or processes. In addition, operations could be negatively impacted by interruptions in fuel supply, inability to
negotiate satisfactory collective bargaining agreements when existing agreements expire or other labor disputes, inability to
comply with regulatory or permit requirements, disruptions in delivery of electricity, operator error and catastrophic events such
as earthquakes, tsunamis, hurricanes, fires, explosions, floods or other similar occurrences affecting the Utilities’ generating
facilities or transmission and distribution systems.
The Utilities may be adversely affected by new legislation or administrative actions. Congress, the Hawaii legislature and
governmental agencies periodically consider legislation and other initiatives that could have uncertain or negative effects on the
Utilities and their customers. Congress, the Hawaii legislature and governmental agencies have adopted, or are considering
adopting, a number of measures that will significantly affect the Utilities, as described below.
Renewable Portfolio Standards law. In 2015, Hawaii’s RPS law was amended to require electric utilities to meet an
RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045 respectively. Energy savings
resulting from energy efficiency programs do not count toward the RPS after 2014. The Utilities are committed to achieving
these goals and met the 2015 RPS; however, due to the exclusion of energy savings in calculating RPS after 2014 and risks such
as potential delays in IPPs being able to deliver contracted renewable energy, it is possible the Utilities may not attain the
required renewable percentages in the future, and management cannot predict the future consequences of failure to do so
(including potential penalties to be assessed by the PUC). On December 19, 2008, the PUC approved a penalty of $20 for every
MWh that an electric utility is deficient under Hawaii’s RPS law. The PUC noted, however, that this penalty may be reduced, in
the PUC’s discretion, due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the
event or circumstance could not be reasonably foreseen and ameliorated, as described in the RPS law and in an RPS framework
adopted by the PUC. In addition, the PUC ordered that the Utilities will be prohibited from recovering any RPS penalty costs
through rates.
Renewable energy. In 2007, a measure was passed by the Hawaii legislature stating that the PUC may consider the
need for increased renewable energy in rendering decisions on utility matters. Due to this measure, it is possible that, if energy
from a renewable source is more expensive than energy from fossil fuel, the PUC may still approve the purchase of energy from
the renewable source, resulting in higher costs.
Global climate change and greenhouse gas emissions reduction. National and international concern about climate
change and the contribution of GHG emissions (including carbon dioxide emissions from the combustion of fossil fuels) to
climate change have led to federal legislative and regulatory proposals and action by the state of Hawaii to reduce GHG
emissions.
In July 2007, the State Legislature passed Act 234, which requires a statewide reduction of GHG emissions by January 1,
2020 to levels at or below the statewide GHG emission levels in 1990. On June 20, 2014, the Governor signed the final rules
required to implement Act 234 and these rules went into effect on June 30, 2014. In general, Act 234 and the GHG rule require
affected sources that have the potential to emit GHGs in excess of established thresholds to reduce their GHG emissions by
16% below 2010 emission levels by 2020. In accordance with State requirements, the Utilities submitted an Emissions
Reduction Plan (EmRP) to the DOH on June 30, 2015. Hawaiian Electric, Maui Electric, and Hawaii Electric Light have a total
of 11 facilities affected by the state GHG rule. Hawaiian Electric made use of the partnering provisions in the GHG rule to
prepare one EmRP for all 11 of the Utilities’ affected facilities. In this plan, the Utilities have committed to a 16% reduction in
GHG emissions company-wide. Pursuant to the State’s GHG rule, the DOH will incorporate the proposed facility-specific GHG
emission limits into each facility’s covered source permit based on the 2020 levels specified in Hawaiian Electric’s EmRP. The
State GHG rule requires affected sources to pay an annual fee that is based on tons per year of GHG emissions. The Utilities’
GHG emissions fee is approximately $0.5 million annually. The latest assessment of the proposed federal and final state GHG
rules is that the continued growth in renewable power generation will significantly reduce the compliance costs and risk for the
Utilities.
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On June 3, 2010, the EPA’s final GHG Tailoring Rule was published. It created a new threshold for GHG emissions from
new and existing facilities and required certain facilities to obtain Prevention of Significant Deterioration (PSD) and Title V
operating permits. The U.S. Supreme Court upheld that the EPA can apply the Best Available Control Technology (BACT)
requirement to GHG for new or modified sources that trigger PSD permitting for air pollutants other than GHG. Any Hawaiian
Electric, Hawaii Electric Light, and Maui Electric new or modified emission sources that trigger PSD permitting will be
required to comply with BACT requirements. On August 26, 2016, the EPA proposed revisions to the PSD and Title V
permitting regulations to fully implement the 2014 U.S. Supreme Court decision including the establishment of a threshold
below which BACT is not required for GHG emissions for new or modified emission sources that trigger PSD permitting.
The Utilities have taken, and continue to identify opportunities to take, direct action to reduce GHG emissions from their
operations, including, but not limited to, supporting DSM programs that foster energy efficiency, using renewable resources for
energy production and purchasing power from IPPs generated by renewable resources, burning renewable biodiesel in
Hawaiian Electric’s CIP CT-1, using biodiesel for startup and shutdown of selected Maui Electric generating units, and testing
biofuel blends in other Hawaiian Electric and Maui Electric generating units.
The foregoing legislation or legislation that now is, or may in the future be, proposed present risks and uncertainties for the
Utilities.
The Utilities may be subject to increased operational challenges and their results of operations, financial condition and
liquidity may be adversely impacted in meeting the commitments and objectives of clean energy initiatives and Renewable
Portfolio Standards (RPS). The far-reaching nature of the Utilities' renewable energy commitments and the RPS goals present
risks to the Company. Among such risks are: (1) the dependence on third party suppliers of renewable purchased energy, which
if the Utilities are unsuccessful in negotiating purchased power agreements with such IPPs or if a major IPP fails to deliver the
anticipated capacity in its purchased power agreement, could impact the Utilities’ achievement of their commitments to RPS
goals and/or the Utilities’ ability to deliver reliable service; (2) delays in acquiring or unavailability of non-fossil fuel supplies
for renewable generation; (3) the impact of intermittent power to the electrical grid and reliability of service if appropriate
supporting infrastructure is not installed or does not operate effectively; (4) the likelihood that the Utilities may need to make
substantial investments in related infrastructure, which could result in increased borrowings and, therefore, materially impact
the financial condition and liquidity of the Utilities; and (5) the commitment to support a variety of initiatives, which, if
approved by the PUC, may have a material impact on the results of operations and financial condition of the Utilities depending
on their design and implementation.
Bank Risks.
Fluctuations in interest rates could result in lower net interest income, impair ASB’s ability to originate new loans or
impair the ability of ASB’s adjustable-rate borrowers to make increased payments or cause such borrowers to repay their
adjustable-rate loans. Interest rate risk is a significant risk of ASB’s operations. ASB’s net interest income consists primarily of
interest income received on fixed-rate and adjustable-rate loans, mortgage-related securities and investments, less interest
expense consisting primarily of interest paid on deposits and other borrowings. Interest rate risk arises when earning assets
mature or when their interest rates change in a time frame different from that of the costing liabilities. Changes in market
interest rates, including changes in the relationship between short-term and long-term market interest rates or between different
interest rate indices, can impact ASB’s net interest margin.
Although ASB pursues an asset-liability management strategy designed to mitigate its risk from changes in market interest
rates, unfavorable movements in interest rates could result in lower net interest income. Residential 1-4 family fixed-rate
mortgage loans comprised about 42% of ASB’s loan portfolio as of December 31, 2017 and do not re-price with movements in
interest rates. ASB continues to face a challenging interest rate environment. The Federal Open Market Committee increased
the federal funds rate in 2016 and 2017, which has caused the yield curve to flatten. Increases in market interest rates could
have an adverse impact on ASB’s cost of funds. Higher market interest rates could lead to higher interest rates paid on deposits
and other borrowings. Significant increases in market interest rates, or the perception that an increase may occur, could
adversely affect ASB’s ability to originate new loans and grow. An increase in market interest rates, especially a sudden
increase, could also adversely affect the ability of ASB’s adjustable-rate borrowers to meet their higher payment obligations. If
this occurred, it could cause an increase in nonperforming assets and charge-offs. Conversely, a decrease in interest rates or a
mismatching of maturities of interest sensitive financial instruments could result in an acceleration in the prepayment of loans
and mortgage-related securities and impact ASB’s ability to reinvest its liquidity in similar yielding assets.
Changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our loan portfolio and
interest income on loans. As a result of concerns about the accuracy of the calculation of the benchmark London Interbank
Offered Rate (LIBOR), a number of British Bankers’ Association (BBA) member banks entered into settlements with regulators
and law enforcement agencies with respect to the alleged manipulation of LIBOR. Actions by the BBA, regulators or law
enforcement agencies, as a result of these or future events, may result in changes to the manner in which LIBOR is determined.
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Potential changes, or uncertainty related to such potential changes may adversely affect the market for loans with LIBOR-
indexed interest rates. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or
prolonged increase or decrease in reported LIBOR. The head of the United Kingdom Financial Conduct Authority announced a
desire to phase out the use of LIBOR by the end of 2021. The potential effect of such an event on our LIBOR-indexed loan
portfolio and interest income on loans cannot yet be determined.
ASB’s operations are affected by factors that are beyond its control, that could result in lower revenues, higher expenses or
decreased demand for its products and services. ASB’s results of operations depend primarily on the income generated by the
supply of and demand for its products and services, which primarily consist of loans and deposit services. ASB’s revenues and
expenses may be adversely affected by various factors, including:
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local, regional, national and other economic and political conditions that could result in declines in employment and
real estate values, which in turn could adversely affect the ability of borrowers to make loan payments and the ability
of ASB to recover the full amounts owing to it under defaulted loans;
the ability of borrowers to obtain insurance and the ability of ASB to place insurance where borrowers fail to do so,
particularly in the event of catastrophic damage to collateral securing loans made by ASB;
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 profiles and asset quality, which may increase or decrease the required level of
allowance for loan losses;
technological disruptions affecting ASB’s operations or financial or operational difficulties experienced by any outside
vendor on whom ASB relies to provide key components of its business operations, such as business processing,
network access or internet connections;
the impact of legislative and regulatory changes, including changes affecting capital requirements, increasing oversight
of and reporting by banks, or affecting the lending programs or other business activities of ASB;
additional legislative changes regulating the assessment of overdraft, interchange and credit card fees, which can have
a negative impact on noninterest income;
public opinion about ASB and financial institutions in general, which, if negative, could impact the public’s trust and
confidence in ASB and adversely affect ASB’s ability to attract and retain customers and expose ASB to adverse legal
and regulatory consequences;
increases in operating costs (including employee compensation expense and benefits and regulatory compliance costs),
inflation and other factors, that exceed increases in ASB’s net interest, fee and other income; and
the ability of ASB to maintain or increase the level of deposits, ASB’s lowest costing funds.
Banking and related regulations could result in significant restrictions being imposed on ASB’s business or in a
requirement that HEI divest ASB. ASB is subject to examination and comprehensive regulation by the Department of Treasury,
the OCC and the FDIC, and is subject to reserve requirements established by the Board of Governors of the Federal Reserve
System. In addition, the FRB is responsible for regulating ASB’s holding companies, HEI and ASB Hawaii. The regulatory
authorities have extensive discretion in connection with their supervisory and enforcement activities and examination policies
to address not only ASB’s compliance with applicable banking laws and regulations, but also capital adequacy, asset quality,
management ability and performance, earnings, liquidity and various other factors.
Under certain circumstances, including any determination that ASB’s relationship with HEI results in an unsafe and
unsound banking practice, these regulatory authorities have the authority to restrict the ability of ASB to transfer assets and to
make distributions to its shareholders (including payment of dividends to HEI), or they could seek to require HEI to sever its
relationship with or divest its ownership of ASB. Payment by ASB of dividends to HEI may also be restricted by the OCC and
FRB under its prompt corrective action regulations or its capital distribution regulations if ASB’s capital position deteriorates.
In order to maintain its status as a QTL, ASB is required to maintain at least 65% of its assets in “qualified thrift investments.”
Institutions that fail to maintain QTL status are subject to various penalties, including limitations on their activities. In ASB’s
case, the activities of HEI and HEI’s other subsidiaries would also be subject to restrictions, and a failure or inability to comply
with those restrictions could effectively result in the required divestiture of ASB. Federal legislation has also been proposed in
the past that could result in a required divestiture of ASB. In the event of a required divestiture, federal law substantially limits
the types of entities that could potentially acquire ASB.
Recent legislative and regulatory initiatives could have an adverse effect on ASB’s business. The Dodd-Frank Act, which
became law in July 2010, has had a substantial impact on the financial services industry. The Dodd-Frank Act establishes a
framework through which regulatory reform will be written and changes to statutes, regulations or regulatory policies could
affect HEI and ASB in substantial and unpredictable ways. A major component of the Dodd-Frank Act is the creation of the
Consumer Financial Protection Bureau that has the responsibility for setting and enforcing clear, consistent rules relating to
consumer financial products and services and has the authority to prohibit practices it finds to be unfair, deceptive or abusive.
Compliance with any such directives could have adverse effects on ASB’s revenues or operating costs. Failure to comply with
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laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage,
which could have a material adverse effect on ASB’s business, results of operations, financial condition and liquidity.
A large percentage of ASB’s loans and securities are collateralized by real estate, and adverse changes in the real estate
market and/or general economic or other conditions may result in loan losses and adversely affect the Company’s profitability.
As of December 31, 2017 approximately 84% of ASB’s loan portfolio was comprised of loans primarily collateralized by real
estate, most of which was concentrated in the State of Hawaii. During 2017, ASB's HELOC and residential 1-4 family
portfolios grew by 6% and 3%, respectively, and now comprise 78% of total real estate loans. ASB’s financial results may be
adversely affected by changes in prevailing economic conditions, either nationally or in the state of Hawaii, including decreases
in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and
other significant external events. Adverse changes in the economy may have a negative effect on the ability of borrowers to
make timely repayments of their loans. A deterioration of the economic environment in Hawaii, including a material decline in
the real estate market, further declines in home resales, a material external shock, or any environmental clean-up obligation,
may also significantly impair the value of ASB’s collateral and ASB’s ability to sell the collateral upon foreclosure. In the event
of a default, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest. In
addition, if poor economic conditions result in decreased demand for real estate loans, ASB’s profits may decrease if its
alternative investments earn less income than real estate loans.
Expanding commercial, commercial real estate and consumer lending activities may result in higher costs and greater
credit risk than residential lending activities due to the unique characteristics of these markets. ASB had been aggressively
pursuing a strategy that included expanding its commercial, commercial real estate and consumer lines of business. If ASB
elects to pursue commercial and commercial real estate loans in the future, such loans have a higher risk profile than residential
loans. Though both commercial and commercial real estate loans have shorter terms and earn higher spreads than residential
mortgage loans, these loan types generally entail higher underwriting and other service costs and present greater credit risks
than traditional residential mortgages. Commercial loans are secured by the assets of the business and, upon default, any
collateral repossessed may not be sufficient to repay the outstanding loan balance. In addition, loan collections are dependent on
the borrower’s continuing financial stability and, thus, are more likely to be affected by current economic conditions and
adverse business developments. Commercial real estate properties tend to be unique and are more difficult to value than
residential real estate properties. Commercial real estate loans may not be fully amortizing, meaning that they have a significant
principal balance or “balloon” payment due at maturity. In addition, commercial real estate properties, particularly industrial
and warehouse properties, are generally subject to relatively greater environmental risks than noncommercial properties and to
the corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be costs and
delays involved in enforcing rights of a property owner against tenants in default under terms of leases with respect to
commercial properties. For example, a tenant may seek protection under bankruptcy laws, which could result in termination of
the tenant’s lease.
ASB also has a national syndicated lending portfolio where ASB is a participant in credit facilities agented by established
and reputable national lenders. Management selectively chooses each deal based on conservative credit criteria to ensure a high
quality, well diversified portfolio. In the event the borrower encounters financial difficulties and ASB is unable to sell its
participation interest in the loan in the secondary market, the bank is typically reliant on the originating lender for managing
any loan workout or foreclosure proceedings that may become necessary. Accordingly, ASB has less control over such
proceedings than loans it originates and may be required to accommodate the interests of other participating lenders in
resolving delinquencies or defaults on participated loans, which could result in outcomes that are not fully consistent with
ASB's preferred strategies. In addition, a significant proportion of ASB's syndicated loans are originated in states other than
Hawaii, and are subject to the local regional and regulatory risks specific to those states.
Similar to the national syndicated lending portfolio, ASB does not service commercial loans in which it has participation
interests rather than being the lead or agent lender and is subject to the policies and practices of the agent lender, who is the
loan servicer, in resolving delinquencies or defaults on participated loans.
The consumer loan portfolio primarily consists of personal unsecured loans as ASB began offering a personal loan product
with risk-based pricing. Repayment is based on the borrower’s financial stability as these loans have no collateral and there is
less assurance that ASB will be able to collect all payments due under these loans or have sufficient collateral to cover all
outstanding loan balances.
ASB's allowance for loan losses may not cover actual loan losses. ASB's allowance for loan losses is the bank's estimate of
probable losses inherent in its loan portfolio and is based on a continuing assessment of:
•
•
•
existing risks in the loan portfolio;
historical loss experience with ASB's loans;
changes in collateral value; and
36
•
current conditions (for example, economic conditions, real estate market conditions and interest rate environment).
If ASB's actual loan losses exceed its allowance for loan losses, it may incur losses, its financial condition may be
materially and adversely affected and additional capital may be required to enhance its capital position. In addition, various
regulatory agencies, as an integral part of their examination process, regularly review the adequacy of ASB's allowance. These
agencies may require ASB to establish additional allowances based on their judgment of the information available at the time of
their examinations. No assurance can be given that ASB will not sustain loan losses in excess of present or future levels of its
allowance for loan losses.
The Tax Act may impact the financial services industry with respect to the marketability of residential loans and home
equity indebtedness. The Tax Act limits the deduction available for mortgage interest by reducing the amount of debt that can be
treated as acquisition indebtedness from the current level of $1 million to $750,000. The new law also suspends the deduction
for interest on home equity indebtedness. The impact of these tax law changes on residential mortgage and home equity line of
credit loan production cannot yet be determined.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
HEI: None.
Hawaiian Electric: Not applicable.
ITEM 2.
PROPERTIES
HEI and Hawaiian Electric: See the “Properties” sections under “HEI,” “Electric utility” and “Bank” in Item 1. Business
above.
ITEM 3.
LEGAL PROCEEDINGS
HEI and Hawaiian Electric: HEI subsidiaries (including Hawaiian Electric and its subsidiaries and ASB) may be involved in
ordinary routine PUC proceedings, environmental proceedings and/or litigation incidental to their respective businesses. See the
descriptions of legal proceedings (including judicial proceedings and proceedings before the PUC and environmental and other
administrative agencies) in “Item 1. Business,” in HEI’s MD&A and in the Notes 3 and 4 of the Consolidated Financial
Statements. The outcomes of litigation and administrative proceedings are necessarily uncertain and there is a risk that the
outcome of such matters could have a material adverse effect on the financial position, results of operations or liquidity of HEI
or one or more of its subsidiaries for a particular period in the future.
ITEM 4.
MINE SAFETY DISCLOSURES
HEI and Hawaiian Electric: Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT (HEI)
The executive officers of HEI are listed below. Messrs. Oshima and Wacker are officers of HEI subsidiaries rather than of
HEI, but are deemed to be executive officers of HEI under SEC Rule 3b-7 promulgated under the 1934 Exchange Act. HEI
executive officers serve from the date of their initial appointment and are reappointed annually by the HEI Board (or annually
by the applicable HEI subsidiary board), and thereafter are appointed for one-year terms or until their successors have been
duly appointed and qualified or until their earlier resignation or removal. HEI executive officers may also hold offices with HEI
subsidiaries and affiliates in addition to their current positions listed below.
37
Name
Constance H. Lau
Age
65
Business experience for last 5 years and prior positions with the Company
HEI President and Chief Executive Officer since 5/06
HEI Director, 6/01 to 12/04 and since 5/06
Hawaiian Electric Chairman of the Board since 5/06
ASB Hawaii Director since 5/06
ASB Chairman of the Board since 5/06, Risk Committee member since 2012 and Director since 1999
· ASB Chief Executive Officer, 6/01 to 11/10, and President, 6/01 to 1/08
· ASB Senior Executive Vice President and Chief Operating Officer and Director, 12/99 to 5/01
· HEI Power Corp. Financial Vice President and Treasurer, 5/97 to 8/99
· HEI Treasurer, 4/89 to 10/99, and HEI Assistant Treasurer, 12/87 to 4/89
· Hawaiian Electric Treasurer 12/87 to 4/89 and Assistant Corporate Counsel, 9/84 to 12/87
Gregory C. Hazelton
53
HEI Executive Vice President and Chief Financial Officer since 4/17
HEI Senior Vice President, Finance, 10/16 to 4/17
Alan M. Oshima
70
· Prior to rejoining the Company in 2016: Northwest Natural Gas Company, Senior Vice
President, Chief Financial Officer and Treasurer, 2/16 to 9/16, and Northwest Natural Gas
Company, Senior Vice President and Chief Financial Officer, 6/15 to 2/16
· HEI Vice President, Finance, Treasurer and Controller, 8/13 to 6/15
· Prior to joining the Company in 2013: UBS Investment Bank, Managing Director, Global
Power & Utilities Group 3/11 to 5/13
Hawaiian Electric President and Chief Executive Officer since 10/14
Hawaiian Electric Director, 2008 to 10/11 and since 10/14
HEI Charitable Foundation President since 10/11
· Hawaiian Electric Senior Executive Officer on loan from HEI, 5/14 to 9/14
· HEI Executive Vice President, Corporate and Community Advancement, 10/11 to 5/14
Richard F. Wacker
55
ASB President and Chief Executive Officer since 11/10
ASB Director since 11/10
Family relationships; executive arrangements
There are no family relationships between any HEI executive officer and any other HEI executive officer or any HEI
director or director nominee. There are no arrangements or understandings between any HEI executive officer and any other
person pursuant to which such executive officer was selected.
38
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
HEI:
Certain of the information required by this item is incorporated herein by reference to Note 12, “Regulatory restrictions on
net assets” and Note 16, “Quarterly information (unaudited)” of the Consolidated Financial Statements and "Item 6. Selected
Financial Data” and “Equity compensation plan information” under "Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" of this Form 10-K. Certain restrictions on dividends and other distributions of
HEI are described in this report under “Item 1. Business—HEI—Regulation—Restrictions on dividends and other distributions”
and that description is incorporated herein by reference. HEI’s common stock is traded on the New York Stock Exchange and the
total number of holders of record of HEI common stock (i.e., registered shareholders) as of February 13, 2018, was 6,133.
HEI's common stock high and low for the quarters of 2017 and 2016 were as follows:
Quarters ended
(in thousands)
March 31
June 30
September 30
December 31
2017
2016
High
Low
High
Low
$
33.94 $
34.08
34.64
38.72
$
32.32
32.01
31.71
33.30
32.69 $
34.98
33.57
34.08
27.30
31.35
29.14
28.31
The dividends declared and paid on HEI's common stock for the quarters of 2017 and 2016 were as follows:
Quarters ended
(in thousands)
March 31
June 30
September 30
December 31
2017
2016
$
$
33,713
33,713
33,723
33,724
33,367
33,481
33,550
33,652
Purchases of HEI common shares were made during the fourth quarter to satisfy the requirements of certain plans as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Period*
October 1 to 31, 2017
November 1 to 30, 2017
December 1 to 31, 2017
Total Number
of Shares
Purchased **
23,311
20,261
171,481
Average
Price Paid
per Share **
34.69
37.74
37.68
$
$
$
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value) of
Shares that May Yet Be Purchased
Under the Plans or Programs
—
—
—
NA
NA
NA
NA Not applicable.
* Trades (total number of shares purchased) are reflected in the month in which the order is placed.
** The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares purchased for cash or by
the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase
plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the
DRIP, the HEIRSP and the ASB 401(k) Plan. Of the "Total number of shares purchased," 195,253 of the 215,053 shares were purchased for the
DRIP; 17,400 of the 215,053 shares were purchased for the HEIRSP; and 2,400 of the 215,053 shares were purchased for the ASB 401(k) Plan.
The repurchased shares were issued for the accounts of the participants under registration statements registering the shares issued under these
plans.
39
Hawaiian Electric:
Since a corporate restructuring on July 1, 1983, all the common stock of Hawaiian Electric has been held solely by its parent,
HEI, and is not publicly traded. Accordingly, information required with respect to “Market information” and “holders” is not
applicable to Hawaiian Electric.
The dividends declared and paid on Hawaiian Electric’s common stock for the quarters of 2017 and 2016 were as follows:
Quarters ended
(in thousands)
March 31
June 30
September 30
December 31
2017
2016
$
$
21,942
21,942
21,941
21,942
23,400
23,400
23,399
23,400
Also, see “Liquidity and capital resources” in HEI’s MD&A.
See the discussion of regulatory and other restrictions on dividends or other distributions under “Item 1. Business—HEI—
Regulation—Restrictions on dividends and other distributions” and in Note 12 of the Consolidated Financial Statements.
40
ITEM 6.
SELECTED FINANCIAL DATA
HEI:
Selected Financial Data
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(dollars in thousands, except per share amounts)
2017
2016
2015
2014
2013
Results of operations
Revenues
Net income for common stock
Basic earnings per common share
Diluted earnings per common share
Return on average common equity
Financial position *
Total assets
Deposit liabilities
Other bank borrowings
Long-term debt, net—other than bank
Preferred stock of subsidiaries – not subject to
mandatory redemption
Common stock equity
Common stock
Book value per common share *
Market price per common share
High
Low
December 31
Dividends declared per common share
Dividend payout ratio
Market price to book value per common share *
Price earnings ratio **
Common shares outstanding (thousands) *
Weighted-average-basic
Shareholders ***
Employees *
$
$
$
$
2,555,625
165,297
1.52
1.52
7.9%
$
$
$
$
2,380,654
248,256
2.30
2.29
12.4%
$
$
$
$
2,602,982
159,877
1.50
1.50
8.6%
$
$
$
$
3,239,542
168,129
1.65
1.63
9.6%
$
$
$
$
3,238,470
161,709
1.63
1.62
9.7%
$ 13,099,828
$ 12,425,506
$ 11,782,018
$ 11,177,143
$ 10,331,921
5,890,597
190,859
1,683,797
5,548,929
192,618
1,619,019
5,025,254
328,582
1,578,368
4,623,415
290,656
1,498,547
4,372,477
244,514
1,483,960
34,293
34,293
34,293
34,293
34,293
2,097,386
2,066,753
1,927,640
1,790,573
1,726,406
$
19.28
$
19.03
$
17.94
$
17.46
$
17.05
38.72
31.71
36.15
1.24
82%
188%
23.8x
108,788
108,749
26,064
3,880
34.98
27.30
33.07
1.24
54%
174%
14.4x
108,583
108,102
26,831
3,796
34.86
27.02
28.95
1.24
82%
161%
19.3x
107,460
106,418
27,927
3,918
35.00
22.71
33.48
1.24
75%
192%
20.3x
102,565
101,968
29,415
3,965
28.30
23.84
26.06
1.24
76%
153%
16.0x
101,260
98,968
30,653
3,966
At December 31.
*
** Calculated using December 31 market price per common share divided by basic earnings per common share. The principal trading market for HEI’s
common stock is the New York Stock Exchange (NYSE).
*** At December 31. Represents registered shareholders plus participants in the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP) who are not
registered shareholders. As of February 13, 2018, HEI had 6,133 registered shareholders (i.e., holders of record of HEI common stock), 23,111 DRIP
participants and total shareholders of 25,977.
2017 results include a $14 million adjustment, primarily to reduce deferred tax net asset balances (not accounted for under Utility regulatory ratemaking) to
reflect the lower rates enacted by Tax Act (see Note 10 of the Consolidated Financial Statements) and $20 million ($11 million, net of tax impacts) lower in
RAM revenues than prior year due to expiration of 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years
2014 to 2016 at Hawaiian Electric. Results for 2016, 2015 and 2014 include merger- and spin-off-related income/(expenses), net of tax impacts, of $60 million,
($16 million), and ($5 million), respectively (see Note 15 of the Consolidated Financial Statements).
Financial data for periods prior to January 1, 2016 has been updated to reflect the retrospective application of ASU No. 2015-03 (Interest - Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs). See "Cautionary Note Regarding Forward-Looking Statements" above, HEI's
MD&A and “Commitments and contingencies” in Note 3 of the Consolidated Financial Statements for discussions of certain contingencies that could adversely
affect future results of operations, financial condition and cash flows.
For 2014 and 2013, under the two-class method of computing basic earnings per share, distributed earnings were $1.24 per share each year and
undistributed earnings (loss) were $0.41 and $0.39 per share, respectively, for both unvested restricted stock awards and unrestricted common stock. For 2014
and 2013, under the two-class method of computing diluted earnings per share, distributed earnings were $1.24 per share each year and undistributed earnings
(loss) were $0.40 and $0.38 per share, respectively, for both unvested restricted stock awards and unrestricted common stock. There were no restricted stock
awards outstanding during 2017, 2016 and 2015.
41
Hawaiian Electric:
Selected Financial Data
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Results of operations
Revenues
Net income for common stock
Financial position *
Utility plant
Accumulated depreciation
Net utility plant
Total assets
Current portion of long-term debt
Short-term borrowings from non-affiliates
Long-term debt, net
Common stock equity
Cumulative preferred stock-not
subject to mandatory redemption
Capital structure
Capital structure ratios (%)
Debt (short-term borrowings, and long-term debt, net, including
current portion)
Cumulative preferred stock
Common stock equity
* At December 31.
2017
2016
2015
2014
2013
$ 2,257,566 $ 2,094,368 $ 2,335,166 $ 2,987,323 $ 2,980,172
119,951
142,317
135,714
137,641
122,929
$ 7,282,979 $ 6,870,627 $ 6,543,799 $ 6,220,397 $ 5,896,991
(2,476,352)
(2,369,282)
(2,266,004)
(2,175,510)
(2,111,229)
$ 4,806,627 $ 4,501,345 $ 4,277,795 $ 4,044,887 $ 3,785,762
$ 6,196,281 $ 5,975,428 $ 5,672,210 $ 5,550,021 $ 5,058,065
$
49,963 $
4,999
— $
—
— $
—
— $
11,383
—
—
1,318,516
1,319,260
1,278,702
1,199,025
1,198,200
1,845,283
1,799,787
1,728,325
1,682,144
1,593,564
34,293
34,293
34,293
34,293
34,293
$ 3,253,054 $ 3,153,340 $ 3,041,320 $ 2,915,462 $ 2,837,440
42.2
1.1
56.7
41.8
1.1
57.1
42.1
1.1
56.8
41.1
1.2
57.7
42.6
1.2
56.2
HEI owns all of Hawaiian Electric’s common stock. Therefore, per share data is not meaningful.
2017 results include $20 million ($11 million, net of tax impacts) lower in RAM revenues than prior year due to expiration of 2013
settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric, and a
$9 million adjustment, primarily to reduce deferred tax net asset balances (not accounted for under regulatory ratemaking) to reflect the lower
rates enacted by Tax Act (see Note 10 of the Consolidated Financial Statements).
Financial data for periods prior to January 1, 2016 has been updated to reflect the retrospective application of ASU No. 2015-03 (Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs).
See "Cautionary Note Regarding Forward-Looking Statements" above, the “electric utility” sections and all information related to, or
including, Hawaiian Electric and its subsidiaries in HEI’s MD&A and “Commitments and contingencies” in Note 3 of the Consolidated
Financial Statements for discussions of certain contingencies that could adversely affect future results of operations, financial condition and
cash flows.
42
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HEI and Hawaiian Electric (in the case of Hawaiian Electric, only the information related to Hawaiian Electric and its
subsidiaries):
The following discussion should be read in conjunction with the Consolidated Financial Statements. The general
discussion of HEI’s consolidated results should be read in conjunction with the electric utility and bank segment discussions
that follow.
HEI Consolidated
Executive overview and strategy. HEI is a holding company primarily overseeing operating subsidiaries in Hawaii’s electric
utility and banking sectors. A major focus of HEI’s strategy is to grow core earnings and profitability of its Utilities and Bank in
a controlled risk manner and improve operating, capital and tax efficiencies in order to support its dividend and deliver
shareholder value while also being a catalyst for improving the economy, environment and community in which the Company
serves. In addition, HEI and its subsidiaries from time to time consider various strategies designed to enhance their competitive
positions and maximize shareholder value.
HEI, through its electric utility subsidiaries (Hawaiian Electric and its subsidiaries, Hawaii Electric Light and Maui
Electric), provides the only electric public utility service to approximately 95% of Hawaii’s population. HEI also provides a
wide array of banking and other financial services to consumers and businesses through its bank subsidiary, ASB, one of
Hawaii’s largest financial institutions based on total assets. Through its third principal subsidiary, Pacific Current, HEI is
focusing on non-regulated investments in renewable energy and infrastructure projects that help to serve Hawaii and help reach
the state’s sustainability goals. Together, HEI’s unique combination of power and financial services companies continues to
provide the Company with a strong balance sheet and the financial resources to invest in the strategic growth of its subsidiaries
while providing an attractive dividend for investors.
In 2017, net income for HEI common stock was $165 million ($1.52 basic earnings per common share), down 33% from
$248 million ($2.30 basic earnings per common share) in 2016 primarily due to the merger termination fee paid in 2016 by
NEE. Excluding merger and spin-off-related income and expenses ($60 million after-tax), the decrease in net income from
2016 to 2017 was comprised of the Utilities’ $22 million lower net income and the “other” segment’s $10 million higher net
loss, partly offset by ASB’s $10 million higher net income. Impacting these results were $14.2 million ($9.2 million at the
Utilities; $(1.0) million at ASB; $6.0 million at the "other" segment) of net loss primarily comprised of tax expenses/(benefits)
to reduce deferred tax balances to reflect the lower rates enacted by the Tax Act and an ASB special employee bonus awarded
after the passing of the Tax Act lowered corporate income taxes in the future.
In 2016, net income for HEI common stock was $248 million, up 55% from $160 million in 2015 primarily due to the
2016 merger- and spin-off-related income and expenses. Basic earnings per share were $2.30 per share in 2016, up 53% from
$1.50 per share in 2015. Excluding merger- and spin-off-related income and expenses, net income for HEI common stock
would have been $188 million, up 7% from $176 million in 2015 primarily due to the Utilities’ and ASB’s 5% higher net
incomes and lower losses at HEI corporate.
The Utilities’ strategic focus has been to meet Hawaii’s energy needs by modernizing and adding needed infrastructure
through capital investment, placing emphasis on energy efficiency and conservation, pursuing renewable energy generation and
taking the necessary steps to secure regulatory support for their plans. Electric utility net income for common stock in 2017 of
$120 million decreased from the prior year by 16% due primarily to the (1) the impact of the federal tax reform recorded in
2017, (2) the expiration of the PUC approved 2013 settlement agreement with the Consumer Advocate that had allowed
Hawaiian Electric to record calendar year rate adjustment mechanism revenues from January 1, 2014 to December 31, 2016
(versus when billed from June 1 each year to May 31 of the following year), (3) higher O&M expenses compared to 2016
(which included higher O&M expenses from higher overhaul and maintenance expenses and ERP costs), (4) higher
depreciation expense (as a result of increasing investments for the integration of more renewable energy, improved service
reliability and greater system efficiency), which were partially offset by the recovery of additional investments for clean energy,
reliability and system efficiency investments and Hawaii Electric Light’s 2016 test year interim rate relief effective August 31,
2017, and (5) higher allowance for funds used during construction.
ASB continues to deepen customer relationships and build out new products and services in order to meet the needs of
both consumer and commercial customers. Additionally, ASB has made process improvements to deliver a continuously better
experience for its customers and be a more efficient bank. ASB’s earnings in 2017 of $67 million increased $10 million
compared to prior year net income due primarily to higher net interest income and lower provision for loan losses, partly offset
43
by higher noninterest expenses and lower noninterest income. In 2017, ASB earnings benefited from higher net interest income
as interest income from loan and investment growth were funded primarily by low cost deposit liabilities. The lower provision
for loan losses reflects ASB’s strategy to improve credit quality in the commercial and national syndicated loan portfolios. The
higher noninterest expenses were due primarily to an increase in compensation and employee benefit expenses, including ASB
non-executive employee bonuses awarded in 2017 in connection with the passing of the Tax Act. The lower noninterest income
was primarily due to a decrease in mortgage banking income. ASB’s future financial results will continue to be impacted by the
interest rate environment and the quality of ASB’s loan portfolio.
HEI’s “other” segment had a net loss in 2017 of $22 million, compared to a net income of $49 million in 2016. Excluding
merger- and spin-off-related income and expenses, the “other” segment's net loss was $10 million higher ($22 million in 2017
compared to $12 million in 2016), primarily due to $6 million of tax reform-related tax expense in 2017 and other tax benefits
recognized in 2016 as a result of moving out of a federal net operating loss position.
Shareholder dividends are declared and paid quarterly by HEI at the discretion of HEI’s Board of Directors. HEI and its
predecessor company, Hawaiian Electric, have paid dividends continuously since 1901. The dividend has been stable at $1.24
per share annually since 1998. The indicated dividend yield as of December 31, 2017 was 3.4%. The dividend payout ratios
based on net income for common stock for 2017, 2016 and 2015 were 82%, 54% and 82%, respectively. The HEI Board of
Directors considers many factors in determining the dividend quarterly, including but not limited to the Company’s results of
operations, the long-term prospects for the Company, and current and expected future economic conditions.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g.,
Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research
Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism
Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers).
Hawaii’s tourism industry, a significant driver of Hawaii’s economy, ended 2017 with annual record totals in both visitor
spending and arrivals for the sixth consecutive year. Visitor expenditures increased 6.2% and arrivals increased 5.0% compared
to 2016. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii for the first quarter of 2018
to increase by 10.9% over the first quarter of 2017 driven primarily by an increase in seats from West Coast, East Coast and
Asia.
Hawaii’s unemployment rate continued to decline to 2.0% in December 2017, which was lower than the 4.1% rate a year
ago in December 2016 and lower than the national unemployment rate of 4.1% in December 2017. It was the lowest
unemployment rate in the nation.
Hawaii real estate activity, as indicated by the home resale market, experienced growth in median sales prices in 2017.
Median sales prices for single family residential homes and condominiums on Oahu through December 2017 were higher by
2.7% and 3.8%, respectively, over the same time period in 2016. The number of closed sales for single family residential homes
was up by 6.3% and for condominiums was up 6.9% through December of 2017 compared to same time period of 2016.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in
international markets. Following price increases throughout 2016 and the first quarter of 2017, the price of crude oil declined
over the next two quarters before resuming to increase in the fourth quarter of 2017.
At its November 2017 meeting, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate target
range of “1.00% to 1.50%” in view of realized and expected labor market conditions and inflation. The FOMC will continue to
assess economic conditions relative to its objectives of maximum employment and 2% inflation in determining the size and
timing of future adjustments to the target range.
Overall, Hawaii’s economy is expected to see another year of positive growth in 2018, albeit at a more subdued pace.
Tourism continues to fare well however, future gains may be hindered by capacity constraints in visitor accommodations.
Unemployment has reached new lows making it difficult for job growth. Although the construction market peaked in 2016
projects such as transit oriented development, several high rises in urban Honolulu and large residential projects in central
Oahu will continue to support construction activity over the next several years. Hawaii’s economy is subject to uncertainty of
the global economy and its potential impact on the U.S. economy.
44
Results of operations.
(dollars in millions, except per share amounts)
2017 % change
2016 % change
2015
Revenues
Operating income
Merger termination fee
Net income for common stock
Net income (loss) by segment:
Electric utility
Bank
Other
Net income for common stock
Basic earnings per share
Diluted earnings per share
Dividends per share
$
2,556
7
$
2,381
(9) $
2,603
338
—
165
120
67
(22)
165
1.52
1.52
1.24
$
$
$
$
$
(3)
(100)
(33)
(16) $
17
NM
(33) $
(34) $
(34) $
— $
348
90
248
142
57
49
248
2.30
2.29
1.24
8
NM
55
5
5
NM
55
53
53
$
$
$
$
— $
323
—
160
136
55
(31)
160
1.50
1.50
1.24
Weighted-average number of common shares outstanding (millions)
108.7
1
108.1
2
106.4
Dividend payout ratio
NM Not meaningful.
82%
54%
82%
See “Executive overview and strategy” above and the “Other segment,” “Electric utility” and “Bank” sections below for
discussions of results of operations.
The Company’s effective tax rate (combined federal and state income tax rates) was higher for 2017 compared to 2016 due
primarily to the (1) 2017 adjustment to accumulated deferred income tax balances (ADIT) (exclusive of ADIT related to the
regulated rate base of the Utilities) for the new federal corporate tax rate of 21%, (2) 2016 deductibility of previously non-tax-
deductible merger costs and (3) higher tax benefits recognized in 2016 for the domestic production activities deduction (DPAD)
related to the Utilities’ generation activities. The Company’s effective tax rate was lower for 2016 compared to 2015 due
primarily to the 2016 items listed above. The new lower federal tax rate of 21% applicable after 2017 impacts the ADIT on the
balance sheet as of December 31, 2017 since the ADIT should reflect the rate applicable when the temporary differences
subsequently reverse. 2017 income tax expense is based on the 35% federal tax rate in effect through December 31, 2017 with
an adjustment to reduce ADIT for the new lower federal tax rate of 21%.
Other segment. HEI corporate-level operating, general and administrative expenses were $18 million in 2017 compared to
$19 million in 2016 and $34 million in 2015. In 2016 and 2015, HEI had approximately $1 million (expenses, net of
reimbursements of expenses from NEE and insurance) and $17 million, respectively, of expenses related to the previously
proposed merger with NEE. Hamakua Energy's operating, general and administrative expenses were $0.5 million in 2017.
The “other” segment’s interest expenses were $9 million in 2017, $9 million in 2016 and $11 million in 2015. In each of
2017, 2016 and 2015, HEI corporate had lower average borrowings when compared to the prior year. In November 2017, a
2.99% $150 million term loan retired term loans with resetting interest periods based on LIBOR rates. In 2016, a 4.41% senior
note was refinanced to a lower rate Eurodollar term loan. In 2015, a $125 million Eurodollar term loan was amended at
improved pricing. In late December 2017, Hamakua Energy closed on $67 million of 4.02% senior secured notes.
The “other” segment’s income (taxes) benefits were $6 million in 2017, $(9 million) in 2016 and $16 million in 2015. In
2017, HEI's other segment included $5.7 million of tax reform-related tax expense, primarily to reduce net deferred tax asset
balances to reflect the lower federal tax rate. In 2016, HEI’s other segment included $25 million of tax expense relating to
merger- and spin-off (net of taxes), comprised of taxes on merger termination fee and reimbursements of expenses from NEE
and insurance ($34 million), partly offset by additional tax benefits on the previously non-tax-deductible merger- and spin-off-
related expenses incurred in previous years ($6 million) and tax on 2016 merger-related expenses ($3 million). In 2016, HEI’s
results also included other tax benefits recognized as a result of moving out of a federal net operating loss position.
Liquidity and capital resources. The Company believes that its ability to generate cash, both internally from electric utility
and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is
adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital
expenditures and investments, its expected retirement benefit plan contributions and other cash requirements for the foreseeable
future.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
45
December 31
(dollars in millions)
Short-term borrowings—other than bank
Long-term debt, net—other than bank
Preferred stock of subsidiaries
Common stock equity
2017
2016
$
$
118
1,684
34
2,097
3,933
3% $
43
1
53
100% $
—
1,619
34
2,067
3,720
—%
43
1
56
100%
HEI’s commercial paper borrowings and line of credit facility were as follows:
(in millions)
Commercial paper
Line of credit draws
Undrawn capacity under HEI’s line of credit facility
Year ended
December 31, 2017
Average
balance
End-of-period
balance
December 31,
2016
$
$
13
—
—
$
63
—
150
—
—
150
Note: This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are
disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” At February 13, 2018, HEI had $20.5 million
of outstanding commercial paper and its line of credit facility was undrawn. The maximum amount of HEI’s short-term borrowings in 2017
was $125 million.
HEI utilizes short-term debt, typically commercial paper, to support normal operations, to refinance commercial paper, to
retire long-term debt, to pay dividends and for other temporary requirements, including short-term financing needs of its
subsidiaries. HEI also periodically makes short-term loans to Hawaiian Electric to meet Hawaiian Electric’s cash requirements,
including the funding of loans by Hawaiian Electric to Hawaii Electric Light and Maui Electric, but no such short-term loans to
Hawaiian Electric were outstanding as of December 31, 2017. HEI periodically utilizes long-term debt, historically unsecured
indebtedness, to fund investments in and loans to its subsidiaries to support their capital improvement or other requirements, to
repay long-term and short-term indebtedness and for other corporate purposes.
In March 2013, HEI entered into equity forward transactions in which a forward counterparty borrowed 7 million shares of
HEI’s common stock from third parties and such borrowed shares were sold pursuant to an HEI registered public offering. See
Note 7 of the Consolidated Financial Statements. In March 2015, HEI issued the 4.7 million shares remaining under the equity
forward transaction for proceeds of $104.5 million.
In October 2017, HEI refinanced a $125 million long-term loan with a 364-day term loan which matures on October 5,
2018.
In November 2017, HEI entered into a five-year, $150 million loan agreement at a fixed interest rate of 2.99%. Proceeds of
the loan were used to repay a $75 million term loan ahead of its March, 2018 maturity and to repay $75 million of the $125
million 364-day term loan.
In December 2017, Hamakua Energy issued $67 million of senior secured notes at a fixed interest rate of 4.02% with a
maturity date of December 31, 2030.
See Notes 5 and 6 of the Consolidated Financial Statements for a brief description of these loans.
HEI has a $150 million line of credit facility. See Note 5 of the Consolidated Financial Statements.
The rating of HEI’s commercial paper and debt securities could significantly impact the ability of HEI to sell its
commercial paper and issue debt securities and/or the cost of such debt. The rating agencies use a combination of qualitative
measures (i.e., assessment of business risk that incorporates an analysis of the qualitative factors such as management,
competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash flow, debt, interest
coverage and liquidity ratios) in determining the ratings of HEI securities.
46
As of February 13, 2018, the Fitch, Moody's and S&P ratings of HEI were as follows:
Long-term issuer default and senior unsecured; long term rating*; and
corporate credit; respectively
Commercial paper
Outlook
Fitch
BBB
F3
Stable
Moody’s
WR*
P-3
Stable
S&P
BBB-
A-3
Stable
* Moody's long-term debt rating was withdrawn because HEI does not currently have any outstanding, publicly traded debt. Moody's
continues to rate Hawaiian Electric's long-term debt. See Utility MD&A.
The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from whom an
explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities;
such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently
of any other rating.
Management believes that, if HEI’s commercial paper ratings were to be downgraded, or if credit markets for commercial
paper with HEI’s ratings or in general were to tighten, it could be more difficult and/or expensive for HEI to sell commercial
paper or HEI might not be able to sell commercial paper in the future. Such limitations could cause HEI to draw on its
syndicated credit facility instead, and the costs of such borrowings could increase under the terms of the credit agreement as a
result of any such ratings downgrades. Similarly, if HEI’s long-term debt ratings were to be downgraded, it could be more
difficult and/or expensive for HEI to issue long-term debt. Such limitations and/or increased costs could materially adversely
affect the results of operations, financial condition and liquidity of HEI and its subsidiaries.
Issuances of common stock through the Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan
(DRIP), Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan provided new capital of $30
million (approximately 1 million shares) in 2016. From March 6, 2014 through January 5, 2016, and from December 7, 2016 to
date, HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases
of its common stock rather than new issuances. Also, from June 2, 2016 through August 9, 2016, HEI satisfied the share
purchase requirements of the HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.
Operating activities provided net cash of $420 million in 2017, $496 million in 2016 and $357 million in 2015. Investing
activities used net cash of $815 million in 2017, $736 million in 2016 and $706 million in 2015. In 2017, net cash used in
investing activities was primarily due to a Hawaiian Electric’s consolidated capital expenditures (net of contributions in aid of
construction), Hamakua Energy’s acquisition of a power plant and ASB's purchases of investment securities, partly offset by
the repayments of investment securities, proceeds from sale of commercial loans and a net decrease in loans held for
investment.
Financing activities provided net cash of $378 million in 2017, $219 million in 2016 and $474 million in 2015. In 2017,
net cash provided by financing activities included net increases in deposits and long-term debt and net increases in short-term
borrowings and ASB’s retail repurchase agreements, partly offset by a net decrease in ASB’s other borrowings and payment of
common and preferred stock dividends.
Other than capital contributions from their parent company, intercompany services (and related intercompany payables and
receivables), Hawaiian Electric’s periodic short-term borrowings from HEI (and related interest) and the payment of dividends
to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See
the electric utility and bank segments’ discussions of their cash flows in their respective “Financial condition-Liquidity and
capital resources” sections below.) During 2017, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI
of $88 million and $38 million, respectively.
A portion of the net assets of Hawaiian Electric and ASB is not available for transfer to HEI in the form of dividends, loans
or advances without regulatory approval. One of the conditions to the PUC’s approval of the corporate restructuring of
Hawaiian Electric and HEI requires that Hawaiian Electric maintain a consolidated common equity to total capitalization ratio
of not less than 35% (actual ratio of 57% at December 31, 2017) and restricts Hawaiian Electric from making distributions to
HEI to the extent it would result in that ratio being less than 35%. In the absence of an unexpected material adverse change in
the financial condition of the electric utilities or ASB, such restrictions are not expected to significantly affect the operations of
HEI, its ability to pay dividends on its common stock or its ability to meet its debt or other cash obligations. See Item I—
Business—Restrictions on dividends and other distributions" Note 12 of the Consolidated Financial Statements.
Forecasted HEI consolidated “net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2018
through 2020 consists primarily of the net capital expenditures of the Utilities. In addition to the funds required for the Utilities’
construction programs (see “Electric utility–Liquidity and capital resources”), approximately $50 million will be required
47
during 2018 through 2020 to repay HEI’s remaining $50 million balance on its 364-day term loan maturing in October 2018,
which is expected to be repaid with the proceeds from the issuance of commercial paper, bank borrowings, other medium- or
long-term debt, common stock and/or dividends from subsidiaries. Additional debt and/or equity financing may be utilized to
invest in the Utilities and bank; to pay down commercial paper or other short-term borrowings; or to fund unanticipated
expenditures not included in the 2018 through 2020 forecast, such as increases in the costs of or an acceleration of the
construction of capital projects of the Utilities, unanticipated utility capital expenditures that may be required by new
environmental laws and regulations, unbudgeted acquisitions or investments in new businesses, significant increases in
retirement benefit funding requirements and higher tax payments that would result if certain tax positions taken by the
Company do not prevail or if taxes are increased by federal or state legislation. In addition, existing debt may be refinanced
prior to maturity with additional debt or equity financing (or both).
Selected contractual obligations and commitments. Information about payments under the specified contractual
obligations and commercial commitments of HEI and its subsidiaries was as follows:
December 31, 2017
(in millions)
Contractual obligations
Less than
1 year
1-3
years
3-5
years
More than
5 years
Total
Investment in qualifying affordable housing projects
$
12
$
3
$ — $
Time certificates
Other bank borrowings
Short-term borrowings
Long-term debt
Interest on certificates of deposit, other bank borrowings, short-term loan
and long-term debt
Operating leases, service bureau contract, maintenance and ASB
construction-related agreements
Hawaiian Electric open purchase order obligations1
Hawaiian Electric fuel oil purchase obligations (estimate based on
December 31, 2017 fuel oil prices)
Hawaiian Electric power purchase obligations–minimum fixed capacity
charges
Liabilities for uncertain tax positions
Total (estimated)
402
191
118
54
85
99
114
130
118
—
238
—
—
103
155
42
12
130
235
3
124
—
—
260
140
30
9
—
212
1
$
1
3
—
—
16
767
191
118
1,277
1,694
790
1,170
44
—
—
854
—
215
135
260
1,419
4
$
1,323
$
921
$
776
$
2,969
$
5,989
1
Includes contractual obligations and commitments for capital expenditures and expense amounts.
The tables above do not include other categories of obligations and commitments, such as deferred taxes, trade payables,
amounts that will become payable in future periods under collective bargaining and other employment agreements and
employee benefit plans, obligations that may arise under indemnities provided to purchasers of discontinued operations, and
potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing mechanism). As of December 31, 2017,
the fair value of the assets held in trusts to satisfy the obligations of the Company’s retirement benefit plans did not exceed the
retirement benefit plans’ benefit obligation. Minimum funding requirements for retirement benefit plans have not been included
in the tables above; however, see Note 8 to the Consolidated Financial Statements for estimated contributions for 2018.
See Note 3 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments. See Note 4
of the Consolidated Financial Statements for a further discussion of ASB's commitments.
Off-balance sheet arrangements. Although the Company and the Utilities have off-balance sheet arrangements, management
has determined that it has no off-balance sheet arrangements that either have, or are reasonably likely to have, a current or
future effect on the Company’s and the Utilities' financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that are material to investors, including the following
types of off-balance sheet arrangements:
1. obligations under guarantee contracts,
2.
retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as
credit, liquidity or market risk support to that entity for such assets,
3. obligations under derivative instruments, and
48
4. obligations under a material variable interest held by the Company or the Utilities in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk support to the Company or the Utilities, or engages in leasing,
hedging or research and development services with the Company or the Utilities.
Certain factors that may affect future results and financial condition. The Company’s results of operations and financial
condition can be affected by numerous factors, many of which are beyond its control and could cause future results of
operations to differ materially from historical results. The following is a discussion of certain of these factors. Also see
“Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” above and “Certain factors that may affect
future results and financial condition” in each of the electric utility and bank segment discussions below.
Economic conditions, U.S. capital markets and credit and interest rate environment. Because the core businesses of HEI’s
subsidiaries are providing local electric public utility services and banking services in Hawaii, the Company’s operating results
are significantly influenced by Hawaii’s economy, which in turn is influenced by economic conditions in the mainland U.S.
(particularly California) and Asia (particularly Japan) as a result of the impact of those conditions on tourism, by the impact of
interest rates, particularly on the construction and real estate industries and by the impact of world conditions on federal
government spending in Hawaii. The two largest components of Hawaii’s economy are tourism and the federal government
(including the military).
If Fitch, Moody's or S&P were to downgrade HEI’s or Hawaiian Electric’s debt ratings or if future events were to
adversely affect the availability of capital to the Company, HEI’s and Hawaiian Electric’s ability to borrow and raise capital
could be constrained, and their future borrowing costs would likely increase.
Changes in the U.S. capital markets can also have significant effects on the Company. For example, pension funding
requirements are affected by the market performance of the assets in the master pension trust and by the discount rate used to
estimate the service and interest cost components of net periodic pension cost and value obligations. The Utilities’ pension
tracking mechanisms help moderate pension expense; however, a decline in the value of the Company’s defined benefit pension
plan assets or the interest rate used to value the obligation may increase the unfunded status of the Company’s pension plans
and result in increases in future funding requirements.
Because the earnings of ASB depend primarily on net interest income, interest rate risk is a significant risk of ASB’s
operations. Changes in interest rates and credit spreads also affect the fair value of ASB’s investment securities. HEI and its
electric utility subsidiaries are also exposed to interest rate risk primarily due to their periodic borrowing requirements, the
discount rate used to determine pension funding requirements and the possible effect of interest rates on the electric utilities’
rates of return and overall economic activity. Interest rates are sensitive to many factors, including general economic conditions
and the policies of government and regulatory authorities. HEI cannot predict future changes in interest rates, nor be certain
that interest rate risk management strategies it or its subsidiaries have implemented will be successful in managing interest rate
risk.
Limited insurance. In the ordinary course of business, the Company purchases insurance coverages (e.g., property and
liability coverages) to protect itself against loss of or damage to its properties and against claims made by third-parties and
employees for property damage or personal injuries. However, the protection provided by such insurance is limited in
significant respects and, in some instances, the Company has no coverage. The Utilities’ transmission and distribution systems
(excluding substation buildings and contents) have a replacement value roughly estimated at $7 billion and are largely
uninsured. Similarly, the Utilities have no business interruption insurance. If a hurricane or other uninsured catastrophic natural
disaster were to occur, and if the PUC were not to allow the Utilities to recover from ratepayers restoration costs and revenues
lost from business interruption, their results of operations, financial condition and liquidity could be materially adversely
impacted. Certain of the Company’s insurance has substantial “deductibles” or has limits on the maximum amounts that may be
recovered. Insurers also have exclusions or limitations of coverage for claims related to certain perils. If a series of losses
occurred, such as from a series of lawsuits in the ordinary course of business each of which were subject to an insurance
deductible amount, or if the maximum limit of the available insurance were substantially exceeded, the Company could incur
uninsured losses in amounts that would have a material adverse effect on the Company’s results of operations, financial
condition and liquidity.
Environmental matters. HEI and its subsidiaries 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. These laws and regulations, among other things, may require that certain environmental
permits be obtained and maintained as a condition to constructing or operating certain facilities. Obtaining such permits can
entail significant expense and cause substantial construction delays. Also, these laws and regulations may be amended from
time to time, including amendments that increase the burden and expense of compliance.
49
Material estimates and critical accounting policies. In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change include the amounts reported for pension and other
postretirement benefit obligations; contingencies and litigation; income taxes; property, plant and equipment; regulatory assets
and liabilities; electric utility revenues; allowance for loan losses; nonperforming loans; troubled debt restructurings; and fair
value. Management considers an accounting estimate to be material if it requires assumptions to be made that were uncertain at
the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on
the Company’s results of operations or financial condition.
In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting
Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial
statements--that is, management believes that the policies discussed below are both the most important to the portrayal of the
Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or
complex judgments. The policies affecting both of the Company’s two principal segments are discussed below and the policies
affecting just one segment are discussed in the respective segment’s section of “Material estimates and critical accounting
policies.” Management has reviewed the material estimates and critical accounting policies with the HEI Audit Committee and,
as applicable, the Hawaiian Electric Audit Committee.
For additional discussion of the Company’s accounting policies, see Note 1 of the Consolidated Financial Statements and
for additional discussion of material estimates and critical accounting policies, see the electric utility and bank segment
discussions below under the same heading.
Pension and other postretirement benefits obligations. The Company’s reported costs of providing retirement benefits are
dependent upon numerous factors resulting from actual plan experience and assumptions about future experience. For example,
retirement benefits costs are impacted by actual employee demographics (including age and compensation levels), the level of
contributions to the plans, plus earnings and realized and unrealized gains and losses on plan assets, and changes made to the
provisions of the plans. Costs may also be significantly affected by changes in key actuarial assumptions, including the
expected return on plan assets, the discount rate and mortality. The Company’s accounting for retirement benefits under the
plans in which the employees of the Utilities participate is also adjusted to account for the impact of decisions by the Public
Utilities Commission of the State of Hawaii (PUC). Changes in obligations associated with the factors noted above may not be
immediately recognized as costs on the income statement, but generally are recognized in future years over the remaining
average service period of plan participants.
Based on various assumptions in Note 8 of the Consolidated Financial Statements, sensitivities of the projected benefit
obligation (PBO) and accumulated postretirement benefit obligation (APBO) as of December 31, 2017, associated with a
change in certain actuarial assumptions, were as follows and constitute “forward-looking statements”:
Actuarial assumption
(dollars in millions)
Pension benefits
Discount rate
Other benefits
Discount rate
Health care cost trend rate
Change in assumption
in basis points
Impact on HEI
Consolidated
PBO or APBO
Impact on Consolidated
Hawaiian Electric
PBO or APBO
+/- 50
(161)/181
(150)/170
'+/- 50
'+/- 100
(14)/15
3/(3)
(13)/15
3/(3)
Also, see Notes 1 and 8 of the Consolidated Financial Statements.
Contingencies and litigation. The Company is subject to proceedings (including PUC proceedings), lawsuits and other
claims. Management assesses the likelihood of any adverse judgments in or outcomes of these matters as well as potential
ranges of probable losses, including costs of investigation. A determination of the amount of reserves required, if any, for these
contingencies is based on an analysis of each individual case or proceeding often with the assistance of outside counsel. The
required reserves may change in the future due to new developments in each matter or changes in approach in dealing with
these matters, such as a change in settlement strategy.
In general, environmental contamination treatment costs are charged to expense, unless it is probable that the PUC would
allow such costs to be recovered through future rates, in which case such costs would be capitalized as regulatory assets. Also,
50
environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of
property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the property
for sale.
See Notes 3 and 4 of the Consolidated Financial Statements.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial
reporting bases and the tax bases of the Company’s assets and liabilities using tax rates expected to be in effect when such
deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible.
Management evaluates its potential exposures from tax positions taken that have or could be challenged by taxing
authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by
management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of
alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other
jurisdictions) and advice from its tax advisors. Management believes that the Company’s provision for tax contingencies is
reasonable. However, the ultimate resolution of tax treatments disputed by governmental authorities may adversely affect the
Company’s current and deferred income tax amounts.
See Note 10 of the Consolidated Financial Statements.
Following are discussions of the electric utility and bank segments. Additional segment information is shown in Note 2 of
the Consolidated Financial Statements. The discussion concerning Hawaiian Electric should be read in conjunction with its
consolidated financial statements and accompanying notes.
51
Electric utility
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state other than Kauai and
operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and
expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to
create a modern, flexible, and dynamic electric grid that enables an optimal mix of distributed energy resources (such as private
rooftop solar), demand response, and grid-scale resources to achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are committed to assisting the State of Hawaii in achieving its Renewable
Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law was revised in the 2015 Legislature and requires
electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045,
respectively. The Utilities have been successful in adding significant amounts of renewable energy resources to their electric
systems and exceeded the 2015 RPS goal. The Utilities' RPS for 2017 was about 27% and on its way to achieving the 2020 RPS
goal of 30%. (See "Developments in renewable energy efforts” below).
In April 2014, the PUC issued orders that collectively address certain key policy, resource planning and operational issues
for the Utilities. The April 2014 regulatory orders were to address: (1) Integrated Resource Planning and Power Supply
Improvement Plans (PSIPs), (2) Reliability Standards Working Group, and (3) Policy Statement and Order Regarding Demand
Response Programs, which are described below. The PUC also provided its inclinations on the future of Hawaii’s electric
utilities in one of the orders. The PUC provided its perspectives on the vision, business strategies and regulatory policy changes
required to align the Utilities' business model with customers’ interests and the state’s public policy goals.
Integrated Resource Planning and Power Supply Improvement Plans. The PUC did not accept the Utilities’ Integrated
Resource Plan and Action Plans submission, and, in lieu of an approved plan, commenced other initiatives to enable resource
planning. As required by the PUC orders, the Utilities filed proposed PSIPs with the PUC in August 2014. Updated PSIPs were
filed in April 2016 and December 2016 in response to PUC orders. The PSIPs provided plans to achieve 100% renewable
energy using a diverse mix of energy resources by 2045. Under these plans, the Utilities support sustainable growth of private
rooftop solar, expand use of energy storage systems, empower customers by developing smart grids and offer new products and
services to customers (e.g., community solar, microgrids and voluntary “demand response” programs).
In the December 2016 PSIP Update Report, the updated plans describe greater and faster expansion of the Utilities’
renewable energy portfolio than in the plans filed in April 2016. The plans include the continued growth of private rooftop solar
and describe the grid and generation modernization work needed to reliably integrate an estimated total of 165,000 private
systems by 2030, and additional grid-scale renewable energy resources. The Utilities already have the highest percentage of
customers using private rooftop solar of any utility in the U.S., and customer-sited resources are seen as a key contributor to the
growth of the renewable portfolio on every island. In addition, the plans forecast the addition of 360 MW of grid-scale solar and
157 MW of grid-scale wind, with 8 MW derived from the first phase of the community-based renewable energy (CBRE)
program. The plans also include 115 MW from Demand Response (DR) programs, which can shift customer use of electricity
to times when more renewable energy is available, potentially making room to add even more renewable resources. Unlike the
April 2016 updated PSIPs, the December 2016 update does not include the use of LNG to generate power in the near-term or
the Kahe 3x1 Combined Cycle Plant. While LNG remains a potential lower-cost bridge fuel to be evaluated, the Utilities’
priority is to continue replacing fossil fuel generation with renewables over the next five years as federal tax incentives for
renewables begin to phase out. An interisland cable is not in the near-term plan, which states that its costs and benefits should
continue to be evaluated. The December 2016 Update Report emphasizes work that is in progress or planned over the next five
years on each of the five islands the Utilities serve.
On July 14, 2017, the PUC accepted the Utilities’ PSIP December 2016 Update Report and closed the proceeding. In its
order, the PUC provided guidance regarding the implementation of the Utilities’ near-term action plan and future planning
activities, requiring the Utilities to file a report that details an updated resource planning approach and schedule by March 1,
2018. The PUC order stated that it intends to use the PSIPs in conjunction with its evaluation of specific filings for approval of
capital and other projects.
Reliability standards working group. In April 2014, the PUC ordered the Utilities to take timely actions intended to lower
energy costs, improve system reliability and address emerging challenges to integrate additional renewable energy. In addition
to the PSIPs mentioned above, the PUC ordered certain filing requirements, including a Distributed Generation Interconnection
Plan, which the Utilities filed in August 2014.
The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and
policy issues associated with distributed energy resources (DER) and (3) the Hawaii electricity reliability administrator, which
is a third-party position that the legislature has authorized the PUC to create by contract to provide support for the PUC in
developing and periodically updating local grid reliability standards and procedures and interconnection requirements and
52
overseeing grid access and operation. The PUC has not yet opened new dockets to address the first and third topics above. To
address DER, the second topic, the PUC opened an investigative proceeding on August 21, 2014 (see “DER investigative
proceeding” below).
Policy statement and order regarding demand response programs. The PUC provided guidance concerning the objectives
and goals for DR programs, and ordered the Utilities to develop an integrated DR Portfolio Plan that will enhance system
operations and reduce costs to customers. The Utilities’ DR Portfolio will create the economic and technical means by which
customers can use their own equipment and behavior to have a role in the management of the electricity grid. Participating
customers will be empowered with increasing opportunities to simultaneously install DER enabling active participation in the
grid and its associated economics. These opportunities will take the form of either rates and incentive-based programs that will
compensate customers for their participation, or by way of engagements with turnkey service providers that contract with the
Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.
The Utilities filed their DR Portfolio Plan in July 2014 and an updated Plan in February 2017. In July 2015, the PUC issued
an order appointing a special adviser to guide, monitor and review the Utilities’ Plan design and implementation. In December
2015, the Utilities filed an application with the PUC for approval of their proposed DR Portfolio Tariff Structure, Reporting
Schedule and Cost Recovery of Program Costs. On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio
tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio, and ordered the
Utilities to complete contracting by June 2018 and initiate first implementation by the third quarter of 2018.
In October 2017, the PUC approved the Utilities request made in December 2015 to defer and recover certain computer
software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of
AFUDC, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities expect the DR Management
System to be in service by the end of 2018.
DER investigative proceeding. In March 2015, the PUC issued an order to address DER issues.
In June 2015, the Utilities submitted their final Statement of Position in the DER proceeding, which included new pricing
provisions for future private rooftop photovoltaic (PV) systems, technical standards for advanced inverters, new options for
customers including battery-equipped private rooftop PV systems, a pilot time-of-use rate, an improved method of calculating
the amount of private rooftop PV that can be safely installed, and a streamlined and standardized PV application process.
In October 2015, the PUC issued a D&O establishing DER reforms that: (1) promote rapid adoption of the next generation
of solar PV and other distributed energy technologies; (2) encourage more competitive pricing of distributed energy resource
systems; (3) lower overall energy supply costs for all customers; and (4) help to manage DER in terms of each island’s limited
grid capacity. The D&O capped the Utilities' Net Energy Metering (NEM) programs at “existing” levels (i.e., for existing NEM
customers and customers who already applied and were waiting for approval), closed the NEM programs to new participants,
and approved new interim options for customers to interconnect DER to the utility electric grids, including Self Supply and
Grid Supply tariff options and modified interconnection standards. The PUC placed caps on the availability of the Grid Supply
program. The Self Supply Program is designed for customers who do not export to the grid.
On October 20, 2017, the PUC issued a D&O which further revises interconnection requirements, creates a Smart Export
program, modifies the customer-grid supply program (Controllable Customer Grid Supply), clarifies that non-export customer
systems can be added to the existing NEM program, and provides guidance and reporting requirements regarding hosting
capacity analyses. The Smart Export program is designed for PV systems with battery storage and features zero compensation
during mid-day, but enhanced compensation at other times of the day to reflect the value of the energy to the grid at different
times of the day. The Controllable Customer Grid Supply program allows PV systems without battery storage to deliver energy
to the grid on an as-available basis except when system-wide technical conditions require reduction of output. The D&O
specified island-specific pricing and program caps for the Smart Export and Controllable Customer Grid Supply programs.
Customers currently under the customer-grid supply program are grandfathered under existing rates for the next five years. The
D&O also authorizes activation of new advanced inverter functions in PV and storage systems, which will provide support to
the electric grid during different types of grid disturbances.
On February 5, 2018, the PUC issued an order which approved, with certain modifications, new tariffs proposed by the
Utilities, which will implement the Smart Export and Controllable Customer Grid Supply programs in manners consistent with
the PUC’s October 2017 D&O, and approved, with certain modifications, revisions to existing tariffs also proposed by the
Utilities. The February 2018 order denied the Utilities’ proposal to allow NEM customers to add non-export energy storage
systems; the Utilities must resubmit their proposal consistent with guidance in the order.
Grid modernization. After launching a smart grid customer engagement plan during the second quarter of 2014, Hawaiian
Electric replaced approximately 5,200 residential and commercial meters with smart meters, 160 direct load control switches,
fault circuit indicators and remote controlled switches in selected areas across Oahu as part of the Smart Grid Initial Phase
53
implementation. Also under the Initial Phase a grid efficiency measure called Volt/Var Optimization (or Conservation Voltage
Reduction) was enabled, customer energy portals were launched and are available for customer use and a PrePay Application
was launched. The Initial Phase implementation was completed in 2015. The smart grid provides benefits such as customer
tools to manage their electric bills, potentially shortening outages and enabling the Utilities to integrate more low-cost
renewable energy, like wind and solar, which will reduce Hawaii’s dependence on imported oil.
In March 2016, the Utilities sought PUC approval to commit funds for an expansion of the smart grid project. The
proposed smart grid project was estimated to cost $340 million and to be implemented over 5 years. On January 4, 2017, the
PUC issued an order dismissing the application without prejudice and directing the Utilities to submit a Grid Modernization
Strategy.
The PUC indicated that the overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an
appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and
obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. On June 30, 2017, the
Utilities filed an initial draft of the Grid Modernization Strategy describing how new technology will help triple private rooftop
solar and make use of rapidly evolving products including storage and advanced inverters. The cost of the first segment of the
modernization is estimated at about $205 million over six years. The Utilities filed their final Grid Modernization Strategy on
August 29, 2017. On February 8, 2018, the PUC issued an order setting forth next steps and directives for the Utilities to
implement the Grid Modernization Strategy. The Utilities have begun work to implement the Grid Modernization Strategy by
issuing solicitations for advanced meters, a meter data management system, and a communications network; the Utilities are
working towards filing its first application with the PUC for the first implementation phase in March 2018. Additional
applications will be filed later to implement subsequent phases of the strategy.
Community-Based Renewable Energy. On October 1, 2015, the Utilities filed a proposed CBRE program and tariff with
the PUC that would allow customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits
of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. In November 2015, the PUC
suspended the tariff submittal and opened an investigatory docket.
On December 22, 2017, the PUC issued an order, which adopts a CBRE program framework. The Utilities submitted tariffs
and related programmatic filings for PUC review pursuant to the order on February 20, 2018. The first phase of the program
will commence upon approval of the tariffs and run for one year. The first phase will total 8 MW of solar PV only with one
credit rate for each island. The Utilities' role will be limited to administrative only during the first phase.
The second phase will commence after review of the first full year of the first phase. The second phase is contemplated to
be a larger capacity and include multiple credit rates (e.g., time of day) and various technologies. The Utilities will have the
opportunity to develop self-build projects, however 50% of utility capacity will be reserved for low to moderate income
customers.
Decoupling. See "Decoupling" in Note 3 of the Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing
mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is
compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings
of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis.
Results for 2017, 2016 and 2015 did not trigger the earnings sharing mechanism for the Utilities. For 2014, the earnings sharing
mechanism was triggered for Maui Electric, and Maui Electric credited $0.5 million to its customers for their portion of the
earnings sharing during the period between June 2015 to May 2016. Earnings sharing credits are included in the annual
decoupling filing for the following year.
Regulated returns. Actual and PUC-allowed (as of December 31, 2017) returns were as follows:
%
Rate-making
Return on rate base (RORB)*
Year ended December 31, 2017
Utility returns
PUC-allowed returns
Difference
Hawaiian
Electric
6.08
7.57
Hawaii
Electric
Light
6.54
7.80
Maui
Electric
Hawaiian
Electric
Maui
Electric
Hawaiian
Electric
6.10
7.34
6.46
9.50
6.97
9.50
6.76
9.00
6.83
9.50
ROACE**
Hawaii
Electric
Light
Rate-making ROACE***
Hawaii
Electric
Light
7.30
9.50
Maui
Electric
6.84
9.00
(2.16)
(1.49)
(1.26)
(1.24)
(3.04)
(2.53)
(2.24)
(2.67)
(2.20)
* Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
** Recorded net income divided by average common equity.
*** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
54
The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion
of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual
RAM revenues on June 1 annually rather than on January 1, the low RBA interest rate (currently a short-term debt rate rather
than the actual cost of capital), O&M increases and return on capital additions since the last rate case in excess of indexed
escalations, and the portion of the pension regulatory asset not earning a return due to pension contributions and pension costs
in excess of the pension amount in rates. In 2017, the utility ROACEs actually achieved, reflect negative impacts of the Tax Act
on deferred tax assets.
Results of operations.
•
2017 vs. 2016
2017
2,258
$
2016
2,094
$
Increase (decrease)
(dollars in millions, except per barrel amounts)
$
164
Revenues. Net increase largely due to:
$
150
40
15
(2)
(5)
higher fuel prices1
higher purchased power energy costs2
higher RAM revenue and interim rate increase at Hawaii Electric Light
lower purchased power non-energy costs2
lower KWH generated
(12)
lower KWH purchased
588
587
418
408
258
120
455
563
406
387
284
142
133
24
12
21
(26)
(22)
6.6%
8.1%
(1.5)%
68.78
8,690
2,724
53.49
8,845
2,662
15.29
(155)
62
(20)
lower RAM revenues due to expiration of 2013 settlement agreement that allowed
the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at
Hawaiian Electric
Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower
KWH generated
Purchased power expense. Increase due to higher purchased power energy prices
largely due to higher fuel prices, partly offset by lower KWH purchased2
9
5
3
1
1
(3)
(4)
Operation and maintenance expense. Net increase due to:
higher overhaul costs due to more overhauls being performed in 2017
higher ERP project costs (project commenced in 2017)
higher transmission and distribution operation and maintenance costs
higher Grid modernization consultant cost (none in 2016)
write off of portion of deferred Geothermal RFP costs
higher LNG consulting costs to negotiate LNG contract in 2016, which was
subsequently terminated following HEI/Nextera merger termination
higher PSIP consulting costs incurred in 2016, in order to complete the PSIP update
in April 2016 and December 2016
Other expenses. Increase due to higher revenue taxes from higher revenue, coupled
with higher depreciation expense for plant investments in 2016
Operating income. Decrease due to lower RAM revenues and higher operation and
maintenance and other expenses
Net income for common stock. Decrease due to lower operating income and higher
income taxes due to to write-down of deferred tax assets to reflect the lower tax
rates enacted by the Tax Act
Return on average common equity
Average fuel oil cost per barrel 1
Kilowatthour sales (millions) 3
Number of employees (at December 31)
1
2
3
The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil
prices and certain components of purchased energy costs are passed on to customers.
The rate schedule of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in
purchase power expenses (except purchased energy costs) are passed on to customers.
KWH sales were lower in 2017 when compared to the prior year due largely to continued energy efficiency and conservation efforts by
customers and increasing levels of private customer-sited renewable generation.
55
•
2016 vs. 2015
2016
2,094
$
2015
2,335
$
Increase (decrease)
(dollars in millions, except per barrel amounts)
$
(241)
Revenues. Net decrease largely due to:
$
(198)
(33)
(25)
15
lower fuel prices1
lower purchased power expense2
lower KWH generated
higher RAM revenues
455
563
406
387
284
142
655
594
413
399
274
136
(200)
(31)
(7)
(12)
10
6
Fuel oil expense. Decrease due to lower fuel cost and lower KWH generated
Purchased power expense. Decrease due to lower purchased power energy prices,
largely due to lower fuel prices2
Operation and maintenance expense. Net decrease due to:
(5) write off of ERP software costs in 2015, as a result of a PUC ERP/EAM decision
(4)
(1)
3
1
additional reserve for environmental costs in 20153
lower storm weather repairs
higher PSIP consulting costs incurred in 2016, in order to complete the PSIP update
in April 2016 and December 2016
higher LNG consulting costs to negotiate LNG contract in 2016, which was
subsequently terminated following HEI/Nextera merger termination
Other expenses. Decrease in revenue taxes due to lower revenue, partly offset by
higher depreciation expense for plant investments
Operating income. Increase due to an overall decrease in expenses
Net income for common stock. Increase due to higher operating income
8.1%
8.0%
0.1%
53.49
8,845
4,788
2,662
74.71
8,957
5,082
2,727
(21.22)
(112)
(294)
(65)
Return on average common equity
Average fuel oil cost per barrel 1
Kilowatthour sales (millions) 4
Cooling degree days (Oahu)
Number of employees (at December 31)
1
2
3
4
The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil
prices and certain components of purchased energy costs are passed on to customers.
The rate schedule of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in
purchase power expenses (except purchased energy costs) are passed on to customers.
Costs to complete Waiau Power Plant's onshore and offshore investigations and the remediation of PCB contamination in the offshore
sediment in 2015.
KWH sales were lower in 2016 when compared to the prior year due largely to continued energy efficiency and conservation efforts by
customers and increasing levels of private customer-sited renewable generation.
Hawaiian Electric’s effective tax rate (combined federal and state income tax rates) was higher for 2017 compared to 2016
and 2015, primarily due to the impact of the 2017 adjustment to accumulated deferred income tax balances (exclusive of
accumulated deferred income tax balances related to the regulated rate base of the Utilities) for the new federal corporate tax
rate of 21%.
Most recent rate proceedings. Unless otherwise agreed or ordered, each electric utility is currently required by PUC order to
initiate a rate proceeding every third year (on a staggered basis) to allow the PUC and the Consumer Advocate to regularly
evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant
and equipment, including the cost of new capital projects to maintain and improve service reliability and integrate more
renewable energy. The PUC may grant an interim increase within 10 to 11 months following the filing of an application, but
there is no guarantee of such an interim increase and interim amounts collected are refundable, with interest, to the extent they
exceed the amount approved in the PUC’s final D&O. The timing and amount of any final increase is determined at the
discretion of the PUC. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE and
RORB) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O.
56
Test year
(dollars in millions)
Hawaiian Electric
2017
Request
Interim increase
Hawaii Electric Light
2016
Request
Interim increase
Maui Electric
2018
Request
Date
(filed/
implemented)
Amount
% over
rates in
effect
ROACE
(%)
RORB
(%)
Rate
base
Stipulated
agreement
reached with
Consumer
Advocate
Common
equity
%
12/16/16
$ 106.4
2/16/18
36.0
9/19/16
8/31/17
$
19.3
9.9
6.9
2.3
6.5
3.4
10.60
9.50
8.28
7.57
$ 2,002
1,980
57.36
57.10
10.60
9.50
$
8.44
7.80
479
482
57.12
56.69
Yes
Yes
10/12/17
$
30.1
9.3
10.60
8.05
$
473
56.94
Note: The “Request date” reflects the application filing date for the rate proceeding. The “Interim increase” date reflects the effective date of
the revised schedules and tariffs as a result of the PUC-approved increase. Hawaiian Electric and Maui Electric proposed no increase in rates
in their 2014 and 2015 rate cases, and the PUC consolidated each of those proceedings into the Hawaiian Electric 2017 and the Maui Electric
2018 rate cases, respectively.
See “Most recent rate proceedings” in Note 3 of the Consolidated Financial Statements.
Performance-based regulation. In the Hawaii Electric Light 2016 test year rate case and the Hawaiian Electric 2017 test
year rate case, the Utilities recommended that a separate investigatory docket be opened to evaluate PBR on a broader scale that
can be implemented across the Utilities, and to fully develop a comprehensive PBR Framework. PBR refers to different ways
in which regulators have modified their regulatory approach in an attempt to strengthen financial incentives for Utilities to
achieve desired outcomes. In its April 27, 2017 order in the Decoupling Investigative proceeding, the PUC stated that it would
initiate a separate investigative docket to examine a full range of Performance Incentive Mechanisms and PBR options.
Depreciation docket. In December 2016, the Utilities filed an application with the PUC for approval of changes in the
depreciation and amortization rates and amortization period for contributions in aid of construction (CIAC). The Utilities have
requested that the effective date of implementation of the change in depreciation and amortization rates and revised CIAC
amortization period, as recommended by the 2015 Book Depreciation Study, coincide with the effective date rates that include
the increased expenses resulting from the new depreciation and amortization rates and change in CIAC amortization period are
established in each of the Utilities’ next general rate cases (i.e., either at interim rates or final rates). In the interest of
simplifying the remainder of this proceeding, the Utilities will hold discussions with the Consumer Advocate to settle the
remaining differences.
Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy
include renewable energy projects discussed in Note 3 of the Consolidated Financial Statements and the following:
New renewable PPAs.
•
•
•
In July 2015, the PUC approved a PPA for the 27.6 MW Waianae Solar project that was developed by Eurus Energy
America. The project achieved commercial operations in January 2017 and is now the largest solar project in Hawaii.
In July 2015, Maui Electric signed two PPAs, with Kuia Solar and South Maui Renewable Resources (which
subsequently assigned its PPA to SSA Solar of HI 2, LLC and SSA Solar of HI 3, LLC, respectively), each for a 2.87-
MW solar facility. In February 2016, the PUC approved both PPAs, subject to certain conditions and modifications.
The guaranteed commercial operations date for the facilities was December 31, 2016, however both projects are
experiencing delays and now expected to be completed by the first half of 2018.
In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 between
Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM) for a proposed 24-MW wind farm on Oahu. The
NPM wind farm is expected to be placed into service by August 31, 2019.
• Hawaiian Electric terminated PPAs to purchase solar energy with three affiliates of SunEdison, which affiliates were
acquired by an affiliate of NRG Energy, Inc. (NRG) during SunEdison’s Chapter 11 bankruptcy proceedings. Hawaiian
Electric then negotiated with NRG and its newly acquired affiliates and entered into amended and restated PPAs for
57
solar energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for 14.7 MW and Kawailoa Solar,
LLC for 49.0 MW. In July 2017, the PUC approved the three NRG PPAs, subject to modifications and conditions. The
three projects are expected to be in service by the end of 2019.
In February 2018, NRG and GIP III Zephyr Acquisition Partners, a subsidiary of Global Infrastructure Partners (GIP),
entered into an agreement where GIP has agreed to purchase substantially all of NRG’s renewable platform, including
NRG’s renewable operations, maintenance and development businesses. Kawailoa Solar, LLC, Lahikuhana Solar,
LLC, and Waipio PV, LLC, along with NRG Renew LLC, are included in the sale transaction. NRG Renew has
confirmed that this transaction will not in any way affect the completion or success of the three PV Projects.
In January 2018, Maui Electric signed a PPA, subject to PUC approval, with Molokai New Energy Partners to
purchase solar energy from a PV plus battery storage project. The 4.9 MW project will deliver no more than 2.7 MW
at any time to the Molokai system and is expected to be in service by end of 2019.
•
•
Tariffed renewable resources.
• As of December 31, 2017, there were approximately 337 MW, 78 MW and 89 MW of installed distributed renewable
energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for
tariff-based private customer generation programs, namely NEM, Customer Grid Supply and Customer Self Supply.
As of December 31, 2017, an estimated 27% of single family homes on the islands of Oahu, Hawaii and Maui have
installed private rooftop solar systems, and an estimated 30% of single family homes have installed, or have been
approved to install, private rooftop solar systems. As of December 31, 2017, approximately 16% of the Utilities' total
customers have solar systems.
• The Utilities began accepting energy from feed-in tariff projects in 2011. As of December 31, 2017, there were 30
MW, 3 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric,
Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•
In September 2015, the PUC approved Hawaiian Electric’s 2-year biodiesel supply contract with Pacific Biodiesel
Technologies, LLC (PBT) to supply 2 million to 3 million gallons of biodiesel at Campbell Industrial Park combustion
turbine No. 1 (CIP CT-1) and the Honolulu International Airport Emergency Power Facility beginning in November
2015. The PBT contract is set to expire on November 2, 2018. PBT also has a spot buy contract with Hawaiian Electric
to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel
have been made under the spot purchase contract, which was recently extended through June 2018. REG Marketing &
Logistics Group, LLC has a contingency supply contract with Hawaiian Electric to also supply biodiesel to CIP CT-1
in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November
2018, and will continue with no volume purchase requirements.
• On October 27, 2017, Hawaiian Electric entered into a new biodiesel supply contract with PBT, subject to PUC
approval, to supply 2 million to 4 million gallons of biodiesel per year for three years. The new PBT contract is
expected to commence as early as November 2018 to be used as fuel for power generation at Hawaiian Electric’s
Schofield Generating Station, the Honolulu International Airport Emergency Power Facility and any other generating
unit on Oahu, as necessary.
Requests for renewable proposals, expressions of interest, and information.
•
In response to requests filed by the Utilities, on October 6, 2017, the PUC opened a docket to receive filings, review
approval requests, and resolve disputes, if necessary, related to the Utilities' plan to proceed with a competitive bidding
process for dispatchable firm renewable generation and variable renewable generation. On October 23, 2017, the
Utilities filed draft requests for proposals for 220 MW of renewable generation on Oahu (Oahu Variable RFP), 50 MW
of renewable generation on Hawaii Island (Hawaii Variable RFP), and 100 MW of renewable generation on Maui,
including 40 MW of firm renewable generation, comprising the Maui Variable RFP and Maui Firm RFP (all resources
to be in service by the end of 2022). With this filing, the Utilities also filed proposed model power purchase
agreements and timelines for each proposed procurement. In January 2018, the PUC issued an order appointing
Independent Observers for the RFPs and directed the Utilities to move forward with the three Variable RFPs. On
February 20, 2018, the PUC approved, with minor modification, the proposed Variable RFPs and directed the Utilities
to issue the RFPs, as modified. On February 27, 2018, the Utilities opened the RFPs to receive proposals. The PUC
indicated it would provide further guidance on the Maui Firm RFP in the first quarter of 2018.
58
• On January 5, 2017, Hawaiian Electric issued requests for Onshore Wind Expression of Interest to developers that are
capable of developing utility scale onshore wind projects that are eligible to capture the federal Investment Tax Credit
for Large Wind on the island of Oahu. Hawaiian Electric is in non-binding confidential negotiations with a developer
that responded.
• On December 12, 2016, the Utilities issued a request for information asking interested landowners to provide
information about properties available for utility-scale renewable energy projects or for growing biofuel feedstock on
the islands of Oahu, Hawaii, Maui, Molokai and Lanai. Responses have been made available to developers interested
in developing renewable energy projects on these five islands.
Adequacy of supply.
Hawaiian Electric. In January 2018, Hawaiian Electric filed its 2018 Adequacy of Supply (AOS) letter, which indicated
that based on its June 2017 sales and peak forecast for the 2018-2023 time period, Hawaiian Electric's generation capacity will
be sufficient to meet reasonably expected demands for service and provide reasonable reserves for emergencies through 2021,
but may have shortfalls in meeting the Utilities’ generating system reliability guideline. The calculated reliability guideline
shortfalls are relatively small and Hawaiian Electric can implement mitigation measures.
In accordance with its planning criteria, Hawaiian Electric deactivated two fossil fuel generating units from active service
at its Honolulu Power Plant in January 2014. Hawaiian Electric acquired new firm capacity of 8 MW with the commissioning
of the State of Hawaii Department of Transportation’s emergency power facility in June 2017. Hawaiian Electric is proceeding
with a future firm capacity addition with the U.S. Department of the Army for a utility owned and operated renewable,
dispatchable, including black start capabilities, generation security project on federal lands, which is expected to be in service in
the second quarter of 2018. Hawaiian Electric is continuing negotiations with firm capacity IPPs on Oahu. On August 31, 2017,
Hawaiian Electric and Kalaeloa entered into an agreement that neither party will give written notice of termination of the
Kalaeloa PPA prior to October 31, 2018. The PPA with AES Hawaii is scheduled to expire in 2022.
Hawaii Electric Light. In January 2018, Hawaii Electric Light filed its 2018 AOS letter, which indicated that Hawaii
Electric Light’s generation capacity through 2020 is sufficient to meet reasonably expected demands for service and provide for
reasonable reserves for emergencies. Hawaii Electric Light is anticipating the addition of the firm dispatchable Hu Honua
facility to be online by the end of 2018.
Maui Electric. In January 2018, Maui Electric filed its 2018 AOS letter, which indicated that Maui Electric’s generation
capacity for the islands of Lanai and Molokai for the next three years is sufficiently large to meet all reasonably expected
demands for service and provide reasonable reserves for emergencies. The 2018 AOS letter also indicated that without the peak
reduction benefits of demand response but with the equivalent firm capacity value of wind generation, Maui Electric expects to
have a reserve capacity shortfall from 2018 to 2020 on the island of Maui. Maui Electric is evaluating several measures to
mitigate the anticipated reserve capacity shortfall. Maui Electric anticipates needing a significant amount of additional firm
capacity on Maui in the 2022 timeframe after the planned retirement of the Kahului Power Plant.
In May 2016, Maui Electric requested that the PUC open a new docket for Maui Electric’s competitive bidding process for
additional firm capacity resources. In October 2017, Maui Electric filed a draft RFP and supporting documents as requested by
the PUC. In January 2018, the PUC issued an order appointing an Independent Observer of the RFP process that reports to the
PUC for Maui Firm RFP. However, the PUC stated Maui Electric should focus on its variable RFP and noted that it would
provide further guidance on the Firm RFP during the first quarter of 2018.
In September 2016, Maui Electric submitted an application to purchase and install three temporary mobile distributed
generation diesel engines to address increasing reserve capacity shortfalls on the island of Maui. Maui Electric has since
requested the PUC to suspend the proceeding to evaluate contingency measures and permanent solutions to minimize or
eliminate the risk of near-term capacity shortfalls on the island of Maui.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or
negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 and “Recent tax
developments” in Note 10 of the Consolidated Financial Statements.
Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the Federal Register the final regulations
required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing
power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water
systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations
prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and
impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian
Electric submitted the final site specific studies to the DOH in December 2016 for the Honolulu and Waiau power plants and in
59
September 2017 for the Kahe power plant. Hawaiian Electric will work with the DOH to identify the appropriate compliance
methods for the 316(b) rule.
Mercury Air Toxics Standards. On February 16, 2012, the EPA published the final rule establishing the National Emission
Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs) in the Federal Register.
The final rule, known as the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power
plants. MATS established the Maximum Achievable Control Technology standards for the control of hazardous air pollutants
emissions from new and existing EGUs. Hawaiian Electric initially selected a MATS compliance strategy based on switching to
lower emission fuels, but has since continued developing and refining its emission control strategy. Hawaiian Electric’s liquid
oil-fired steam generating units that are subject to the MATS limits are able to comply with the new standards without a
significant fuel switch in combination with a suite of operational changes.
Hawaiian Electric has proceeded with the implementation of its MATS Compliance Plan and has met all compliance
requirements to date.
Liquidity and capital resources. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate
cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and
draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures and investments
and to cover debt, retirement benefits and other cash requirements in the foreseeable future.
Hawaiian Electric’s consolidated capital structure was as follows:
December 31
(dollars in millions)
Short-term borrowings
Long-term debt, net
Preferred stock
Common stock equity
2017
2016
$
$
5
1,369
34
1,845
3,253
—% $
42
1
57
100% $
—
1,319
34
1,800
3,153
—%
42
1
57
100%
Information about Hawaiian Electric’s short-term borrowings (other than from Hawaii Electric Light and Maui Electric)
and Hawaiian Electric’s line of credit facility were as follows:
(in millions)
Short-term borrowings1
Commercial paper
Line of credit draws
Borrowings from HEI
Undrawn capacity under line of credit facility
Year ended
December 31, 2017
Average
balance
End-of-period
balance
December 31,
2016
$
$
7
—
2
—
$
5
—
—
200
—
—
—
200
1
The maximum amount of external short-term borrowings by Hawaiian Electric during 2017 was $48 million. At December 31, 2017,
Hawaiian Electric had short-term borrowings from Hawaii Electric Light and Maui Electric of nil and $12 million, respectively, which
intercompany borrowings are eliminated in consolidation. At February 13, 2018, Hawaiian Electric had $90 million outstanding
commercial paper, its line of credit facility was undrawn and it had no borrowings from HEI. Also, at February 13, 2018, Hawaii Electric
Light and Maui Electric had short-term borrowings from Hawaiian Electric of $4.5 million and $1.5 million, respectively.
Hawaiian Electric utilizes short-term debt, typically commercial paper, to support normal operations, to refinance short-
term debt and for other temporary requirements. Hawaiian Electric also borrows short-term from HEI for itself and on behalf of
Hawaii Electric Light and Maui Electric, and Hawaiian Electric may borrow from or loan to Hawaii Electric Light and Maui
Electric short-term. The intercompany borrowings among the Utilities, but not the borrowings from HEI, are eliminated in the
consolidation of Hawaiian Electric’s financial statements. The Utilities periodically utilize long-term debt, borrowings of the
proceeds of special purpose revenue bonds (SPRBs) issued by the Department of Budget and Finance of the State of Hawaii
(DBF) and the issuance of privately placed unsecured senior notes bearing taxable interest, to finance the Utilities’ capital
improvement projects, or to repay short-term borrowings used to finance such projects. The PUC must approve issuances, if
any, of equity and long-term debt securities by the Utilities.
Hawaiian Electric has a $200 million line of credit facility. See Note 5 of the Consolidated Financial Statements.
60
The ratings of Hawaiian Electric’s commercial paper and debt securities could significantly impact the ability of Hawaiian
Electric to sell its commercial paper and issue debt securities and/or the cost of such debt. The rating agencies use a
combination of qualitative measures (e.g., assessment of business risk that incorporates an analysis of the qualitative factors
such as management, competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash
flow, debt, interest coverage and liquidity ratios) in determining the ratings of Hawaiian Electric securities.
As of February 13, 2018, the Fitch, Moody’s and S&P ratings of Hawaiian Electric were as follows:
Long-term issuer default, long-term issuer and corporate credit, respectively
Commercial paper
Senior unsecured debt/special purpose revenue bonds
Hawaiian Electric-obligated preferred securities of trust subsidiary
Cumulative preferred stock (selected series)
Subordinated debt
Outlook
* Not rated.
Fitch Moody’s
Baa2
BBB+
F2
P-2
Baa2
A-
Baa3
*
Ba1
*
*
BBB
Stable
Stable
S&P
BBB-
A-3
BBB-
BB
*
*
Stable
The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from
whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or
hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating
should be evaluated independently of any other rating.
Management believes that, if Hawaiian Electric’s commercial paper ratings were to be downgraded or if credit markets
were to further tighten, it could be more difficult and/or expensive to sell commercial paper or secure other short-term
borrowings. Similarly, management believes that if Hawaiian Electric’s long-term credit ratings were to be downgraded or
further downgraded, or if credit markets further tighten, it could be more difficult and/or expensive for DBF and/or the Utilities
to sell SPRBs and other debt securities, respectively, for the benefit of the Utilities in the future. Such limitations and/or
increased costs could materially adversely affect the results of operations, financial condition and liquidity of the Utilities.
SPRBs have been issued by the DBF to finance (and refinance) capital improvement projects of Hawaiian Electric and its
subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries
under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
In May 2015, up to $80 million of SPRBs ($70 million for Hawaiian Electric, $2.5 million for Hawaii Electric Light and
$7.5 million for Maui Electric) were authorized by the Hawaii legislature for issuance, with PUC approval, prior to June 30,
2020 to finance the Utilities’ capital improvement programs.
On January 26, 2017, Hawaiian Electric, Hawaii Electric Light and Maui Electric obtained PUC approval to issue, on or
before December 31, 2017, unsecured obligations bearing taxable interest (Hawaiian Electric up to $100 million, Hawaii
Electric Light up to $10 million and Maui Electric up to $30 million), with the proceeds expected to be used, as applicable, to
finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures and/or to
reimburse funds used for payment of capital expenditures. On December 14, 2017, Hawaiian Electric and Maui Electric issued
through a private placement, $40 million and $10 million, respectively, of unsecured senior notes bearing 4.31% taxable
interest. See Note 6 of the Consolidated Financial Statements.
On April 28, 2017, Hawaiian Electric, Hawaii Electric Light and Maui Electric received PUC approval to issue unsecured
obligations bearing taxable interest and/or refunding SPRBs with principal amounts totaling up to $252 million, $88 million
and $75 million, respectively, to refinance three series of outstanding revenue bonds. The approval was limited to 2017, and an
expedited approval procedure would apply for refinancings during January 2018 through December 2020. Pursuant to this
approval, on June 29, 2017, the DBF issued, at par, Refunding Series 2017A SPRBs in the aggregate principal amount of $125
million with a maturity of May 1, 2026 and Refunding Series 2017B SPRBs in the aggregate principal amount of $140 million
with a maturity of March 1, 2037, with the proceeds of each issuance used to refinance outstanding revenue bonds. See Note 6
of the Consolidated Financial Statements.
In September 2017, the Utilities requested PUC approval to issue, over a four-year period from 2018 to December 31,
2021, unsecured obligations bearing taxable interest (Hawaiian Electric up to $280 million, Hawaii Electric Light up to $30
million and Maui Electric up to $10 million), with the proceeds expected to be used, as applicable, to finance capital
expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures and/or to reimburse
funds used for payment of capital expenditures.
61
On October 31, 2017, the Utilities received PUC approval to issue and sell each utility’s common stock through December
31, 2021 (Hawaiian Electric’s sale/s to HEI of up to $150 million and Hawaii Electric Light’s and Maui Electric’s sale/s to
Hawaiian Electric of up to $10 million each) and the purchase of Hawaii Electric Light and Maui Electric common stock by
Hawaiian Electric through December 31, 2021. Pursuant to this approval, in December 2017, Hawaiian Electric sold $14
million of its common stock to HEI and Maui Electric sold $4.8 million of its common stock to Hawaiian Electric. Hawaii
Electric Light did not issue common stock in 2017.
Cash flows.
(in thousands)
Net cash provided by operating activities
2017
335,186
$
Change
2016
$(34,731) $ 369,917
Change
$ 36,511
2015
$ 333,406
Years ended December 31
Net cash used in investing activities
Net cash used in financing activities
2017 Cash Flows Compared to 2016:
(372,287)
(84,088)
(288,199)
20,583
(308,782)
(24,668)
7,213
(31,881)
(17,944)
(13,937)
Net cash provided by operating activities: Cash flows from operating activities generally relate to the amount and
timing of cash received from customers and payments made to third parties. Using the indirect method of determining cash
flows from operating activities, noncash expense items such as depreciation and amortization, as well as changes in certain
assets and liabilities, are added to (or deducted from ) net income.
The decrease in net cash provided by operating activities in 2017 over 2016 was impacted by the following:
• Lower cash from an increase in fuel oil stock due to an increase in fuel prices
• Lower cash from an increase in unbilled revenues due to higher fuel prices
• Lower cash due to refund of federal income taxes in 2016 based on bonus depreciation enacted in the fourth quarter of
2015 (similar treatment was not granted in the fourth quarter of 2016).
Net cash used in investing activities: The increase in net cash used in investing activities in 2017 over 2016 was driven
primarily by an increase in capital expenditures related to construction activities, offset by higher contribution in aid of
construction and capital goods tax credit.
Net cash used in financing activities: Financing activities provide supplemental cash for both day-to-day operations
and capital requirements as needed. The decrease in net cash used in financing activities in 2017 over 2016 was driven
primarily by lower common stock dividends paid in 2017.
2016 Cash Flows Compared to 2015:
Net cash provided by operating activities: The increase in net cash provided by operating activities in 2016 over 2015
was impacted by the following:
• Higher cash from a refund of federal income taxes in 2016 due to the extension of bonus depreciation enacted in the
fourth quarter of 2015 and lower revenue taxes paid resulting from lower revenues due largely to lower fuel prices.
• Lower unbilled revenues due to timing and lower fuel prices.
Net cash used in investing activities: The decrease in net cash used in investing activities in 2016 from 2015 was
driven primarily by decreased capital expenditures, offset by lower proceeds from contributions in aid of construction.
Net cash used in financing activities: The increase in net cash used in financing activities was driven primarily by
decreased proceeds from issuance of long-term debt, partially offset by proceeds from issuance of common stock.
2018 forecast capital expenditures. For 2018, the Utilities forecast $450 million of net capital expenditures, which could
change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in
permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating
activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the
funds needed for the net capital expenditures in 2018, to pay down commercial paper or other short-term borrowings, as well as
to fund any unanticipated expenditures not included in the 2018 forecast (such as increases in the costs or acceleration of capital
projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations).
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates
may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of
62
KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and
ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for
fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the
effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting
authorities.
Selected contractual obligations and commitments. The following table presents aggregated information about total
payments due from the Utilities during the indicated periods under the specified contractual obligations and commitments:
December 31, 2017
(in millions)
Less than 1
year
Payments due by period
3-5
years
1-3
years
More than
5 years
Short-term borrowings
Long-term debt
Interest on long-term debt
Operating leases
Open purchase order obligations ¹
Fuel oil purchase obligations (estimate based on December 31, 2017
fuel oil prices)
Purchase power obligations-minimum fixed capacity charges
Liabilities for uncertain tax positions
Total (estimated)
$
$
5
50
65
9
114
130
118
—
491
$
$
— $
96
123
15
12
130
235
3
614
$
— $
52
119
11
9
—
212
—
403
$
— $
1,179
780
32
—
—
854
—
2,845
$
¹ Includes contractual obligations and commitments for capital expenditures and expense amounts.
Total
5
1,377
1,087
67
135
260
1,419
3
4,353
The table above does not include other categories of obligations and commitments, such as deferred taxes, trade payables,
amounts that will become payable in future periods under collective bargaining and other employment agreements and
employee benefit plans and potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing
mechanism). As of December 31, 2017, the fair value of the assets held in trusts to satisfy the obligations of the Utilities’
retirement benefit plans did not exceed the retirement benefit plans’ benefit obligation. Minimum funding requirements for
retirement benefit plans have not been included in the table above. See Note 8 of the Consolidated Financial Statements for
retirement benefit plan obligations and estimated contributions for 2018.
See Note 3 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments.
Certain factors that may affect future results and financial condition. Also see “Cautionary Note Regarding Forward-
Looking Statements” and “Certain factors that may affect future results and financial condition” for Consolidated HEI above.
Clean energy initiatives and Renewable Portfolio Standards (RPS). The far-reaching nature of the Utilities’ renewable
energy commitments and the RPS goals presents risks to the Utilities. Among such risks are: (1) the dependence on third party
suppliers of renewable purchased energy, which if the Utilities are unsuccessful in negotiating purchased power agreements
with such IPPs or if a major IPP fails to deliver the anticipated capacity in its purchased power agreement, could impact the
Utilities’ achievement of their commitments to RPS goals and/or the Utilities’ ability to deliver reliable service; (2) delays in
acquiring or unavailability of non-fossil fuel supplies for renewable generation; (3) the impact of intermittent power to the
electrical grid and reliability of service if appropriate supporting infrastructure is not installed or does not operate effectively;
(4) the likelihood that the Utilities may need to make substantial investments in related infrastructure, which could result in
increased borrowings and, therefore, materially impact the financial condition and liquidity of the Utilities; and (5) the
commitment to support a variety of initiatives, which, if approved by the PUC, may have a material impact on the results of
operations and financial condition of the Utilities depending on their design and implementation. These initiatives include, but
are not limited to, removing the system-wide caps on net energy metering (but studying distributed generation interconnections
on a per-circuit basis); and developing an Energy Efficiency Portfolio Standard. The implementation of these or other programs
may adversely impact the results of operations, financial condition and liquidity of the Utilities.
Regulation of electric utility rates. The rates the electric utilities are allowed to charge for their services, and the timeliness
of permitted rate increases, are among the most important items influencing their results of operations, financial condition and
liquidity. The PUC has broad discretion over the rates the electric utilities charge and other matters. Any adverse decision by the
PUC concerning the level or method of determining electric utility rates, the items and amounts permitted to be included in rate
base, the authorized returns on equity or rate base found to be reasonable, the potential consequences of exceeding or not
meeting such returns, or any prolonged delay in rendering a decision in a rate or other proceeding could have a material adverse
effect on the Company’s and Hawaiian Electric’s consolidated results of operations, financial condition and liquidity. Upon a
showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of
63
filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing
is not completed). There is no time limit for rendering a final D&O and interim rate increases are subject to refund with interest
if the interim increase is greater than the increase approved in the final D&O.
Fuel oil and purchased power. The electric utilities rely on fuel oil suppliers and IPPs to deliver fuel oil and power,
respectively. See “Fuel contracts” and “Power purchase agreements” in Note 3 of the Consolidated Financial Statements.
Approximately 69%, 68% and 70% of the net energy generated or purchased by the Utilities in 2017, 2016 and 2015,
respectively, were generated from the burning of fossil fuel oil. Purchased KWHs provided approximately 46%, 47% and 46%
of the total net energy generated and purchased in 2017, 2016 and 2015, respectively.
Failure or delay by the electric utilities’ oil suppliers and shippers to provide fuel pursuant to existing supply contracts, or
failure by a major IPP to deliver the firm capacity anticipated in its PPA, could interrupt the ability of the electric utilities to
deliver electricity, thereby materially adversely affecting the Company’s and the Utilities' results of operations and financial
condition. Hawaiian Electric generally maintains an average system fuel inventory level equivalent to 47 days of forward
consumption. Hawaii Electric Light and Maui Electric generally maintain an inventory level equivalent to one month’s supply
of both medium sulfur fuel oil and diesel fuel. Some, but not all, of the Utilities’ PPAs require that the IPPs maintain minimum
fuel inventory levels and all of the firm capacity PPAs include provisions imposing substantial penalties for failure to produce
the firm capacity anticipated by those agreements.
Other regulatory and permitting contingencies. Many public utility projects require PUC approval and various permits
(e.g., environmental and land use permits) from other agencies. Delays in obtaining PUC approval or permits can result in
increased costs. If a project does not proceed or if the PUC disallows costs of the project, the project costs may need to be
written off in amounts that could have a material adverse effect on the Company and the Utilities. Significant write-offs of this
type were made in 2007, 2011 and 2012. See Note 3 of the Consolidated Financial Statements for a discussion of additional
regulatory contingencies.
Competition. Although competition in the generation sector in Hawaii is moderated by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric utilities, the PUC has promoted a more competitive
electric industry environment through its decisions concerning competitive bidding and distributed generation (DG). An
increasing amount of generation is provided by IPPs and customer distributed generation.
Competitive bidding. In December 2006, the PUC issued a decision that included a final competitive bidding
framework, which became effective immediately. The final framework states, among other things, that: (1) a utility is required
to use competitive bidding to acquire a future generation resource or a block of generation resources unless the PUC finds
bidding to be unsuitable; (2) the framework does not apply in certain situations identified in the framework; (3) waivers from
competitive bidding for certain circumstances will be considered; (4) the utility is required to select an independent observer
from a list approved by the PUC whenever the utility or its affiliate seeks to advance a project proposal (i.e., in competition
with those offered by bidders); (5) the utility may consider its own self-bid proposals in response to generation needs identified
in its RFP; and (6) for any resource to which competitive bidding does not apply (due to waiver or exemption), the utility
retains its traditional obligation to offer to purchase capacity and energy from a Qualifying Facility (QF) at avoided cost upon
reasonable terms and conditions approved by the PUC.
Environmental matters. The Utilities' generating stations operate under air pollution control permits issued by the Hawaii
Department of Health (DOH) and, in a limited number of cases, by the federal Environmental Protection Agency (EPA). Hawaii
law requires an environmental assessment for proposed waste-to-energy facilities, landfills, oil refineries, power-generating
facilities greater than 5 MW and wastewater facilities, except individual wastewater systems. Meeting this requirement for
environmental assessments results in increased project costs.
Changes to environmental laws and legally required updates of the rules promulgated pursuant to those laws may increase
costs and cause substantial changes in the way electric utilities operate. For example, as Clean Air Act programs are updated,
such as the updates to the National Ambient Air Quality Standards (NAAQS) or the Clean Water Act program governing
cooling water intakes, or if new legislation or rules are adopted by the federal or state governments, operation of the Hawaiian
Electric steam generating facilities may be significantly impacted. Hawaiian Electric may be required to retire older generating
units, add pollutions controls or switch to fuels that emit lower emissions. Management believes that the recovery through rates
of most, if not all, of any costs incurred by the Utilities in complying with environmental requirements would be allowed by the
PUC, but no assurance can be given that this will in fact be the case. In addition, there can be no assurance that a significant
environmental liability will not be incurred by the Utilities or that the related costs will be recoverable through rates. See
“Environmental regulation” in Note 3 of the Consolidated Financial Statements.
Technological developments. New emerging and breakthrough technological developments (e.g., the commercial
development of energy storage, grid support utility interactive inverters, fuel cells, DG, grid modernization, electrification of
64
transportation, and generation from renewable sources) may impact the Utilities’ future competitive position, results of
operations, financial condition and liquidity. The Utilities continue to seek prudent opportunities to develop and implement
advanced technologies that align with its technical and business plans.
Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” for
Consolidated HEI above.
Property, plant and equipment. The Utilities believe that the PUC will allow recovery of property, plant and equipment in
its electric rates. If the PUC does not allow recovery of any such costs, the electric utility would be required to write off the
disallowed costs at that time. See the discussion under “Utility projects” in Note 3 of the Consolidated Financial Statements
concerning costs of major projects that have not yet been approved for inclusion in the applicable utility’s rate base.
Regulatory assets and liabilities. The Utilities are regulated by the PUC. In accordance with accounting standards for
regulatory operations, the Company’s and the Utilities’ financial statements reflect assets, liabilities, revenues and costs of the
Utilities based on current cost-based rate-making regulations. The actions of regulators can affect the timing of recognition of
revenues, expenses, assets and liabilities.
Regulatory liabilities represent amounts collected from customers for costs that are expected to be incurred in the future, or
amounts collected in excess of costs incurred that are refundable to customers. Regulatory assets represent incurred costs that
have been deferred because their recovery in future customer rates is probable. As of December 31, 2017, the consolidated
regulatory liabilities and regulatory assets of the Utilities amounted to $881 million and $869 million, respectively, compared to
$411 million and $957 million as of December 31, 2016, respectively. Regulatory liabilities and regulatory assets are itemized
in Note 3 of the Consolidated Financial Statements. Management continually assesses whether the regulatory assets are
probable of future recovery by considering factors such as changes in the applicable regulatory environment. Because current
rates include the recovery of regulatory assets existing as of the last rate case and rates in effect allow the Utilities to earn a
reasonable rate of return, management believes that the recovery of the regulatory assets as of December 31, 2017 is probable.
This determination assumes continuation of the current political and regulatory climate in Hawaii, and is subject to change in
the future.
Management believes that the operations of the Utilities currently satisfy the criteria for regulatory accounting. If events or
circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory assets, net of
regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may result in a
material adverse effect on the Company’s and the Utilities’ results of operations, financial condition and liquidity.
Revenues. Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to energy
consumed in the accounting period, but not yet billed to customers, and RBA revenues or refunds for the difference between
PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthour sales. As of
December 31, 2017, revenues applicable to energy consumed, but not yet billed to customers, amounted to $107 million and the
RBA revenues recognized in 2017 amounted to $66 million.
The rate schedules of the Utilities include ECACs under which electric rates are adjusted for changes in the weighted-
average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated
power and purchased power. The rate schedules of the Utilities also include PPACs under which electric rates are more closely
aligned with purchase power costs incurred. Management believes that a material adverse effect on the Company’s and the
Utilities’ results of operations, financial condition and liquidity may result if the ECACs, PPACs or RBAs were lost or
adversely modified.
Consolidation of variable interest entities. A business enterprise must evaluate whether it should consolidate a variable
interest entity (VIE). The Utilities evaluate the impact of applying accounting standards for consolidation to its relationships
with IPPs with whom the Utilities execute new PPAs or execute amendments of existing PPAs. A possible outcome of the
analysis is that Hawaiian Electric or its subsidiaries may be found to meet the definition of a primary beneficiary of a VIE
which finding may result in the consolidation of the IPP in the Consolidated Financial Statements. The consolidation of IPPs
could have a material effect on the 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. The Utilities do not know how the consolidation of IPPs would be treated for regulatory or credit
ratings purposes. See Notes 1 and 3 of the Consolidated Financial Statements.
65
Bank
Executive overview and strategy. When ASB was acquired by HEI in 1988, it was a traditional thrift with assets of $1 billion
and net income of about $13 million. Since then, ASB has grown by both acquisition and internal growth. Over the last several
years the focus has been on efficient growth to maximize profitability and capital efficiency. ASB ended 2017 with assets of
$6.8 billion and net income of $67 million, compared to assets of $6.4 billion as of December 31, 2016 and net income of $57
million in 2016.
ASB is a full-service community bank serving both consumer and commercial customers. In order to remain competitive
and continue building core franchise value, ASB continues to develop and introduce new products and services in order to meet
the needs of those markets such as mobile banking. Additionally, the banking industry is constantly changing and ASB is
making the investments in people and technology necessary to adapt and remain competitive. ASB’s ongoing challenge is to
continue to increase revenues and control expenses. Key strategies to drive organic growth include:
1. deepening customer relationships;
2. building out product and service offerings to open new segments;
3.
fully deploying online and remotely-assisted account opening capabilities; and
4. prioritizing efficiency actions to gain earnings leverage on organic growth.
The interest rate environment and the quality of ASB’s assets will continue to impact its financial results. A flattened yield
curve as a result of an increase in short-term interest rates and excess liquidity in the financial system have made it challenging
to grow the bank's loan portfolio and find investments with adequate risk-adjusted returns. The potential for compression of
ASB’s margin when interest rates rise is a risk that is actively managed.
As part of its interest rate risk management process, ASB uses simulation analysis to measure net interest income
sensitivity to changes in interest rates (see “Quantitative and Qualitative Disclosures about Market Risk”). ASB then employs
strategies to limit the impact of changes in interest rates on net interest income. ASB’s key strategies to manage interest rate risk
include:
1. attracting and retaining low-cost deposits, particularly those in non-interest bearing transaction accounts;
2. diversifying the loan portfolio with higher-spread, shorter-maturity loans and/or variable rate loans;
3.
focusing investment growth in securities that exhibit less extension risk (i.e., risk of longer average lives) as rates rise.
ASB’s loan quality benefited in 2017 from increasing property values, more financial flexibility of borrowers, and overall
general economic improvement in the state of Hawaii. ASB’s net charge-offs as a percentage of total average loans was 0.27%
for 2017 compared to 0.24% for 2016. The higher net charge-off ratio was primarily due to charge offs of unsecured consumer
loans. ASB’s provision for loan losses decreased from $16.8 million for 2016 to $10.9 million for 2017, primarily due to lower
reserves for the commercial and commercial real estate loan portfolios as a result of lower portfolio balances and improving
credit trends, partly offset by higher loan loss reserves needed for the growing consumer loan portfolio.
Effective July 2013, ASB became non-exempt from the Durbin Amendment to the Dodd-Frank Act which resulted in lower
debit card interchange fees. For 2017, 2016 and 2015, the estimated net income impact of the lower debit card interchange fees
was $6 million per year.
66
Results of operations.
•
2017 vs. 2016
(in millions)
Interest income
2017
2016
$
236
$
219
Increase
(decrease)
17
$
Primary reason(s)
Higher interest income was due to higher average earning asset
balances and an increase in yields on earning assets. ASB's average
investment and mortgage-related securities portfolio balance for 2017
increased by $345 million compared to the average balance in 2016
as ASB purchased investments with liquidity not used to fund the
loan portfolio. The average loan portfolio balance for 2017 was $11
million lower than 2016 primarily due to a decrease in the average
commercial loan portfolio balance of $112 million. The decrease was
due to the strategic reduction of the national syndicated lending
portfolio ($88 million decrease in average balance) and paydowns in
the commercial portfolio. The average consumer, HELOC and
commercial real estate loan balances increased by $56 million,
$29 million and $15 million, respectively. The growth in these loan
portfolios was consistent with ASB’s portfolio mix targets and loan
growth strategy. The yield on earning assets increased 8 basis points
as the increase in short-term interest rates during the year repriced the
adjustable rate loans upward and increased the yields for the
investment securities.
Noninterest income
62
67
(5) Noninterest income was lower due to a decrease in mortgage banking
income and lower fee income from other financial products. The
lower mortgage banking income was due to lower residential loan
production and ASB's decision to portfolio a larger portion of the
residential loan production.
Revenues
Interest expense
298
12
286
13
12
(1)
Provision for loan losses
11
17
(6)
Lower interest expense was due to the payoff of a maturing other
borrowing, partly offset by higher interest expense from an increase
in average interest-bearing liabilities. Average deposit balances for
2017 increased by $451 million compared to 2016 due to an increase
in core deposits and time certificates of $319 million and $132
million, respectively. The other borrowings average balance
decreased by $94 million primarily due to a decrease in repurchase
agreements.
Lower provision for loan losses for 2017 was primarily due to a
decrease in reserves for the commercial and commercial real estate
loan portfolios as a result of lower portfolio balances and improving
credit trends, partly offset by increased provision for loan losses for
the consumer loan portfolio as a result of growth and increased
charge-offs. The provision for loan losses in 2016 was used primarily
to establish loan loss reserves for the growth in the commercial real
estate and consumer loan portfolios and additional reserve levels for
specific commercial credits.
Noninterest expense
Expenses
Operating income
Net income
Return on average
common equity 1
176
199
99
67
169
199
87
57
7
Higher noninterest expense was primarily due to higher
compensation and employee benefit costs.
—
12
Higher interest income and lower provision for loan losses, partly
offset by lower noninterest income and higher noninterest expenses.
10
Higher operating income and tax benefit from the Tax Act.
11.2%
9.9%
1.3%
67
•
2016 vs. 2015
(in millions)
Interest income
2016
2015
$
219
$
200
Increase
(decrease)
19
$
Primary reason(s)
Higher interest income was due to higher average earning asset
balances and higher loan yields. ASB’s average loan portfolio balance
for 2016 was $223 million higher than 2015 as the average
commercial real estate, HELOC and consumer loan balances
increased by $204 million, $32 million and $30 million, respectively.
The growth in these loan portfolios was consistent with ASB’s
portfolio mix targets and loan growth strategy. The commercial loan
average balance decreased $55 million due to the strategic reduction
of the national syndicated lending portfolio. The loan portfolio yield
benefited from a shift in the mix of the loan portfolio and the
repricing of the adjustable rate loans with the increase in the prime
rate. The average investment and mortgage-related securities
portfolio balance increased by $248 million as ASB purchased
investments with liquidity in excess of loan growth funding.
Noninterest income
67
67
— Noninterest income was flat as higher gains on sales of investment
securities and insurance proceeds in 2016 were offset by lower gains
on sales of real estate and mortgage servicing rights.
Revenues
Interest expense
286
13
267
12
19
1
Provision for loan losses
17
6
11
Noninterest expense
169
166
Expenses
Operating income
Net income
Return on average
common equity 1
199
87
57
184
83
55
9.9%
9.9%
—%
Higher interest expense was due to an increase in average interest-
bearing liabilities. Average deposit balances for 2016 increased by
$438 million compared to 2015 due to an increase in core deposits
and time certificates of $322 million and $116 million, respectively.
The other borrowings average balance decreased by $48 million due
to a decrease in repurchase agreements.
Higher provision for loan losses for 2016 was primarily due to
growth in the commercial real estate and consumer loan portfolios
and additional reserves for specific commercial credits. The provision
for loan losses in 2015 was used primarily to establish loan loss
reserves for the growth in the loan portfolio and additional reserve
levels for the commercial and unsecured consumer loan portfolios.
Higher noninterest expense was primarily due to costs related to
replacement and upgrade of ASB's electronic banking platform in
mid 2016 to enhance the Bank's online and mobile banking services
to consumer and business customers as well as expand its distribution
channels.
Higher interest income, partly offset by higher provision for loan
losses and noninterest expenses.
Higher operating income, partly offset by higher taxes.
3
15
4
2
1
Calculated using the average daily balances.
See Note 4 of the Consolidated Financial Statements for a discussion of guarantees and further information about ASB.
68
Average balance sheet and net interest margin. The following table provides a summary of average balances, including
major categories of interest-earning assets and interest-bearing liabilities:
(dollars in thousands)
Assets:
2017
Interest1
income/
expense
Average
balance
Yield/
rate
(%)
Average
balance
2016
Interest1
income/
expense
Yield/
rate
(%)
Average
balance
2015
Interest1
income/
expense
Yield/
rate
(%)
Interest-earning deposits
$
79,927
$
10,770
898
208
1,265,240
27,291
15,427
655
1.12
1.93
2.16
4.24
$
75,092
$
11,153
383
191
934,469
18,592
717
28
0.51
1.72
1.99
3.87
$ 124,874
$
32,140
323
148
687,215
14,649
—
—
0.26
0.46
2.13
—
FHLB stock
Investment securities
Taxable
Non-taxable
Total investment securities
1,280,667
27,946
2.18
935,186
18,620
1.99
687,215
14,649
2.13
Loans
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial
Consumer
Total loans 2,3
2,077,705
887,890
889,360
16,837
631,170
205,334
86,934
37,806
30,001
1,011
27,405
24,098
4,708,296
207,255
Total interest-earning assets
6,079,660
236,307
Allowance for loan losses
Noninterest-earning assets
Total Assets
(55,629)
546,523
$6,570,554
Liabilities and Shareholder’s Equity:
Savings
Interest-bearing checking
Money market
Time certificates
$2,278,396
1,567
902,678
142,068
696,799
238
168
7,687
9,660
Total interest-bearing deposits
4,019,941
Advances from Federal Home Loan
Bank
Securities sold under agreements to
repurchase
4.18
4.26
3.37
6.00
4.34
11.74
4.40
3.89
2,074,564
872,694
859,955
18,850
743,586
149,287
88,274
35,940
28,249
1,118
29,743
16,450
4,718,936
199,774
5,740,367
218,968
4.26
4.12
3.28
5.93
4.00
11.02
4.23
3.81
2,064,170
669,184
828,129
17,304
798,182
119,267
89,933
26,558
26,511
1,101
29,282
11,397
4,496,236
184,782
5,340,465
199,902
(54,338)
507,850
$ 6,193,879
(46,881)
490,187
$ 5,783,771
0.07
0.03
0.12
1.10
0.24
$ 2,117,186
1,402
839,339
160,700
565,135
3,682,360
173
202
5,390
7,167
0.07
0.02
0.13
0.95
0.19
$ 1,980,151
1,257
782,811
164,568
449,179
3,376,709
139
205
3,747
5,348
4.36
3.97
3.20
6.36
3.67
9.56
4.11
3.74
0.06
0.02
0.12
0.83
0.16
79,374
2,245
2.83
101,597
3,160
3.11
100,438
3,146
3.13
Total interest-bearing liabilities
4,196,850
12,156
97,535
251
0.26
0.29
169,730
3,953,687
2,428
12,755
1.43
0.32
219,351
3,696,498
2,832
11,326
1.29
0.31
Noninterest bearing liabilities:
Deposits
Other
Shareholder’s equity
Total Liabilities and Shareholder’s
Equity
Net interest income
Net interest margin (%)4
1,672,780
102,789
598,135
$6,570,554
1,559,132
102,302
578,758
$ 6,193,879
1,426,962
109,386
550,925
$ 5,783,771
$ 224,151
$206,213
$188,576
3.69
3.59
3.53
1
2
3
4
Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $0.2 million, $0.01
million and nil for 2017, 2016 and 2015, respectively.
Includes loans held for sale, at lower of cost or fair value, of $7.4 million, $5.4 million and $5.6 million as of December 31, 2017, 2016
and 2015, respectively.
Includes recognition of net deferred loan fees of $1.7 million, $2.8 million and $2.7 million for 2017, 2016 and 2015 respectively,
together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities and other factors. Earnings of ASB depend primarily on net interest income, which is
the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment
has been impacted by disruptions in the financial markets over a period of several years. These conditions have begun to
69
moderate with the interest rate increases in the past year which resulted in an increase in ASB's net interest income and net
interest margin.
Loan originations and mortgage-related securities are ASB’s primary earning assets.
Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for
financing, availability of funds and management’s responses to these factors. See Note 4 of the Consolidated Financial
Statements for the composition of ASB’s loans receivable.
The decrease in the total loan portfolio from $4.7 billion at the end of 2016 to $4.6 billion at the end of 2017 was
primarily due to a decrease in the commercial real estate and commercial loan portfolios. The decrease in the commercial real
estate loan portfolio was primarily due to the payoff of a large commercial real estate credit. The decrease in the commercial
loan portfolio was primarily due to ASB's strategic reduction in its national syndicated lending portfolio. The bank experienced
growth in the residential 1-4 family, HELOC, and consumer loan portfolios, which was consistent with ASB’s portfolio mix
targets and loan growth strategy. See “Loans receivable” in Note 4 of the Consolidated Financial Statements, which sets forth
ASB's loan balances as of December 31, 2017 and 2016.
Home equity — key credit statistics. Attention has been given by regulators and rating agencies to the potential for
increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price
appreciation between 2003 and 2007 as they have reached, or are starting to reach, the end of their 10-year, interest only
payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along
with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of the HELOC
originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period.
These older equity lines represent 1% of the portfolio and are included in the amortizing balances identified in the loan
portfolio table below.
December 31
Outstanding balance of home equity loans (in thousands)
Percent of portfolio in first lien position
Net charge-off (recovery) ratio
Delinquency ratio
2017
913,052
$
2016
863,163
$
48.0 %
(0.03)%
0.28 %
45.1%
0.01%
0.35%
December 31, 2017
Outstanding balance (in thousands)
Total
$ 913,052
Interest only
$ 718,231
2018-2019
70,443
$
2020-2022
$ 116,936
Thereafter
$ 530,852
End of draw period – interest only
Current
amortizing
$ 194,821
% of total
100%
79%
8%
13%
58%
21%
The HELOC portfolio makes up 20% of the total loan portfolio and is generally an interest-only revolving loan for a 10-
year period, after which time the HELOC outstanding balance converts to a fully amortizing variable rate term loan with a 20-
year amortization period. This product type comprises 79% of the total HELOC portfolio and is the current product offering.
Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully
amortizing fixed rate loan with level principal and interest payments. As of December 31, 2017, approximately 20% of the
portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the
delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a
collection action, including foreclosure proceedings in the case of real estate secured loans. In a foreclosure action, the property
securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is
the successful bidder, the property is classified as real estate owned until it is sold.
See “Allowance for loan losses” in Note 4 of the Consolidated Financial Statements for information with respect to
nonperforming assets. The level of nonperforming loans has continued to decrease with the improving Hawaii economy.
Allowance for loan losses. See “Allowance for loan losses” in Note 4 of the Consolidated Financial Statements for the
tables which sets forth the allocation of ASB’s allowance for loan losses. For 2017, the allowance for loan losses decreased by
$1.9 million primarily due to lower loan loss reserves for the commercial, commercial construction and commercial real estate
loan portfolios as a result of a decrease in the portfolio balances and improving credit trends, partly offset by additional loss
reserves for the consumer and HELOC loan portfolios.
70
Investment securities. ASB’s investment portfolio was comprised as follows:
December 31
2017
2016
2015
(dollars in thousands)
U.S. Treasury and federal agency obligations
Mortgage-related securities — FNMA, FHLMC
and GNMA
Mortgage revenue bond
Total investment securities
Balance
$ 184,298
1,245,988
15,427
$1,445,713
% of total
Balance
% of total
Balance
13% $ 192,281
18% $ 212,959
% of total
26%
86
1
897,474
15,427
100% $1,105,182
81
1
100%
607,689
—
820,648
74
—
100%
Principal and interest on mortgage-related securities issued by Federal National Mortgage Association (FNMA), Federal
Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) are guaranteed by the
issuer and, in the case of GNMA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also
backed by the full faith of the U.S. government. The increase in investment securities was due to the purchase of agency
mortgage-related securities with excess liquidity.
The net unrealized losses on ASB’s investment securities were primarily caused by movements in interest rates. All
contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Based upon ASB's evaluation
at December 31, 2017, 2016, and 2015 there was no indicated impairment as the Bank expects to collect the contractual cash
flows for these investments. See “Investment securities” in Note 1 of the Consoldiated Financial Statements for a discussion of
securities impairment assessment.
As of December 31, 2017, 2016 and 2015, ASB did not have any private-issue mortgage-related securities.
Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by
market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain
challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances
from the FHLB of Des Moines and securities sold under agreements to repurchase continue to be additional sources of funds.
As of December 31, 2017 and 2016, ASB’s costing liabilities consisted of 97% deposits and 3% other borrowings. See Note 4
of the Consolidated Financial Statements for the composition of ASB’s deposit liabilities and other borrowings.
Federal Home Loan Bank of Des Moines. As of December 31, 2017 and 2016, ASB had $50 million and $100 million,
respectively, of advances outstanding at the FHLB of Des Moines. The decrease in advances outstanding was due to the payoff
of a maturing FHLB advance. As of December 31, 2017, the unused borrowing capacity with the FHLB of Des Moines was
$1.8 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor
affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate
into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads
also impact the fair values of the investment securities.
As of December 31, 2017, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including
securities pledged for repurchase agreements) in AOCI of $15.0 million compared to an unrealized loss, net of taxes, of $7.9
million as of December 31, 2016. See “Quantitative and qualitative disclosures about market risk.”
Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on
ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with
other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.” Also
see “Federal Deposit Insurance Corporation Assessment” in Note 4 of the Consolidated Financial Statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Regulation of the financial services
industry, including regulation of HEI, ASB Hawaii and ASB, has changed and will continue to change as a result of the
enactment of the Dodd-Frank Act, which became law in July 2010. Importantly for HEI, ASB Hawaii and ASB, under the
Dodd-Frank Act all of the functions of the OTS transferred on July 21, 2011 to the OCC, the FDIC, the FRB and the Consumer
Financial Protection Bureau (Bureau). Supervision and regulation of HEI and ASB Hawaii, as thrift holding companies, moved
to the FRB, and supervision and regulation of ASB, as a federally chartered savings bank, moved to the OCC. While the laws
and regulations applicable to HEI and ASB did not generally change, the applicable laws and regulations are being interpreted,
and new and amended regulations may be adopted, by the FRB, the OCC and the Bureau. In addition, HEI will continue to be
required to serve as a source of strength to ASB in the event of its financial distress. The Dodd-Frank Act also imposed new
restrictions on the ability of a savings bank to pay dividends should it fail to remain a qualified thrift lender.
71
More stringent affiliate transaction rules now apply to ASB in the securities lending, repurchase agreement and derivatives
areas. Standards were raised with respect to the ability of ASB to merge with or acquire another institution. In reviewing a
potential merger or acquisition, the approving federal agency will need to consider the extent to which the proposed transaction
will result in “greater or more concentrated risks to the stability of the U.S. banking or financial system.”
The Dodd-Frank Act established the Bureau. It has authority to prohibit practices it finds to be unfair, deceptive or abusive,
and it may also issue rules requiring specified disclosures and the use of new model forms. On January 10, 2013, the Bureau
issued the Ability-to-Repay rule which closed for comment on February 25, 2013. For mortgages, among other things,
(i) potential borrowers have to supply financial information, and lenders must verify it, (ii) to qualify for a particular loan, a
consumer has to have sufficient assets or income to pay back the loan, and (iii) lenders have to determine the consumer’s ability
to repay both the principal and the interest over the long term - not just during an introductory period when the rate may be
lower.
ASB may also be subject to new state regulation because of a provision in the Dodd-Frank Act that acknowledges that a
federal savings bank may be subject to state regulation and allows federal law to preempt a state consumer financial law on a
“case by case” basis only when (1) the state law would have a discriminatory effect on the bank compared to that on a bank
chartered in that state, (2) the state law prevents or significantly interferes with a bank’s exercise of its power or (3) the state
law is preempted by another federal law.
The Dodd-Frank Act also adopts a number of provisions that impact the mortgage industry, including the imposition of
new specific duties on the part of mortgage originators (such as ASB) to act in the best interests of consumers and to take steps
to ensure that consumers will have the capability to repay loans they may obtain, as well as provisions imposing new disclosure
requirements and requiring appraisal reforms.
Also, the Dodd-Frank Act directs the Bureau to publish rules and forms that combine certain disclosures that consumers
receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate
Settlement Procedures Act. Consistent with this requirement, the Bureau amended Regulation X (Real Estate Settlement
Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure requirements and forms in Regulation Z for
most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure
requirements and implementing new requirements, the final rule provides extensive guidance regarding compliance with those
requirements. This rule was effective October 3, 2015.
The “Durbin Amendment” to the Dodd-Frank Act required the FRB to issue rules to ensure that debit card interchange fees
are “reasonable and proportional” to the processing costs incurred. In June 2011, the FRB issued a final rule establishing
standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. Under the
final rule, effective October 1, 2011, the maximum permissible interchange fee that an issuer may receive for an electronic debit
transaction is 21-24 cents, depending on certain components. Financial institutions and their affiliates that have less than $10
billion in assets are exempt from this Amendment; however, on July 1, 2013, ASB became non-exempt as the consolidated
assets of HEI exceeded $10 billion. The debit card interchange fees received by ASB have been lower as a result of the
application of this Amendment.
Final Capital Rules. On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework.
The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank
holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding
Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the
requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar
year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis
(calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company
Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and
other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a
proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to
intermediate holding companies and propose to apply the FRB’s capital requirements to such intermediate holding companies.
The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are
substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.
Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding
companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1
capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of
4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and
discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common
equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets
72
(capital conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to
2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final
rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure
their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the
standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and address shortcomings
in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule
are:
Minimum Capital Requirements
Effective dates
Capital conservation buffer
Common equity Tier 1 ratio + conservation buffer
Tier 1 capital ratio + conservation buffer
Total capital ratio + conservation buffer
Tier 1 leverage ratio
Countercyclical capital buffer — not applicable to ASB
1/1/2015
1/1/2016
1/1/2017
1/1/2018
1/1/2019
4.50%
6.00%
8.00%
4.00%
0.625%
5.125%
6.625%
8.625%
4.00%
0.625%
1.25%
5.75%
7.25%
9.25%
4.00%
1.25%
1.875%
6.375%
7.875%
9.875%
4.00%
1.875%
2.50%
7.00%
8.50%
10.50%
4.00%
2.50%
The final rule was effective January 1, 2015 for ASB. As of December 31, 2017, ASB met the new capital requirements
with a Common equity Tier-1 ratio of 13.0%, a Tier-1 capital ratio of 13.0%, a Total capital ratio of 14.2% and a Tier-1 leverage
ratio of 8.6%.
Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that
the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in
capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements,
including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt
concerning intermediate holding companies or their impact on ASB Hawaii, if any.
Military Lending Act. The Department of Defense (DOD) amended its regulation that implements the Military Lending
Act (MLA), which became effective on October 3, 2016. The DOD amended its regulation primarily for the purpose of
extending the protections of the MLA to a broader range of closed-end and open-end credit products. It initially applied to three
narrowly-defined “consumer credit” products: closed-end payday loans; closed-end auto title loans; and closed-end tax refund
anticipation loans. The DOD revised the scope of the definition of ‘‘consumer credit’’ to be generally consistent with the credit
products that have been subject to the requirements of the Regulation Z, namely: credit offered or extended to a covered
borrower primarily for personal, family, or household purposes and that is (i) subject to a finance charge or (ii) payable by a
written agreement in more than four installments.
Additionally, the DOD elected to exercise its discretion by generally requiring any fees for credit insurance products or for
credit-related ancillary products to be included in the Military Annual Percentage Rate. The DOD also modified the disclosures
that a creditor must provide to a covered borrower and implemented the enforcement provisions of the MLA. ASB has modified
certain products, practices and associated training to conform to these changes.
Effective December 14, 2017, the DOD released changes to its interpretive rule clarifying provisions of the MLA. Among
the amendments is a clarification that the exemption for purchase money loans includes loans that are used not only to purchase
the item securing the loan but also to purchase related items, such as extended warranties on a car. The release also clarified the
foregoing in the context of loans secured by a deposit account, remotely created checks to make loan payments, lenders' use of
the right of offset and the timing of checking military status to qualify for the MLA safe harbor.
Overtime Rules. The Secretary of Labor updated the overtime regulations of the Fair Labor Standards Act to simplify and
modernize them. The Department of Labor issued final rules that will raise the salary threshold indicating eligibility from $455/
week to $913/week ($47,476 per year), and update automatically the salary threshold every three years, based on wage growth
over time, increasing predictability. The final rule was to become effective on December 1, 2016. In late-November 2016
however, the U.S. District Court in the Eastern District of Texas granted a nationwide preliminary injunction that blocked the
final rule, saying the Department of Labor's rule exceeds the authority the agency was delegated by Congress. Despite this
block, ASB modified its salaries in the fourth quarter of 2016 such that it is in voluntary compliance with the final rule. On July
26, 2017, the Department of Labor published a Request for Information Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees (RFI). On August 31, 2017, U.S. District Court in the
Eastern District of Texas granted summary judgment against the Department of Labor in consolidated cases challenging the
final rule published on May 23, 2016. The court held that the final rule's salary level exceeded the Department of Labor's
73
authority and concluded that the final rule was invalid. The Department of Labor has not yet released a proposed rule associated
with RFI.
Arbitration Agreements. Pursuant to section 1028(b) of the Dodd-Frank Act, on July 19, 2017, the Bureau issued a final
rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule
prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that
provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class
action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are
involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and
also to submit specified court records. The compliance date for this regulation is March 19, 2018. Under the Congressional
Review Act, the U.S. House of Representatives voted to overturn the final rule on July 25, 2017, and the U.S. Senate did the
same on October 24, 2017. On November 1, 2017, the President signed the repeal of the final rule. In light of this, ASB did not
modify its existing agreements.
Stock in FHLB. In the second quarter of 2015, the FHLB of Des Moines and the FHLB of Seattle successfully completed the
merger of the two banks and operated as one under the name FHLB of Des Moines as of June 1, 2015. The FHLB of Des
Moines will continue to be a source of liquidity for ASB.
As of December 31, 2017 and 2016, ASB’s stock in FHLB of Des Moines ($9.7 million and $11.2 million, respectively)
was carried at cost because it can only be redeemed at par. There is a minimum required investment in such stock based on
measurements of ASB’s capital, assets and/or borrowing levels. In 2017, 2016 and 2015, ASB received cash dividends of
$208,000, $191,000 and $147,000, respectively, on its FHLB Stock.
Mortgage Servicing Rights. As of December 31, 2017 and 2016, ASB's mortgage servicing rights had a net carrying amount
of $8.6 million and $9.4 million, respectively. The decrease in the net carrying amount was due to amortization expense
recorded during the year.
Liquidity and capital resources.
December 31
(dollars in millions)
Total assets
Investment securities
Loans receivable held for investment, net
Deposit liabilities
Other bank borrowings
2017
% change
2016
% change
$
6,799
1,446
4,617
5,891
191
$
6
31
(1)
6
(1)
6,421
1,105
4,683
5,549
193
7
35
3
10
(41)
As of December 31, 2017, ASB was one of Hawaii’s largest financial institutions based on assets of $6.8 billion and
deposits of $5.9 billion.
ASB’s principal sources of liquidity are customer deposits, borrowings and the maturity and repayment of portfolio loans
and securities. ASB’s deposits as of December 31, 2017 were $342 million higher than December 31, 2016. ASB’s principal
sources of borrowings are advances from the FHLB and securities sold under agreements to repurchase from broker/dealers and
commercial account holders. As of December 31, 2017, FHLB borrowings totaled $50 million, representing 0.7% of assets.
ASB is approved to borrow from the FHLB up to 35% of ASB’s assets to the extent it provides qualifying collateral and holds
sufficient FHLB stock. As of December 31, 2017, ASB’s unused FHLB borrowing capacity was approximately $1.8 billion. As
of December 31, 2017, securities sold under agreements to repurchase totaled $141 million, representing 2.1% of assets. ASB
utilizes deposits, advances from the FHLB and securities sold under agreements to repurchase to fund maturing and withdrawn
deposits, repay maturing borrowings, fund existing and future loans and purchase investment and mortgage-related securities.
As of December 31, 2017, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.8 billion,
of which, ASB did not have commitments to borrowers whose loan terms have been modified in troubled debt restructurings.
Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at
satisfactory levels.
As of December 31, 2017 and 2016, ASB had $23.6 million and $23.3 million of loans on nonaccrual status, respectively,
or 0.5% of net loans outstanding for both years ended. As of December 31, 2017 and 2016, ASB had $0.1 million and
$1.2 million, respectively, of real estate acquired in settlement of loans.
In 2017, operating activities provided cash of $109 million. Net cash of $366 million was used by investing activities
primarily due to purchases of available-for-sale investment securities of $528 million, capital expenditures of $53 million,
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purchases of held-to-maturity investment securities of $45 million, and contributions to low-income housing investments of $18
million, partly offset by receipt of repayments from available-for-sale investment securities of $220 million, proceeds from the
sale of commercial loans of $37 million, and a net decrease in loans receivable of $16 million. Financing activities provided net
cash of $302 million primarily due to a net increase in deposits of $342 million, a net increase in retail repurchase agreements
of $62 million, proceeds from FHLB advances of $60 million, partly offset by principal payments on FHLB advances of $110
million, common stock dividends to HEI (through ASB Hawaii) of $38 million, and repayments of securities sold under
agreements to repurchase of $14 million.
ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords
protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for
growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms
as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered
by competing institutions. As of December 31, 2017, ASB was well-capitalized (see “Regulation—Capital requirements” below
for ASB’s capital ratios).
For a discussion of ASB dividends, see “Common stock equity” in Note 4 of the Consolidated Financial Statements.
See "Commitments" and "Contingency" in Note 4 of the Consolidated Financial Statements for a discussion of
commitments and contingencies and off-balance sheet arrangements.
Certain factors that may affect future results and financial condition. Also see “Cautionary Note Regarding Forward-
Looking Statements” and “Certain factors that may affect future results and financial condition” for Consolidated HEI above.
Competition. The banking industry in Hawaii is highly competitive. ASB is one of Hawaii’s largest financial institutions,
based on total assets, and is in direct competition for deposits and loans, not only with larger institutions, but also with smaller
institutions that are heavily promoting their services in certain niche areas, such as providing financial services to small- and
medium-sized businesses, and national organizations offering financial services. ASB’s main competitors are banks, savings
associations, credit unions, mortgage brokers, finance companies and securities brokerage firms. These competitors offer a
variety of lending, deposit and investment products to retail and business customers.
The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing,
convenience of locations, hours of operation, other non-branch channels such as online and mobile banking and perceptions of
the institution’s financial soundness and safety. To meet competition, ASB offers a variety of savings and checking accounts at
competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at
each branch, convenient automated teller machines and an upgrade of the Bank's electronic banking platform. ASB also
conducts advertising and promotional campaigns.
The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality
and range of lending and other services offered. ASB believes that it is able to compete for such loans primarily through the
competitive interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of
the services it provides to individual borrowers and the business community.
ASB is a full-service community bank serving both consumer and commercial customers and has been diversifying its loan
portfolio from single-family home mortgages to higher-spread, shorter-duration consumer, commercial and commercial real
estate loans. The origination of consumer, commercial and commercial real estate loans involves risks and other considerations
different from those associated with originating residential real estate loans. For example, the sources and level of competition
may be different and credit risk is generally higher than for residential mortgage loans. These different risk factors are
considered in the underwriting and pricing standards and in the allowance for loan losses established by ASB for its consumer,
commercial and commercial real estate loans.
U.S. capital markets and credit and interest rate environment. Volatility in U.S. capital markets may negatively impact the
fair values of investment and mortgage-related securities held by ASB. As of December 31, 2017, the fair value and carrying
value of the investment and mortgage-related securities held by ASB was $1.4 billion.
Interest rate risk is a significant risk of ASB’s operations. ASB actively manages this risk, including managing the
relationship of its interest-sensitive assets to its interest-sensitive liabilities. Persistent low levels of interest rates have made it
challenging to find investments with adequate risk-adjusted returns and had a negative impact on ASB’s asset yields and net
interest margin. If the current interest rate environment persists, the potential for compression of ASB’s net interest margin will
continue. ASB also manages the credit risk associated with its lending and securities portfolios, but a deep and prolonged
recession led by a material decline in housing prices could materially impair the value of its portfolios. See “Quantitative and
Qualitative Disclosures about Market Risk” below.
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Technological developments. New technological developments (e.g., significant advances in internet banking) may impact
ASB’s future competitive position, results of operations and financial condition.
Environmental matters. Prior to extending a loan collateralized by real property, ASB conducts due diligence to assess
whether or not the property may present environmental risks and potential cleanup liability. In the event of default and
foreclosure of a loan, ASB may become the owner of the mortgaged property. For that reason, ASB seeks to avoid lending upon
the security of, or acquiring through foreclosure, any property with significant potential environmental risks; however, there can
be no assurance that ASB will successfully avoid all such environmental risks.
Regulation. ASB is subject to examination and comprehensive regulation by the Department of Treasury, OCC and the
FDIC, and is subject to reserve requirements established by the Board of Governors of the Federal Reserve System. Regulation
by these agencies focuses in large measure on the adequacy of ASB’s capital and the results of periodic “safety and soundness”
examinations conducted by the OCC.
Capital requirements. The OCC, which is ASB’s principal regulator, administers two sets of capital standards—
minimum regulatory capital requirements and prompt corrective action requirements. The FDIC also has prompt corrective
action capital requirements. As of December 31, 2017, ASB was in compliance with OCC minimum regulatory capital
requirements and was “well-capitalized” within the meaning of OCC prompt corrective action regulations and FDIC capital
regulations, as follows:
• ASB met applicable minimum regulatory capital requirements (noted in parentheses) as of December 31, 2017 with a
Tier 1 leverage ratio of 8.6% (4.0%), a common equity Tier 1 capital ratio of 13.0% (4.5%), a Tier 1 capital ratio of
13.0% (6.0%) and a total capital ratio of 14.2% (8.0%).
• ASB met the capital requirements to be generally considered “well-capitalized” (noted in parentheses) as of
December 31, 2017 with a Tier 1 leverage ratio of 8.6% (5.0%), a common equity Tier 1 capital ratio of 13.0% (6.5%),
a Tier 1 capital ratio of 13.0% (8.0%) and a total capital ratio of 14.2% (10.0%).
The purpose of the prompt corrective action capital requirements is to establish thresholds for varying degrees of oversight
and intervention by regulators. Declines in levels of capital, depending on their severity, will result in increasingly stringent
mandatory and discretionary regulatory consequences. Capital levels may decline for any number of reasons, including
reductions that would result if there were losses from operations, deterioration in collateral values or the inability to dispose of
real estate owned (typically acquired by foreclosure). The regulators have substantial discretion in the corrective actions they
might direct and could include restrictions on dividends and other distributions that ASB may make to HEI (through ASB
Hawaii) and the requirement that ASB develop and implement a plan to restore its capital. Under an agreement with regulators
entered into by HEI when it acquired ASB, HEI currently could be required to contribute to ASB up to an additional
$28.3 million of capital, if necessary, to maintain ASB’s capital position.
Examinations. ASB is subject to periodic “safety and soundness” examinations and other examinations by the OCC.
In conducting its examinations, the OCC utilizes the Uniform Financial Institutions Rating System adopted by the Federal
Financial Institutions Examination Council, which system utilizes the “CAMELS” criteria for rating financial institutions. The
six components in the rating system are: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to
market risk. The OCC examines and rates each CAMELS component. An overall CAMELS rating is also given, after taking
into account all of the component ratings. A financial institution may be subject to formal regulatory or administrative direction
or supervision such as a “memorandum of understanding” or a “cease and desist” order following an examination if its
CAMELS rating is not satisfactory. An institution is prohibited from disclosing the OCC’s report of its safety and soundness
examination or the component and overall CAMELS rating to any person or organization not officially connected with the
institution as an officer, director, employee, attorney or auditor, except as provided by regulation. The OCC also regularly
examines ASB’s information technology practices and its performance under Community Reinvestment Act measurement
criteria.
The Federal Deposit Insurance Act, as amended, addresses the safety and soundness of the deposit insurance system,
supervision of depository institutions and improvement of accounting standards. Pursuant to this Act, federal banking agencies
have promulgated regulations that affect the operations of ASB and its holding companies (e.g., standards for safety and
soundness, real estate lending, accounting and reporting, transactions with affiliates and loans to insiders). FDIC regulations
restrict the ability of financial institutions that fail to meet relevant capital measures to engage in certain activities, such as
offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of
December 31, 2017, ASB was “well-capitalized” and thus not subject to these restrictions.
Qualified Thrift Lender status. ASB is a “qualified thrift lender” (QTL) under its federal thrift charter and, in order to
maintain this status, ASB is required to maintain at least 65% of its assets in “qualified thrift investments,” which include
housing-related loans (including mortgage-related securities) as well as certain small business loans, education loans, loans
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made through credit card accounts and a basket (not exceeding 20% of total assets) of other consumer loans and other assets.
Institutions that fail to maintain QTL status are subject to various penalties, including limitations on their activities. In ASB’s
case, the activities of HEI, ASB Hawaii and HEI’s other subsidiaries would also be subject to restrictions if ASB failed to
maintain its QTL status, and a failure or inability to comply with those restrictions could effectively result in the required
divestiture of ASB. As of December 31, 2017, ASB was a qualified thrift lender.
Unitary savings and loan holding company. The Gramm-Leach-Bliley Act of 1999 (Gramm Act) permitted banks,
insurance companies and investment firms to compete directly against each other, thereby allowing “one-stop shopping” for an
array of financial services. Although the Gramm Act further restricted the creation of so-called “unitary savings and loan
holding companies” (i.e., companies such as HEI whose subsidiaries include one or more savings associations and one or more
nonfinancial subsidiaries), the unitary savings and loan holding company relationship among HEI, ASB Hawaii and ASB is
“grandfathered” under the Gramm Act so that HEI and its subsidiaries will be able to continue to engage in their current
activities so long as ASB maintains its QTL status. Under the Gramm Act, any proposed sale of ASB would have to satisfy
applicable statutory and regulatory requirements and potential acquirers of ASB would most likely be limited to companies that
are already qualified as, or capable of qualifying as, either a traditional savings and loan association holding company or a bank
holding company, or as one of the authorized financial holding companies permitted under the Gramm Act. There have been
legislative proposals in the past which would operate to eliminate the thrift charter or the grandfathered status of HEI as a
unitary thrift holding company and effectively require the divestiture of ASB.
Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” for
Consolidated HEI above.
Allowance for loan losses. See Note 1 of the Consolidated Financial Statements and the discussion above under “Earning
assets, costing liabilities and other factors.” ASB maintains an allowance for loan losses believed to be adequate to absorb
losses inherent in its loan portfolio. The level of allowance for loan losses is based on a continuing assessment of existing risks
in the loan portfolio, historical loss experience, changes in collateral values and current conditions (for example, economic
conditions, real estate market conditions and interest rate environment). The allowance for loan losses is allocated to loan types
using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The
formula-based approach emphasizes loss factors primarily derived from actual historical default and loss rates, which are
combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan
categories. Adverse changes in any of these factors could result in higher charge-offs and provision for loan losses.
ASB disaggregates the loan portfolio into loan segments for purposes of determining the allowance for loan losses.
Commercial and commercial real estate loans are defined as non-homogeneous loans. ASB utilizes a risk rating system for
evaluating the credit quality of such loans. Loans are rated based on the degree of risk at origination and periodically thereafter,
as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction
risk). ASB's credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal
risk rating system and timeliness of rating changes. Non-homogeneous loans are categorized into the regulatory asset quality
classifications: Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. For loans classified as
substandard, an analysis is done to determine if the loan is impaired. A loan is deemed impaired when it is probable that ASB
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is deemed
impaired, ASB applies a valuation methodology to determine whether there is an impairment shortfall. The measurement of
impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan’s
original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral, net of
costs to sell. For all loans collateralized by real estate whose repayment is dependent on the sale of the underlying collateral
property, ASB measures impairment by utilizing the fair value of the collateral, net of costs to sell; for other loans that are not
considered collateral dependent, generally the discounted cash flow method is used to measure impairment. For loans
collateralized by real estate that are classified as troubled debt restructured (TDR) loans, the present value of the expected
future cash flows of the loans may also be used to measure impairment as these loans are expected to perform according to their
restructured terms. Impairment shortfalls are charged to the provision for loan losses and included in the allowance for loan
losses. However, impairment shortfalls that are deemed to be confirmed losses (uncollectible) are charged off, with the loan
written down by the amount of the confirmed loss.
Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically
underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on
delinquency status. The homogeneous loan portfolios are stratified into individual products with common risk characteristics
and segmented into various secured and unsecured loan product types. For the homogeneous portfolio, the quality of the loan is
best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external
credit bureau data and credit scores such as the Fair Isaac Corporation (FICO) score on a quarterly basis. ASB has built
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portfolio loss models for each major segment based on the combination of internal and external data to predict the probability
of default at the loan level.
ASB's methodology for determining the allowance for loan losses was generally based on historic loss rates using various
look-back periods. During the second quarter of 2014, ASB implemented enhancements to the loss rate calculation for
estimating the allowance for loan losses that included several refinements to determining the probability of default and the loss
given default for the various segments of the loan portfolio that are more statistically sound than those previously employed.
The result is an estimated loss rate established for each loan. ASB believes that these enhancements improve the precision in
estimating the allowance for loan losses. The enhancement did not have a material effect on the total allowance for loan losses
or the provision for loan losses for 2014 and did result in the full allocation of the previously unallocated portion of the
allowance for loan losses.
In conjunction with the above enhancement, management also adopted an enhanced risk rating system for monitoring and
managing credit risk in the non-homogeneous loan portfolios that measures general creditworthiness at the borrower level. The
numerical-based, risk rating “PD Model” takes into consideration fiscal year-end financial information of the borrower and
identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that
demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given
default value is assigned to each loan to measure loss in the event of default based on loan specific features such as collateral
that mitigates the amount of loss in the event of default. Together the PD Model and loss given default construct provide a more
quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the
ultimate collectability of each loan. Additionally, qualitative factors may be included in the estimation process.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the
consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded
credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss
rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the
allowance for loan losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other
noninterest expense in the consolidated statements of income.
Management believes its allowance for loan losses adequately estimates actual loan losses that will ultimately be incurred.
However, such estimates are based on currently available information and historical experience, and future adjustments may be
required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due to
changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these
differences and subsequent adjustments could be material.
Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or
earlier if management believes that the probability of collection is insufficient to warrant further accrual. All interest that is
accrued but not collected is reversed. A loan may be returned to accrual status if (i) principal and interest payments have been
brought current and ASB expects repayment of the remaining contractual principal and interest, (ii) the loan has otherwise
become well-secured and collection efforts are reasonably expected to result in repayment of the debt, or (iii) the borrower has
been making regularly scheduled payments in full for the prior six months and it is reasonably assured that the loan will be
brought fully current within a reasonable period. Cash receipts on nonaccruing loans are generally applied to reduce the unpaid
principal balance.
Loans considered to be uncollectible are charged-off against the allowance. The amount and timing of charge-offs on loans
includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority and the overall
financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance. Loans that
have been charged-off against the allowance are periodically monitored to evaluate whether further adjustments to the
allowance are necessary.
Loans in the commercial and commercial real estate portfolio are charged-off when the loan is risk rated “doubtful” or
“loss.” The loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial
condition and collateral deficiency. A loan is considered uncollectible when: (a) the borrower is delinquent in principal or
interest 90 days or more; (b) significant improvement in the borrower’s repayment capacity is doubtful; and/or (c) collateral
value is insufficient to cover outstanding indebtedness and no other viable assets exist.
Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is
determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A loan is
considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that
collateral value is insufficient to cover outstanding indebtedness and no other viable assets exist; (c) notification of the
78
borrower’s bankruptcy is received; or (d) in cases where ASB is in a subordinate position to other debt, the senior lien holder
has foreclosed and extinguished the junior lien.
Other consumer loans are generally charged-off when the balance becomes 120 days delinquent.
See "Nonperforming loans" in Note 1 of the Consolidated Financial Statements for additional information regarding ASB's
nonperforming loans.
Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be
experiencing financial difficulties and ASB grants a concession it would not otherwise consider. When a borrower experiencing
financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to
improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure
a loan to help a distressed borrower improve their financial position to eventually be able to repay the loan fully, provided the
borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an
alternative to foreclosure or liquidation with the goal of minimizing losses and maximizing recovery.
ASB may consider various types of concessions in granting a TDR, including maturity date extensions, extended
amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants
principal forgiveness in TDR modifications. Residential loan modifications generally involve interest rate reduction, extending
the amortization period or interest only payments for a period of time. Land loans at origination are typically structured as a
three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically
involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest
monthly payments. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization
period and temporary deferral of principal payments. ASB generally do not reduce the interest rate on commercial loan TDR
modifications. Occasionally, additional collateral and/or guaranties are obtained.
Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. These
nonaccruing TDRs can be returned to accrual status when principal and interest have been current for at least six months and a
well-documented evaluation of the borrower’s financial condition has been performed and indicates future payments are
reasonably assured.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the
allowance for loan losses based on the appropriate method of measuring impairment. The financial impact of the calculated
impairment amount is an increase to the allowance for loan losses associated with the modified loan. When available
information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off
against the allowance for loan losses.
Fair value. Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a
liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally
determined based on assumptions that market participants would use in pricing the asset or liability and are based on market
data obtained from independent third party sources. However, in certain cases, ASB uses its own assumptions based on the best
information available in certain circumstances. These valuations are estimates at a specific point in time, based on relevant
market information, information about the financial instrument and judgments regarding future expected loss experience,
economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any
premium or discount that could result if ASB were to sell its entire holdings of a particular financial instrument at one time.
Because no active trading market exists for a portion of its financial instruments, fair value estimates cannot be determined with
precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses
could have a significant effect on fair value estimates, but have not been considered in making such estimates.
ASB classifies its financial assets and liabilities that are measured at fair value in accordance with the three level valuation
hierarchy outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and is used t measure
fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs
to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are
not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means.
79
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the
asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data,
there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more
significant due to the lack of observable market data.
Significant assets measured at fair value on a recurring basis include ASB's mortgage-related securities available for sale.
These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The
third-party pricing services use a variety of methods to determine fair value including quoted prices for similar securities in an
active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic
prepayment speeds and other observable market factors. To enhance the robustness of the pricing process, ASB compares its
standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance
range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be
conducted by the investment manager and a challenge to the price may be made. Fair value in such cases will be based on the
value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been
independently determined by a third-party pricing vendor or non-affiliated broker.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes.
Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan
impairments for certain loans, real estate acquired in settlement of loans and goodwill.
See "Investment securities" and "Derivative financial instruments" in Note 4 and Note 14 of the Consolidated Financial
Statements for additional information regarding ASB's fair value measurements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEI and Hawaiian Electric (in the case of Hawaiian Electric, only the information related to Hawaiian Electric and its
subsidiaries is applicable):
The Company manages various market risks in the ordinary course of business, including credit risk and liquidity risk. The
Company believes the electric utility and the “other” segment’s exposures to these two risks were not material as of
December 31, 2017.
Credit risk for ASB is the risk that borrowers or issuers of securities will not be able to repay their obligations to the bank.
Credit risk associated with ASB’s lending portfolios is controlled through its underwriting standards, loan rating of commercial
and commercial real estate loans, on-going monitoring by loan officers, credit review and quality control functions in these
lending areas and adequate allowance for loan losses. Credit risk associated with the securities portfolio is mitigated through
investment portfolio limits, experienced staff working with analytical tools, monthly fair value analysis and on-going
monitoring and reporting such as investment watch reports and loss sensitivity analysis. See “Allowance for loan losses” above
and in Note 4 of the Consolidated Financial Statements.
Liquidity risk for ASB is the risk that the bank will not meet its obligations when they become due. Liquidity risk is
mitigated by ASB’s asset/liability management process, on-going analytical analysis, monitoring and reporting information
such as weekly cash-flow analyses and maintenance of liquidity contingency plans.
The Utilities are exposed to some commodity price risk primarily related to their fuel supply and IPP contracts. The
Utilities' commodity price risk is substantially mitigated so long as they have their current ECACs in their rate schedules. The
Utilities currently have no hedges against its commodity price risk.
The Company currently has no direct exposure to market risk from trading activities nor foreign currency exchange rate
risk.
The Company considers interest rate risk to be a very significant market risk as it could potentially have a significant effect
on the Company’s results of operations, financial condition and liquidity, especially as it relates to ASB, but also as it may
affect the discount rate used to determine retirement benefit liabilities, the market value of retirement benefit plans’ assets and
the Utilities’ allowed rates of return. Interest rate risk can be defined as the exposure of the Company’s earnings to adverse
movements in interest rates.
80
Bank interest rate risk
The Company’s success is dependent, in part, upon ASB’s ability to manage interest rate risk (IRR). ASB’s interest-rate
risk profile is strongly influenced by its primary business of making fixed-rate residential mortgage loans and taking in retail
deposits. Large mismatches in the amounts or timing between the maturity or repricing of interest sensitive assets or liabilities
could adversely affect ASB’s earnings and the market value of its interest-sensitive assets and liabilities in the event of
significant changes in the level of interest rates. Many other factors also affect ASB’s exposure to changes in interest rates, such
as general economic and financial conditions, customer preferences and competition for loans or deposits.
ASB’s Asset/Liability Management Committee (ALCO), whose voting members are officers and employees of ASB, is
responsible for managing interest rate risk and carrying out the overall asset/liability management objectives and activities of
ASB as approved by the ASB Board of Directors. ALCO establishes policies under which management monitors and
coordinates ASB’s assets and liabilities.
See Note 4 of the Consolidated Financial Statements for a discussion of the use of rate lock commitments on loans held for
sale and forward sale contracts to manage some interest rate risk associated with ASB’s residential loan sale program.
Management of ASB measures interest-rate risk using simulation analysis with an emphasis on measuring changes in net
interest income (NII) and the market value of interest-sensitive assets and liabilities in different interest-rate environments. The
simulation analysis is performed using a dedicated asset/liability management software system enhanced with a mortgage
prepayment model and a collateralized mortgage obligation database. The simulation software is capable of generating
scenario-specific cash flows for all instruments using the specified contractual information for each instrument and product
specific prepayment assumptions for mortgage loans and mortgage-related securities.
NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios. NII
sensitivity is measured as the change in NII in the alternate interest-rate scenarios as a percentage of the base case NII. The base
case interest-rate scenario is established using the current yield curve and assumes interest rates remain constant over the next
twelve months. The alternate scenarios are created by assuming “rate ramps” or gradual interest changes and accomplished by
moving the yield curve in a parallel fashion, over the next twelve month period, in increments of +/- 100 basis points. The
simulation model forecasts scenario-specific principal and interest cash flows for the interest-bearing assets and liabilities, and
the NII is calculated for each scenario. Key balance sheet modeling assumptions used in the NII sensitivity analysis include: the
size of the balance sheet remains relatively constant over the simulation horizon and maturing assets or liabilities are reinvested
in similar instruments in order to maintain the current mix of the balance sheet. In addition, assumptions are made about the
prepayment behavior of mortgage-related assets, future pricing spreads for new assets and liabilities and the speed and
magnitude with which deposit rates change in response to changes in the overall level of interest rates. Other NII sensitivity
analysis may include scenarios such as yield curve twists or non-static balance sheet changes (such as changes to key balance
sheet drivers).
Consistent with OCC guidelines, the market value or economic capitalization of ASB is measured as economic value of
equity (EVE). EVE represents the theoretical market value of ASB’s net worth and is defined as the present value of expected
net cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present
value of expected net cash flows from existing off-balance sheet contracts. Key assumptions used in the calculation of ASB’s
EVE include the prepayment behavior of loans and investments, the possible distribution of future interest rates, pricing spreads
for assets and liabilities in the alternate scenarios and the rate and balance behavior of deposit accounts with indeterminate
maturities. EVE is calculated in multiple scenarios. As with the NII simulation, the base case is represented by the current yield
curve. Alternate scenarios are created by assuming immediate parallel shifts in the yield curve in increments of +/- 100 basis
points (bp) up to + 300 bp. The change in EVE is measured as the change in EVE in a given rate scenario from the base case
and expressed as a percentage. To gain further insight into the IRR profile, additional analysis is periodically performed in
alternate scenarios including rate shifts of greater magnitude and changes in key balance sheet drivers.
ASB’s interest-rate risk sensitivity measures as of December 31, 2017 and 2016 constitute “forward-looking statements”
and were as follows:
81
Change in interest rates
(basis points)
+300
+200
+100
-100
Change in NII
(gradual change in interest rates)
Change in EVE
(instantaneous change in interest rates)
December 31,
2017
December 31,
2016
December 31, 2017
December 31, 2016
3.0%
2.4
1.6
(2.7)
1.9%
0.8
—
(0.5)
(8.0)%
(4.0)
(0.6)
(6.0)
(8.0)%
(4.6)
(1.6)
(1.6)
Management believes that ASB’s interest rate risk position as of December 31, 2017 represents a reasonable level of risk.
The NII profile under the rising interest rate scenarios were more asset sensitive for all rate increases as of December 31, 2017
compared to December 31, 2016. Asset sensitivity increased due to growth and shortening in duration of the investment
portfolio allowing more assets to reprice up over a 12-month horizon. The implementation of a new asset/liability management
system in the third quarter along with some modeling improvements further improved sensitivity.
ASB’s base EVE increased to $1.2 billion as of December 31, 2017 from $1.1 billion as of December 31, 2016 due to the
growth and mix of the balance sheet. Growth in the investment portfolio was funded primarily with core deposits. The upward
shift in short rates resulted in the market valuation of assets exceeding the valuation of liabilities.
EVE sensitivity to rising rates declined as of December 31, 2017, compared to December 31, 2016. Growth in shorter
duration investment securities was funded with longer duration core deposits resulting in a net decrease in EVE sensitivity. In
addition, the implementation of the new asset/liability management system along with some modeling improvements further
decreased sensitivity.
The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage
change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance
changes and pricing strategies, and should not be relied upon as indicative of actual results. To the extent market conditions and
other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation
results. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate
scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate
appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management
might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period
and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent
management’s views of future market movements, the level of future earnings, or the timing of any changes in earnings within
the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and
speed with which rates change, actual changes in ASB’s balance sheet, and management’s responses to the changes in interest
rates.
Other than bank interest rate risk
The Company’s general policy is to manage “other than bank” interest rate risk through use of a combination of short-term
debt, long-term debt and preferred securities. As of December 31, 2017, the Company was exposed to “other than bank” interest
rate risk because of its periodic borrowing requirements, the impact of interest rates on the discount rate and the market value of
plan assets used to determine retirement benefits expenses and obligations (see “Pension and other postretirement benefits
obligations” in HEI’s MD&A and “Retirement benefits” in Notes 1 and 8 of the Consolidated Financial Statements) and the
possible effect of interest rates on the electric utilities’ allowed rates of return (see “Electric utility—Certain factors that may
affect future results and financial condition—Regulation of electric utility rates”). Other than these exposures, management
believes its exposure to “other than bank” interest rate risk is not material. The Company’s long-term debt, in the form of
borrowings of proceeds of revenue bonds, privately-placed senior notes and bank term loans, is predominately at fixed rates
(see Note 14 of the Consolidated Financial Statements for the fair value of long-term debt, net-other than bank).
82
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEI and Hawaiian Electric:
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms - HEI
Reports of Independent Registered Public Accounting Firms - Hawaiian Electric
Consolidated Financial Statements
HEI
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Hawaiian Electric
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Capitalization at December 31, 2017 and 2016
Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Page
85
87
88
88
89
90
91
92
94
94
95
96
98
99
100
83
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hawaiian Electric Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Hawaiian Electric Industries, Inc. and subsidiaries (the "Company") as of
December 31, 2017, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows,
for the year ended December 31, 2017, and the related notes to consolidated financial statements and the schedules listed in the Index at Item
15(a)(2) (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 1, 2018
We have served as the Company's auditor since 2017.
84
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Hawaiian Electric Industries, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2016 and the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the
period ended December 31, 2016 present fairly, in all material respects, the financial position of Hawaiian Electric
Industries, Inc. and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules
listed in the index appearing under Item 15(a)(2) for each of the two years in the period ended December 31, 2016
present fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted our audits of these financial
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 24, 2017
85
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of Hawaiian Electric Company, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Hawaiian Electric Company, Inc. and subsidiaries (the
"Company") as of December 31, 2017, the related consolidated statements of income, comprehensive income, capitalization,
changes in common stock equity, and cash flows, for the year ended December 31, 2017, and the related notes to consolidated
financial statements and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 1, 2018
We have served as the Company's auditor since 2017.
86
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder
of Hawaiian Electric Company, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2016 and the related consolidated statements of
income, comprehensive income, capitalization, changes in common stock equity, and cash flows for each of the two
years in the period ended December 31, 2016 present fairly, in all material respects, the financial position of
Hawaiian Electric Company, Inc. and its subsidiaries as of December 31, 2016, and the results of their operations
and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) for each of the two years in the period ended
December 31, 2016 presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 24, 2017
87
Consolidated Statements of Income
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands, except per share amounts)
Revenues
Electric utility
Bank
Other
Total revenues
Expenses
Electric utility
Bank
Other
Total expenses
Operating income (loss)
Electric utility
Bank
Other
Total operating income
Merger termination fee
Interest expense, net – other than on deposit liabilities and other bank borrowings
Allowance for borrowed funds used during construction
Allowance for equity funds used during construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income for common stock
Basic earnings per common share
Diluted earnings per common share
Weighted-average number of common shares outstanding
Net effect of potentially dilutive shares
Weighted-average shares assuming dilution
2017
2016
2015
$
2,257,566
297,640
$
2,094,368
285,924
$
2,335,166
267,733
419
362
83
2,555,625
2,380,654
2,602,982
2,000,045
1,809,900
2,061,050
198,924
18,365
198,572
24,007
183,921
35,458
2,217,334
2,032,479
2,280,429
257,521
98,716
(17,946)
338,291
—
(78,972)
4,778
12,483
276,580
109,393
167,187
1,890
165,297
1.52
1.52
108,749
184
108,933
$
$
$
284,468
87,352
(23,645)
348,175
90,000
(75,803)
3,144
8,325
373,841
123,695
250,146
1,890
248,256
2.30
2.29
108,102
207
108,309
$
$
$
274,116
83,812
(35,375)
322,553
—
(77,150)
2,457
6,928
254,788
93,021
161,767
1,890
159,877
1.50
1.50
106,418
303
106,721
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
88
Consolidated Statements of Comprehensive Income
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Net income for common stock
Other comprehensive income (loss), net of taxes:
Net unrealized losses on available-for sale investment securities:
Net unrealized losses on available-for sale investment securities arising during the
period, net of tax benefits of $2,886, $3,763 and $1,541 for 2017, 2016 and 2015,
respectively
Reclassification adjustment for net realized gains included in net income, net of taxes
of nil, $238 and nil for 2017, 2016 and 2015, respectively
Derivatives qualified as cash flow hedges:
Effective portion of foreign currency hedge net unrealized gains (losses) arising during
the period, net of (taxes) benefits of nil, $179 and nil for 2017, 2016 and 2015,
respectively
Reclassification adjustment to net income, net of (taxes) benefits of $289, $(76) and
$150 for 2017, 2016 and 2015, respectively
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of $(41,129),
$27,703 and $(3,753) for 2017, 2016 and 2015, respectively
Adjustment for amortization of prior service credit and net losses recognized during
the period in net periodic benefit cost, net of tax benefits of $10,041, $9,267 and
$14,344 for 2017, 2016 and 2015, respectively
Reclassification adjustment for impact of D&Os of the PUC included in regulatory
assets, net of (taxes) benefits of $49,523, $(18,206) and $16,011 for 2017, 2016 and
2015, respectively
Other comprehensive income (loss), net of taxes
2017
2016
2015
$
165,297
$
248,256
$
159,877
(4,370)
(5,699)
(2,334)
—
(360)
—
—
454
(281)
(119)
—
235
65,531
(43,510)
5,889
15,737
14,518
22,465
(78,724)
(1,372)
28,584
(6,867)
(25,139)
1,116
Comprehensive income attributable to Hawaiian Electric Industries, Inc.
$
163,925
$
241,389
$
160,993
The accompanying notes are an integral part of these consolidated financial statements.
89
Consolidated Balance Sheets
Hawaiian Electric Industries, Inc. and Subsidiaries
December 31
(dollars in thousands)
ASSETS
Cash and cash equivalents
Accounts receivable and unbilled revenues, net
Available-for-sale investment securities, at fair value
Held-to-maturity investment securities, at amortized cost
Stock in Federal Home Loan Bank, at cost
Loans receivable held for investment, net
Loans held for sale, at lower of cost or fair value
Property, plant and equipment, net
Land
Plant and equipment
Construction in progress
Less – accumulated depreciation
Regulatory assets
Other
Goodwill
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable
Interest and dividends payable
Deposit liabilities
Short-term borrowings—other than bank
Other bank borrowings
Long-term debt, net—other than bank
Deferred income taxes
Regulatory liabilities
Contributions in aid of construction
Defined benefit pension and other postretirement benefit plans
liability
Other
Total liabilities
Preferred stock of subsidiaries - not subject to mandatory
redemption
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: 108,787,807 shares and 108,583,413
shares at December 31, 2017 and 2016, respectively
Retained earnings
Accumulated other comprehensive loss, net of tax benefits
$
$
106,435
7,140,427
332,349
7,579,211
(2,553,295)
$
$
2017
2016
261,881
263,209
1,401,198
44,515
9,706
4,617,131
11,250
$
5,025,916
869,297
513,535
82,190
13,099,828
193,714
25,837
5,890,597
117,945
190,859
1,683,797
388,430
880,770
565,668
509,514
521,018
10,968,149
34,293
—
1,662,491
476,836
$
278,452
237,950
1,105,182
—
11,218
4,683,160
18,817
97,423
6,727,935
222,455
7,047,813
(2,444,348)
$
$
4,603,465
957,451
447,621
82,190
12,425,506
143,279
25,225
5,548,929
—
192,618
1,619,019
728,806
410,693
543,525
638,854
473,512
10,324,460
34,293
—
1,660,910
438,972
Net unrealized losses on securities
Unrealized losses on derivatives
Retirement benefit plans
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
(14,951)
—
(26,990)
$
$
(41,941)
2,097,386
13,099,828
(7,931)
(454)
(24,744)
$
(33,129)
2,066,753
12,425,506
The accompanying notes are an integral part of these consolidated financial statements.
90
Consolidated Statements of Changes in Shareholders’ Equity
Hawaiian Electric Industries, Inc. and Subsidiaries
(in thousands, except per share amounts)
Balance, December 31, 2014
Net income for common stock
Other comprehensive income, net of taxes
Issuance of common stock:
Partial settlement of equity forward
Retirement savings and other plans
Expenses and other, net
Common stock dividends ($1.24 per share)
Balance, December 31, 2015
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock:
Dividend reinvestment and stock purchase plan
Retirement savings and other plans
Expenses and other, net
Common stock dividends ($1.24 per share)
Balance, December 31, 2016
Net income for common stock
Other comprehensive loss, net of tax benefits
Reclass of AOCI for tax rate reduction impact
Issuance of common stock:
Retirement savings and other plans
Expenses and other, net
Common stock dividends ($1.24 per share)
Balance, December 31, 2017
Common stock
Shares
Amount
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
102,565
$ 1,521,297
$
296,654
$
(27,378) $ 1,790,573
—
—
4,700
195
—
—
—
—
109,183
5,578
(6,922)
159,877
—
—
—
—
—
(131,765)
107,460
1,629,136
—
(134,050)
108,583
1,660,910
—
—
859
264
—
—
—
—
—
205
—
—
—
—
26,844
9,298
(4,368)
—
—
—
324,766
248,256
—
—
—
—
438,972
165,297
—
7,440
4,664
(3,083)
—
—
—
(134,873)
—
1,116
159,877
1,116
—
—
—
—
109,183
5,578
(6,922)
(131,765)
(26,262)
1,927,640
—
(6,867)
248,256
(6,867)
—
—
—
—
26,844
9,298
(4,368)
(134,050)
(33,129)
2,066,753
—
(1,372)
(7,440)
—
—
—
165,297
(1,372)
—
4,664
(3,083)
(134,873)
108,788
$ 1,662,491
$
476,836
$
(41,941) $ 2,097,386
The accompanying notes are an integral part of these consolidated financial statements.
91
Consolidated Statements of Cash Flows
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Cash flows from operating activities
Net income
2017
2016
2015
$ 167,187
$ 250,146
$ 161,767
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
200,658
194,273
183,966
Other amortization
Provision for loan losses
Impairment of utility assets
Loans receivable originated and purchased, held for sale
Proceeds from sale of loans receivable, held for sale
Deferred income taxes
Share-based compensation expense
Allowance for equity funds used during construction
Other
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net
Decrease (increase) in fuel oil stock
Increase in regulatory assets
Increase (decrease) in accounts, interest and dividends payable
Change in prepaid and accrued income taxes, tax credits and utility revenue
taxes
Increase (decrease) in defined benefit pension and other postretirement benefit
plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Available-for-sale investment securities purchased
Principal repayments on available-for-sale investment securities
Proceeds from sale of available-for-sale investment securities
Purchases of held-to-maturity investment securities
Purchase of stock from Federal Home Loan Bank
Redemption of stock from Federal Home Loan Bank
Net decrease (increase) in loans held for investment
Proceeds from sale of commercial loans
Proceeds from sale of real estate acquired in settlement of loans
Proceeds from sale of real estate held for sale
Capital expenditures
Contributions in aid of construction
Contributions to low income housing investments
Acquisition of business
Other
Net cash used in investing activities
92
21,340
10,901
—
(115,104)
127,951
37,835
5,404
(12,483)
(3,324)
(12,875)
(20,794)
(17,256)
34,985
10,473
16,763
—
(236,769)
236,062
47,118
4,789
(8,325)
(12,422)
(898)
4,786
(18,273)
(9,643)
11,619
6,275
6,021
(268,279)
275,296
41,432
6,542
(6,928)
1,672
62,304
34,830
(24,182)
(52,663)
20,685
39,109
(42,596)
882
(25,551)
420,441
1,587
(23,118)
495,658
852
(41,070)
356,858
(528,379)
220,231
—
(44,515)
(2,868)
4,380
15,887
36,760
1,019
—
(495,187)
64,733
(17,505)
(76,323)
6,468
(815,299)
(533,956)
219,845
16,423
—
(7,773)
7,233
(194,042)
52,299
(429,262)
153,271
—
—
(1,600)
60,223
(181,343)
—
829
1,329
1,764
(330,043)
30,100
7,283
(363,804)
40,239
—
—
—
—
856
(736,465)
7,940
(705,724)
(continued)
Consolidated Statements of Cash Flows (continued)
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
Cash flows from financing activities
Net increase in deposit liabilities
Net increase (decrease) in short-term borrowings with original maturities of three
months or less
Proceeds from issuance of short-term debt
Repayment of short-term debt
Net increase (decrease) in retail repurchase agreements
Proceeds from other bank borrowings
Repayments of other bank borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt and funds transferred for redemption of special
purpose revenue bonds
Withheld shares for employee taxes on vested share-based compensation
Net proceeds from issuance of common stock
Common stock dividends
Preferred stock dividends of subsidiaries
Other
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
2017
2016
2015
341,668
523,675
401,839
67,992
125,000
(75,000)
61,776
59,500
(123,034)
532,325
(465,000)
(3,828)
—
(134,873)
(1,890)
(6,349)
378,287
(16,571)
278,452
(103,063)
—
—
(43,601)
180,835
(272,902)
115,000
(75,000)
(2,416)
13,220
(117,274)
(1,890)
2,197
218,781
(22,026)
300,478
(15,909)
—
—
37,925
50,000
(50,000)
80,000
—
(3,260)
104,435
(131,765)
(1,890)
2,427
473,802
124,936
175,542
$ 261,881
$ 278,452
$ 300,478
The accompanying notes are an integral part of these consolidated financial statements.
93
Consolidated Statements of Income
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Total expenses
Operating income
Allowance for equity funds used during construction
Interest expense and other charges, net
Allowance for borrowed funds used during construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian Electric
Preferred stock dividends of Hawaiian Electric
Net income for common stock
2017
2016
2015
$
2,257,566
$
2,094,368
$
2,335,166
587,768
586,634
417,910
192,784
214,949
2,000,045
257,521
12,483
(69,637)
4,778
205,145
83,199
121,946
915
121,031
1,080
119,951
$
454,704
562,740
405,533
187,061
199,862
1,809,900
284,468
8,325
(66,824)
3,144
229,113
84,801
144,312
915
143,397
1,080
142,317
$
654,600
594,096
413,089
177,380
221,885
2,061,050
274,116
6,928
(66,370)
2,457
217,131
79,422
137,709
915
136,794
1,080
135,714
$
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Net income for common stock
Other comprehensive income (loss), net of taxes:
Derivatives qualified as cash flow hedges:
2017
2016
2015
$
119,951
$
142,317
$
135,714
Effective portion of foreign currency hedge net unrealized losses arising during
the period, net of tax benefits of nil, $179 and nil for 2017, 2016 and 2015,
respectively
Reclassification adjustment to net income, net of taxes of $289, $110 and nil for
2017, 2016 and 2015, respectively
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of $(39,587),
$27,153 and $(3,590) for 2017, 2016 and 2015, respectively
Adjustment for amortization of prior service credit and net losses recognized
during the period in net periodic benefit cost, net of tax benefits of $9,221,
$8,442 and $12,981 for 2017, 2016 and 2015, respectively
Reclassification adjustment for impact of D&Os of the PUC included in
regulatory assets, net of (taxes) benefits of $49,523, $(18,206) and $16,011 for
2017, 2016 and 2015, respectively
Other comprehensive income (loss), net of taxes
Comprehensive income attributable to Hawaiian Electric Company, Inc.
—
454
(281)
(173)
—
—
63,105
(42,631)
5,638
14,477
13,254
20,381
(78,724)
(688)
119,263
$
28,584
(1,247)
141,070
$
(25,139)
880
136,594
$
The accompanying notes are an integral part of these consolidated financial statements.
94
Consolidated Balance Sheets
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less accumulated depreciation of $1,251 as of December 31,
2017 and $1,232 as of December 31, 2016
Total property, plant and equipment, net
Current assets
Cash and cash equivalents
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization (see Consolidated Statements of Capitalization)
Common stock equity
Cumulative preferred stock – not subject to mandatory redemption
Commitments and contingencies (Note 3)
Long-term debt, net
Total capitalization
Current liabilities
Current portion of long-term debt
Short-term borrowings from non-affiliate
Accounts payable
Interest and preferred dividends payable
Taxes accrued, including revenue taxes
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other postretirement benefit plans liability
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total capitalization and liabilities
The accompanying notes are an integral part of these consolidated financial statements.
95
2017
2016
$
$
53,177
6,946,563
(2,476,352)
283,239
4,806,627
7,580
4,814,207
53,153
6,605,732
(2,369,282)
211,742
4,501,345
7,407
4,508,752
12,517
127,889
107,054
7,163
86,873
54,397
25,355
88,390
509,638
780,907
611
90,918
872,436
6,196,281
1,845,283
34,293
$
$
74,286
123,688
91,693
5,233
66,430
53,679
23,100
66,032
504,141
891,419
208
70,908
962,535
5,975,428
1,799,787
34,293
1,318,516
3,198,092
1,319,260
3,153,340
49,963
4,999
159,610
22,575
199,101
3,401
59,456
499,105
394,041
877,369
90,369
472,948
98,689
1,933,416
565,668
6,196,281
$
—
—
117,814
22,838
172,730
3,762
55,221
372,365
733,659
406,931
88,961
599,726
76,921
1,906,198
543,525
5,975,428
$
$
$
2017
2016
$
107,634
614,675
1,124,193
$
106,818
601,491
1,091,800
—
(1,219)
(1,219)
1,845,283
(454)
132
(322)
1,799,787
Shares
outstanding
December 31,
2017 and 2016
2017
2016
150,000
$
3,000
$
50,000
150,000
250,000
89,657
250,000
175,000
70,000
50,000
1,000
3,000
5,000
1,793
5,000
3,500
7,000
5,000
3,000
1,000
3,000
5,000
1,793
5,000
3,500
7,000
5,000
1,234,657
34,293
34,293
(continued)
Consolidated Statements of Capitalization
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(dollars in thousands, except par value)
Common stock equity
Common stock of $6 2/3 par value
Authorized: 50,000,000 shares. Outstanding: 16,142,216 shares and
16,019,785 shares at December 31, 2017 and 2016, respectively
Premium on capital stock
Retained earnings
Accumulated other comprehensive income (loss), net of taxes
Unrealized losses on derivatives
Retirement benefit plans
Common stock equity
Cumulative preferred stock not subject to mandatory redemption
Authorized: 5,000,000 shares of $20 par value and 7,000,000 shares of $100 par
value.
Series
Par Value
(dollars in thousands, except par value and shares outstanding)
C-4 1/4%
(Hawaiian Electric)
20
$
D-5%
E-5%
H-5 1/4%
I-5%
J-4 3/4%
K-4.65%
G-7 5/8%
H-7 5/8%
20
20
20
20
20
20
100
100
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaii Electric Light)
(Maui Electric)
96
Consolidated Statements of Capitalization (continued)
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(in thousands)
Long-term debt
Obligations to the State of Hawaii for the repayment of Special Purpose Revenue Bonds (subsidiary
obligations unconditionally guaranteed by Hawaiian Electric):
2017
2016
3.10%, Refunding series 2017A, due 2026
4.00%, Refunding series 2017B, due 2037
3.25%, Refunding series 2015, due 2025
6.50%, Series 2009, due 2039
4.65%, Series 2007A, paid in 2017
4.60%, Refunding series 2007B, paid in 2017
Total obligations to the State of Hawaii
Other long-term debt – unsecured:
Taxable senior notes:
4.31%, Series 2017A, due 2047
4.54%, Series 2016A, due 2046
5.23%, Series 2015A, due 2045
3.83%, Series 2013A, due 2020
4.45%, Series 2013A and 2013B, due 2022
4.84%, Series 2013A, 2013B and 2013C, due 2027
5.65%, Series 2013B and 2013C, due 2043
3.79%, Series 2012A, due 2018
4.03%, Series 2012B, due 2020
4.55%, Series 2012B and 2012C, due 2023
4.72%, Series 2012D, due 2029
5.39%, Series 2012E, due 2042
4.53%, Series 2012F, due 2032
Total taxable senior notes
6.50 %, series 2004, Junior subordinated deferrable interest debentures, due 2034
Total other long-term debt – unsecured
Total long-term debt
Less unamortized debt issuance costs
Less current portion long-term debt, net of unamortized debt issuance costs
Long-term debt, net
Total capitalization
The accompanying notes are an integral part of these consolidated financial statements.
$
125,000
$
$
$
140,000
47,000
150,000
—
—
462,000
$
$
50,000
40,000
80,000
14,000
52,000
100,000
70,000
50,000
82,000
100,000
35,000
150,000
40,000
863,000
51,546
914,546
—
—
47,000
150,000
140,000
125,000
462,000
—
40,000
80,000
14,000
52,000
100,000
70,000
50,000
82,000
100,000
35,000
150,000
40,000
813,000
51,546
864,546
1,376,546
1,326,546
8,067
49,963
7,286
—
1,318,516
1,319,260
$
3,198,092
$
3,153,340
97
Consolidated Statements of Changes in Common Stock Equity
Hawaiian Electric Company, Inc. and Subsidiaries
(in thousands)
Balance, December 31, 2014
Net income for common stock
Other comprehensive income, net of taxes
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2015
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2016
Net income for common stock
Other comprehensive loss, net of tax benefits
Reclass of AOCI for tax rate reduction impact
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2017
Common stock
Premium
on
capital
Shares
Amount
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
15,805
$ 105,388
$ 578,938
$
997,773
$
—
—
—
—
—
—
—
—
—
—
(8)
—
135,714
—
—
(90,405)
15,805
105,388
578,930
1,043,082
—
—
215
—
—
—
1,430
—
—
—
22,561
142,317
—
—
—
(93,599)
16,020
106,818
601,491
1,091,800
—
—
—
122
—
—
—
—
816
—
—
—
—
13,184
119,951
—
209
—
—
(87,767)
45
—
880
—
—
925
—
(1,247)
—
—
(322)
—
(688)
(209)
—
—
$
1,682,144
135,714
880
(8)
(90,405)
1,728,325
142,317
(1,247)
23,991
(93,599)
1,799,787
119,951
(688)
—
14,000
(87,767)
16,142
$ 107,634
$ 614,675
$ 1,124,193
$
(1,219) $
1,845,283
The accompanying notes are an integral part of these consolidated financial statements.
98
Consolidated Statements of Cash Flows
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Cash flows from operating activities
Net income
2017
2016
2015
$
121,946
$
144,312
$
137,709
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
192,784
187,061
177,380
Other amortization
Impairment of utility assets
Deferred income taxes
Allowance for equity funds used during construction
Other
Changes in assets and liabilities
Decrease in accounts receivable
Decrease (increase) in accrued unbilled revenues
Decrease (increase) in fuel oil stock
Decrease (increase) in materials and supplies
Increase in regulatory assets
Increase (decrease) in accounts payable
Change in prepaid and accrued income taxes, tax credits and revenue taxes
Increase in defined benefit pension and other postretirement
benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Other
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
Preferred stock dividends of Hawaiian Electric and subsidiaries
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Funds transferred for redemption of special purpose revenue bonds
Net increase in short-term borrowings from non-affiliates and affiliate with original
maturities of three months or less
Other
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
8,498
—
38,037
(12,483)
(1,066)
2,914
(15,361)
(20,443)
(718)
(17,256)
25,734
29,862
604
(17,866)
335,186
6,935
—
74,386
(8,325)
(3,700)
8,551
(7,184)
4,786
750
(18,273)
(10,614)
2,123
484
(11,375)
369,917
8,939
6,021
75,626
(6,928)
6,516
23,727
40,093
34,830
2,821
(24,182)
(54,555)
(63,096)
1,125
(32,620)
333,406
(441,598)
(320,437)
(350,161)
64,733
4,578
30,100
2,138
40,239
1,140
(372,287)
(288,199)
(308,782)
(87,767)
(1,995)
14,000
315,000
(265,000)
4,999
(3,905)
(24,668)
(61,769)
74,286
(93,599)
(1,995)
24,000
40,000
—
—
(287)
(31,881)
49,837
24,449
$
12,517
$
74,286
$
(90,405)
(1,995)
—
80,000
—
—
(1,537)
(13,937)
10,687
13,762
24,449
The accompanying notes are an integral part of these consolidated financial statements.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 · Summary of significant accounting policies
General
Hawaiian Electric Industries, Inc. (HEI) is a holding company with direct and indirect subsidiaries principally engaged in
electric utility and banking businesses, primarily in the State of Hawaii. HEI is the parent holding company of Hawaiian
Electric Company, Inc. (Hawaiian Electric) and indirect parent holding company of American Savings Bank, F. S. B. (ASB) and
Hamakua Energy, LLC (Hamakua Energy). HEI’s common stock is traded on the New York Stock Exchange.
Hawaiian Electric and its wholly-owned operating subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric
Light) and Maui Electric Company, Limited (Maui Electric), are regulated public electric utilities (collectively, the Utilities) in
the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other
than Kauai. See Note 2.
ASB is a federally chartered savings bank providing a full range of banking services to individual and business
customers through its branch system in Hawaii.
Hamakua Energy owns and operates a 60-megawatt (MW) combined-cycle power plant, which sells the power it
produces only to Hawaii Electric Light.
Basis of presentation. In preparing the consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP), management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change for HEI and its subsidiaries (collectively, the
Company) include the amounts reported for investment securities (ASB only); property, plant and equipment; pension and other
postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities (Utilities only);
electric utility unbilled revenues (Utilities only); and allowance for loan losses (ASB only).
Consolidation. The HEI consolidated financial statements include the accounts of HEI and its subsidiaries, except for HECO
Capital Trust III (Trust III), as the Company does not exercise control over Trust III. Hamakua Energy, LLC (which was formed
in 2017) has been included in the HEI consolidated financial statements. The Hawaiian Electric consolidated financial
statements include the accounts of Hawaiian Electric and its subsidiaries, except for Trust III. When HEI or Hawaiian Electric
has a controlling financial interest in another entity (usually, majority voting interest), that entity is consolidated. Investments in
companies over which the Company or the Utilities have the ability to exercise significant influence, but not control, are
accounted for using the equity method. The consolidated financial statements exclude variable interest entities (VIEs) when the
Company or the Utilities are not the primary beneficiaries. Hawaiian Electric is not the primary beneficiary of Trust III, which
is a VIE, and accounts for Trust III under the equity method. See Note 3 for information regarding unconsolidated VIEs. In
general, intercompany amounts are eliminated in consolidation (see Note 2 for exceptions).
Cash and cash equivalents. The Utilities consider cash on hand, deposits in banks, money market accounts, certificates of
deposit, short-term commercial paper of non-affiliates and liquid investments (with original maturities of three months or less)
to be cash and cash equivalents. The Company considers the same items to be cash and cash equivalents as well as ASB’s
deposits with the Federal Home Loan Bank (FHLB), federal funds sold (excess funds that ASB loans to other banks overnight
at the federal funds rate) and securities purchased under resale agreements.
Property, plant and equipment. Property, plant and equipment are reported at cost. Self-constructed electric utility plant
includes engineering, supervision, administrative and general costs and an allowance for the cost of funds used during the
construction period. These costs are recorded in construction in progress and are transferred to utility plant when construction is
completed and the facilities are either placed in service or become useful for public utility purposes. Costs for betterments that
make utility plant more useful, more efficient, of greater durability or of greater capacity are also capitalized. Upon the
retirement or sale of electric utility plant, generally no gain or loss is recognized. The cost of the plant retired is charged to
accumulated depreciation. Amounts collected from customers for cost of removal are included in regulatory liabilities. See
discussion regarding “Utility projects” in Note 3.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Depreciation. Depreciation is computed primarily using the straight-line method over the estimated lives of the assets being
depreciated. Electric utility plant additions in the current year are depreciated beginning January 1 of the following year in
accordance with rate-making. Electric utility plant has lives ranging from 20 to 88 years for production plant, from 25 to 65
years for transmission and distribution plant and from 5 to 65 years for general plant. The Utilities’ composite annual
depreciation rate, which includes a component for cost of removal, was 3.2% in 2017, 2016 and 2015.
Leases. HEI, the Utilities and ASB have entered into lease agreements for the use of equipment and office space. The
provisions of some of the lease agreements contain renewal options.
HEI's consolidated operating lease expense was $20 million, $19 million and $18 million in 2017, 2016 and 2015,
respectively. The Utilities' operating lease expense was $11 million, $10 million and $9 million in 2017, 2016 and 2015,
respectively. HEI's consolidated and the Utilities' future minimum lease payments are as follows:
(in millions)
2018
2019
2020
2021
2022
Thereafter
HEI
Hawaiian
Electric
$
$
11
10
8
7
4
36
76
$
$
6
5
5
5
3
29
53
Retirement benefits. Pension and other postretirement benefit costs are charged primarily to expense and electric utility plant
(in the case of the Utilities). Funding for the Company’s qualified pension plans (Plans) is based on actuarial assumptions
adopted by the Pension Investment Committee administering the Plans. The participating employers contribute amounts to a
master pension trust for the Plans in accordance with the funding requirements of the Employee Retirement Income Security
Act of 1974, as amended (ERISA), including changes promulgated by the Pension Protection Act of 2006, and considering the
deductibility of contributions under the Internal Revenue Code. The Company generally funds at least the net periodic pension
cost during the year, subject to limits and targeted funded status. Under a pension tracking mechanism approved by the Public
Utilities Commission of the State of Hawaii (PUC), the Utilities generally will make contributions to the pension fund at the
greater of the minimum level required under the law or net periodic pension cost.
Certain health care and/or life insurance benefits are provided to eligible retired employees and the employees’
beneficiaries and covered dependents. The Company generally funds the net periodic postretirement benefit costs other than
pensions (except for executive life) for postretirement benefits other than pensions (OPEB), while maximizing the use of the
most tax advantaged funding vehicles, subject to cash flow requirements and reviews of the funded status with the consulting
actuary. The Utilities must fund OPEB costs as specified in the OPEB tracking mechanisms, which were approved by the PUC.
Future decisions in rate cases could further impact funding amounts.
Environmental expenditures. The Company and the Utilities are subject to numerous federal and state environmental statutes
and regulations. In general, environmental contamination treatment costs are charged to expense. Environmental costs are
capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of property; the costs mitigate
or prevent future environmental contamination; or the costs are incurred in preparing the property for sale. Environmental costs
are either capitalized or charged to expense when environmental assessments and/or remedial efforts are probable and the cost
can be reasonably estimated. The Utilities review their sites and measure the liability quarterly by assessing a range of
reasonably likely costs of each identified site using currently available information, including existing technology, presently
enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition
of other potentially responsible parties.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial
reporting bases and the tax bases of the Company’s and the Utilities' assets and liabilities at federal and state tax rates expected
to be in effect when such deferred tax assets or liabilities are realized or settled. As a result of the 2017 Tax Cuts and Jobs Act
(Tax Act), the accumulated deferred income tax balances (ADIT) were adjusted in 2017 for the lower federal income tax rate
expected to be in effect when the deferred tax assets or liabilities are realized or settled. See further discussion under "Recent
tax developments" in Note 10. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
income during the periods in which those temporary differences become deductible. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be realized.
The Utilities' investment tax credits are deferred and amortized over the estimated useful lives of the properties to which
the credits relate, in accordance with Accounting Standards Codification (ASC) Topic 980, “Regulated Operations.”
The Utilities are included in the consolidated income tax returns of HEI. However, income tax expense has been computed
for financial statement purposes as if each utility filed a separate income tax return and Hawaiian Electric filed a consolidated
Hawaiian Electric income tax return.
Governmental tax authorities could challenge a tax return position taken by the Company. If the Company’s position does
not prevail, the Company’s results of operations and financial condition may be adversely affected as the related deferred or
current income tax asset might be impaired and charged to expense or an unanticipated tax liability might be incurred.
The Company and the Utilities use a “more-likely-than-not” recognition threshold and measurement standard for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Fair value measurements. Fair value estimates are estimates of the price that would be received to sell an asset, or paid upon
the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value
estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and
are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their
own assumptions about market participant assumptions based on the best information available in the circumstances. These
valuations are estimates at a specific point in time, based on relevant market information, information about the financial
instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various
financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company
or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market
exists for a portion of the Company’s and the Utilities' financial instruments, fair value estimates cannot be determined with
precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses
could have a significant effect on fair value estimates, but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to
measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs
to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are
not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the
asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data,
there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more
significant due to the lack of observable market data.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter
to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair
value hierarchy levels and are recognized based on period-end balances.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes.
Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan
impairments for certain loans, real estate acquired in settlement of loans, goodwill and asset retirement obligations (AROs).
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings per share (HEI only). Basic earnings per share (EPS) is computed by dividing net income for common stock by the
weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly, except that dilutive
common shares for stock compensation and the equity forward transactions are added to the denominator.
Impairment of long-lived assets and long-lived assets to be disposed of. The Company and the Utilities review long-lived
assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair
value, less costs to sell.
Recent accounting pronouncements.
Stock compensation. In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions.
The Company adopted ASU No. 2016-09 in the first quarter of 2017. From January 1, 2017, all excess tax benefits and tax
deficiencies are recognized as income tax expense or benefit in the income statement. From January 1, 2017, no excess tax
benefits or deficiencies are included in determining the assumed proceeds under the treasury stock method of calculating
diluted EPS. As of January 1, 2017, HEI adopted an accounting policy to account for forfeitures when they occur.
From January 1, 2017, HEI retrospectively applied the cashflow guidance for taxes paid (equivalent to the value of
withheld shares for tax withholding purposes) and excess tax benefits. Excess tax benefits are classified along with other
income tax cash flows as an operating activity and the cash payments made to taxing authorities on the employees’ behalf for
withheld shares are classified as financing activities on the Company's consolidated statements of cash flows for all periods that
are presented.
Goodwill impairment. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” Prior to the adoption of ASU No. 2017-04, an entity was required to perform a
two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compared the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeded its fair value,
the entity performed Step 2 and compared the implied fair value of goodwill with the carrying amount of that goodwill for that
reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit
exceeded the implied fair value of that goodwill would then be recorded. ASU No. 2017-04 removes the second step of the test.
An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting
unit's carrying amount over its fair value. ASU No. 2017-04 does not amend the optional qualitative assessment of goodwill
impairment.
The Company adopted ASU No. 2017-04 prospectively in the fourth quarter of 2017 and the adoption had no impact on
the Company’s consolidated financial statements.
Revenues from contracts with customers. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with
Customers (Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should: (1) identify the
contract/s with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4)
allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, the entity
satisfies a performance obligation. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers.
As of December 31, 2017, the Company has identified its revenue streams from, and performance obligations related to,
contracts with customers and has performed an analysis of these revenue streams for the impacts of Topic 606. The revenue
subject to Topic 606 is largely the Utilities’ electric sales revenue and the Utilities’ and ASB’s fee income. The Company and
Hawaiian Electric adopted ASU No. 2014-09 (and subsequently issued revenue-related ASUs) in the first quarter of 2018 using
the modified retrospective approach with no impact on the timing or pattern of revenue recognition, but with impacts on the
presentation of revenues. Also, expanded disclosures around the amount, timing, nature and uncertainty of revenues from
contracts with customers will be presented.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 expects changes to disclosures, but otherwise the
impact of adoption is 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 the impact
of adoption is not material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
Restricted cash. In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230):
Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
The Company adopted ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and the impact
of adoption is not material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
Net periodic pension cost and net periodic postretirement benefit cost. In March 2017, the FASB issued ASU No. 2017-07,
“Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items
as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the
other components of net periodic pension cost (NPPC) and net periodic postretirement benefit cost (NPBC) as defined in
paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component
and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization
under GAAP, when applicable.
The Company 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. 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 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 plan to seek PUC clarification to 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 the next rate cases, each utility’s future rates 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).
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Thus, the adoption of ASU 2017-07 in the first quarter of 2018 does not have a net income impact.
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 consolidated statements of income. For operating leases, a
lessee is required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a
generally straight-line basis.
The Company plans to adopt ASU No. 2016-02 in the first quarter of 2019 and has not yet determined the impact of
adoption.
Credit losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments,” which is intended to improve financial reporting by requiring timelier
recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU
No. 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date (based on
historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures to help financial
statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit
quality and underwriting standards of an organization’s portfolio. In addition, ASU No. 2016-13 amends the accounting for
credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than-
temporary impairment model of accounting for credit losses on AFS debt securities will be replaced with an estimate of
expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an
AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists.
The AFS debt security model will also require the use of an allowance to record the estimated losses (and subsequent
recoveries). The accounting for the initial recognition of the estimated expected credit losses for purchased financial assets with
credit deterioration would be recognized through an allowance for credit losses with an offset to the cost basis of the related
financial asset at acquisition (i.e., there is no impact to net income at initial recognition).
The Company plans to adopt ASU No. 2016-13 in the first quarter of 2020 and has not yet determined the impact of
adoption.
Tax effects in AOCI. In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income,” which contains
amendments that allow a reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax
Cuts and Jobs Act (Tax Act) and requires certain disclosures regarding the stranded tax effects.
The Company and the Utilities adopted ASU No. 2018-02 as of the beginning of the fourth quarter of 2017 and elected to
reclassify the income tax effects of the Tax Act (i.e., the effect of the federal tax rate change only) of $7.4 million and $0.2
million, respectively, from AOCI to retained earnings. Other than this reclassification to retained earnings, the Company and the
Utilities release the income tax effects in AOCI from AOCI when the specific AOCI items (e.g., on a security-by-security basis
for ASB’s gains/losses on investment securities) are included in net income.
Electric utility
Regulation by the Public Utilities Commission of the State of Hawaii (PUC). The Utilities are regulated by the PUC and
account for the effects of regulation under FASB ASC Topic 980, “Regulated Operations.” As a result, the Utilities’ financial
statements reflect assets, liabilities, revenues and expenses based on current cost-based rate-making regulations. Their
continued accounting under ASC Topic 980 generally requires that rates are established by an independent, third-party
regulator; rates are designed to recover the costs of providing service; and it is reasonable to assume that rates can be charged
to, and collected from, customers. Management believes the Utilities’ operations currently satisfy the ASC Topic 980 criteria. If
events or circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory
assets, net of regulatory liabilities, would be charged to the statement of income in the period of discontinuance.
Accounts receivable. Accounts receivable are recorded at the invoiced amount. The Utilities generally assess a late payment
charge on balances unpaid from the previous month. The allowance for doubtful accounts is the Utilities’ best estimate of the
amount of probable credit losses in the Utilities existing accounts receivable. At December 31, 2017 and 2016, the allowance
for customer accounts receivable, accrued unbilled revenues and other accounts receivable was $1.2 million and $1.1 million,
respectively.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contributions in aid of construction. The Utilities receive contributions from customers for special construction
requirements. As directed by the PUC, contributions are amortized on a straight-line basis over 30 to 55 years as an offset
against depreciation expense.
Electric utility revenues. Electric utility revenues are based on rates authorized by the PUC. Revenues related to electric
service are generally recorded when service is rendered and include revenues applicable to energy consumed in the accounting
period but not yet billed to the customers. Under decoupling, electric utility revenues also incorporate: (1) monthly revenue
balancing account (RBA) revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted
revenues, which delinks revenues from kilowatthour sales, (2) rate adjustment mechanism (RAM) revenues for escalation in
certain operation and maintenance (O&M) expenses and rate base changes and (3) an earnings sharing mechanism, which
reduces revenues between rate cases in the event the utility’s ratemaking return on average common equity (ROACE) exceeds
the ROACE allowed in its most recent rate case. Under the decoupling tariff approved in 2011, the prior year accrued RBA
revenues (regulatory asset) and the annual RAM amount are billed from June 1 of each year through May 31 of the following
year, which is within 24 months following the end of the year in which they are recorded as required by the accounting standard
for alternative revenue programs. See "Decoupling" discussion in Note 3 Electric Utility segment.
The rate schedules of the Utilities include energy cost adjustment clauses (ECACs) under which electric rates are adjusted
for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative
amounts of company-generated power and purchased power. The rate schedules also include purchased power adjustment
clauses (PPACs) under which the remaining purchase power expenses are recovered through surcharge mechanisms. The
amounts collected through the ECACs and PPACs are required to be reconciled quarterly.
The Utilities’ revenues include amounts for recovery of various Hawaii state revenue taxes. Revenue taxes are generally
recorded as an expense in the year the related revenues are recognized. For 2017, 2016 and 2015, the Utilities’ revenues include
recovery of revenue taxes of approximately $202 million, $187 million and $209 million, respectively, which amounts are in
“Taxes, other than income taxes” expense. However, the Utilities pay revenue taxes to the taxing authorities 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. As of December 31, 2017 and 2016, the
Utilities had recorded $115 million and $104 million, respectively, in “Taxes accrued, including revenue taxes” on the Utilities’
consolidated balance sheet for amounts previously collected from customers or accrued for public service company taxes and
PUC fees, net of amounts paid to the taxing authorities. Such amounts will be used to pay public service company taxes and
PUC fees owed for the following year.
Repairs and maintenance costs. Repairs and maintenance costs for overhauls of generating units are generally expensed as
they are incurred.
Allowance for funds used during construction (AFUDC). AFUDC is an accounting practice whereby the costs of debt and
equity funds used to finance plant construction are credited on the statement of income and charged to construction in progress
on the balance sheet. If a project under construction is delayed for an extended period of time, AFUDC on the delayed project
may be stopped after assessing the causes of the delay and probability of recovery.
The weighted-average AFUDC rate was 7.7% in 2017, 7.6% in 2016 and 7.6% in 2015, and reflected quarterly
compounding.
Bank (HEI only)
Investment securities. Investments in debt and equity securities are classified as held-to-maturity (HTM), trading or available-
for-sale (AFS). ASB determines the appropriate classification at the time of purchase. Debt securities that ASB intends to and
has the ability to hold to maturity are classified as HTM securities and reported at amortized cost. Marketable debt and equity
securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in earnings. Marketable debt and equity securities not
classified as either HTM or trading securities are classified as AFS and reported at fair value. Unrealized gains and losses for
AFS securities are excluded from earnings and reported on a net basis in accumulated other comprehensive income (AOCI)
until realized.
Interest income is recorded on an accrual basis. Discounts and premiums on securities are accreted or amortized into
interest income using the interest method over the remaining contractual lives of the agency obligation securities and the
estimated lives of the mortgage-related securities adjusted for anticipated prepayments. ASB uses actual prepayment experience
and estimates of future prepayments to determine the constant effective yield necessary to apply the interest method of income
recognition. The discounts and premiums on the agency obligations portfolio are accreted or amortized on a prospective basis
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
using expected contractual cash flows. The discounts and premiums on the mortgage-related securities portfolio are accreted or
amortized on a retrospective basis using changes in anticipated prepayments. This method requires a retrospective adjustment
of the effective yield each time ASB changes the estimated life as if the new estimate had been known since the original
acquisition date of the securities. Estimates of future prepayments are based on the underlying collateral characteristics and
historic or projected prepayment behavior of each security. The specific identification method is used in determining realized
gains and losses on the sales of securities.
For securities that are not trading securities, individual securities are assessed for impairment at least on a quarterly basis,
and more frequently when economic or market conditions warrant. A security is impaired if the fair value of the security is
less than its carrying value at the financial statement date. When a security is impaired, ASB determines whether this
impairment is temporary or other-than-temporary. If ASB does not expect to recover the entire amortized cost basis of the
security or there is a change in the expected cash flows, an OTTI exists. If ASB intends to sell the security, or will more likely
than not be required to sell the security before recovery of its amortized cost, the OTTI must be recognized in earnings. If
ASB does not intend to sell the security, and it is not more likely than not that ASB will be required to sell the security before
recovery of its amortized cost, the OTTI must be separated into the amount representing the credit loss and the amount related
to all other factors. The amount of OTTI related to the credit loss is recognized in earnings, while the remaining OTTI is
recognized in AOCI. Based on ASB's evaluation as of December 31, 2017 and 2016, there was no indicated impairment as the
bank expects to collect the contractual cash flows for these investments.
Stock in Federal Home Loan Bank (FHLB) is carried at cost and is reviewed at least periodically for impairment, with
valuation adjustments recognized in noninterest income.
Loans receivable. ASB carries loans receivable at amortized cost less the allowance for loan losses, loan origination fees (net
of direct loan origination costs), commitment fees and purchase premiums and discounts. Interest on loans is credited to income
as it is earned. Discounts and premiums are accreted or amortized over the life of the loans using the interest method.
Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment in yield over
periods not exceeding the contractual life of the loan using the interest method or taken into income when the loan is paid off or
sold. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) received for commitments to originate
or purchase loans are deferred and, if the commitment is exercised, recognized as an adjustment of yield over the life of the
loan using the interest method. Nonrefundable commitment fees received for which the commitment expires unexercised are
recognized as income upon expiration of the commitment.
Loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. Premiums, discounts and
net deferred loan fees are not amortized while a loan is classified as held for sale. A sale is recognized only when the
consideration received is other than beneficial interests in the assets sold and control over the assets is transferred irrevocably to
the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the
net sales proceeds and the allocated basis of the loans sold.
Allowance for loan losses. ASB maintains an allowance for loan losses to absorb losses inherent in its loan portfolio. The level
of allowance for loan losses is based on a continuing assessment of existing risks in the loan portfolio, historical loss
experience, changes in collateral values and current conditions (e.g., economic conditions, real estate market conditions and
interest rate environment). The allowance for loan losses is allocated to loan types using both a formula-based approach applied
to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss
factors primarily derived from actual historical default and loss rates, which are combined with an assessment of certain
qualitative factors to determine the allowance amounts allocated to the various loan categories. Adverse changes in any of these
factors could result in higher charge-offs and provision for loan losses.
ASB disaggregates its portfolio loans into portfolio segments for purposes of determining the allowance for loan losses.
Commercial and commercial real estate loans are defined as non-homogeneous loans and ASB utilizes a risk rating system for
evaluating the credit quality of the loans. Loans are rated based on the degree of risk at origination and periodically thereafter,
as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction
risk). ASB’s credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal
risk rating system and timeliness of rating changes. Non-homogeneous loans are categorized into the regulatory asset quality
classifications-Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. For loans classified as
substandard, an analysis is done to determine if the loan is impaired. A loan is deemed impaired when it is probable that ASB
will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Once a loan is
deemed impaired, ASB applies a valuation methodology to determine whether there is an impairment shortfall. The
measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair
value of the collateral, net of costs to sell. For all loans collateralized by real estate whose repayment is dependent on the sale of
the underlying collateral property, ASB measures impairment by utilizing the fair value of the collateral, net of costs to sell; for
other loans that are not considered collateral dependent, generally the discounted cash flow method is used to measure
impairment. For loans collateralized by real estate that are classified as troubled debt restructured loans, the present value of the
expected future cash flows of the loans may also be used to measure impairment as these loans are expected to perform
according to their restructured terms. Impairments are charged to the provision for loan losses and included in the allowance for
loan losses. However, confirmed losses (uncollectible) are charged off, with the loan written down by the amount of the
confirmed loss.
Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically
underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on
delinquency status. The homogeneous loan portfolios are stratified into individual products with common risk characteristics
and segmented into various secured and unsecured loan product types. For the homogeneous portfolio, the quality of the loan is
best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external
credit bureau data and credit scores such as the Fair Isaac Corporation (FICO) score on a quarterly basis. ASB has built
portfolio loss models for each major segment based on the combination of internal and external data to predict the probability
of default at the loan level.
ASB also considers the following qualitative factors for all loans in estimating the allowance for loan losses:
•
•
•
•
•
•
•
•
•
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in the nature, volume and terms of the loan portfolio;
changes in lending management and other relevant staff;
changes in loan quality (past due, non-accrual, classified loans);
changes in the quality of the loan review system;
changes in the value of underlying collateral;
effect of, and changes in the level of, any concentrations of credit; and
effect of other external and internal factors.
ASB’s methodology for determining the allowance for loan losses was generally based on historic loss rates using various
look-back periods. In the second quarter of 2014, ASB implemented enhancements to the loss rate calculation for estimating the
allowance for loan losses that included several refinements to determining the probability of default and the loss given default
for the various segments of the loan portfolio that are more statistically sound than those previously employed. The result is an
estimated loss rate established for each borrower. ASB also updated its measurement of the loss emergence period in the
calculation of the allowance for loan losses. The loss emergence period is broadly defined as the period that it takes, on average,
for the lender to identify the specific borrower and amount of loss incurred by the bank for a loan that has suffered from a loss-
causing event.
In conjunction with the above enhancement, management also adopted an enhanced risk rating system for monitoring and
managing credit risk in the non-homogeneous loan portfolios, that measures general creditworthiness at the borrower level. The
numerical-based, risk rating “PD Model” takes into consideration fiscal year-end financial information of the borrower and
identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that
demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given
default (LGD) value is assigned to each loan to measure loss in the event of default based on loan specific features such as
collateral that mitigates the amount of loss in the event of default. Together the PD Model and LGD construct provide a more
quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the
ultimate collectability of each loan.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the
consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded
credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss
rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the
allowance for loan losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other
noninterest expense in the consolidated statements of income.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for loan losses is based on currently available information and historical experience, and future adjustments
may be required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due
to changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these
differences and subsequent adjustments could be material.
Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or
earlier if the probability of collection is insufficient to warrant further accrual. All interest that is accrued but not collected is
reversed. A loan may be returned to accrual status if (i) principal and interest payments have been brought current and
repayment of the remaining contractual principal and interest is expected to be made, (ii) the loan has otherwise become well-
secured and in the process of collection, or (iii) the borrower has been making regularly scheduled payments in full for the prior
six months and it is reasonably assured that the loan will be brought fully current within a reasonable period. Cash receipts on
nonaccruing loans are generally applied to reduce the unpaid principal balance.
Loans considered to be uncollectible are charged-off against the allowance for loan losses. The amount and timing of
charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien
priority and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the
allowance for loan losses. Loans that have been charged-off against the allowance for loan losses are periodically monitored to
evaluate whether further adjustments to the allowance are necessary.
Loans in the commercial and commercial real estate portfolio are charged-off when the loan is risk rated “Doubtful” or
“Loss.” The loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial
condition and collateral deficiency. A commercial or commercial real estate loan is considered uncollectible when: (a) the
borrower is delinquent in principal or interest 90 days or more; (b) significant improvement in the borrower’s repayment
capacity is doubtful; and/or (c) collateral value is insufficient to cover outstanding indebtedness and no other viable assets or
repayment sources exist.
Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is
determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. Such loan
is considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that
collateral value is insufficient to cover outstanding indebtedness and no other viable assets or repayment sources exist; (c)
borrower’s debt is discharged in bankruptcy and the loan is not reaffirmed; or (d) in cases where ASB is in a subordinate
position to other debt, the senior lien holder has foreclosed and ASB's junior lien is extinguished.
Other consumer loans are generally charged-off when the balance becomes 120 days delinquent.
Loans modified in a troubled debt restructuring. Loans are considered to have been modified in a troubled debt restructuring
(TDR) when, due to a borrower’s financial difficulties, ASB makes concessions to the borrower that it would not otherwise
consider for a non-troubled borrower. Modifications may include interest rate reductions, interest only payments for an
extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in the
normal market place, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or
repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status until the
borrower has demonstrated sustained repayment performance for a period of six consecutive months. However, performance
prior to the modification, or significant events that coincide with the modification, are included in assessing whether the
borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or
after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, or there is
reasonable doubt over the full collectability of principal and interest, the loan remains on nonaccrual status.
Real estate acquired in settlement of loans. ASB records real estate acquired in settlement of loans at fair value, less
estimated selling expenses. ASB obtains appraisals based on recent comparable sales to assist management in estimating the
fair value of real estate acquired in settlement of loans. Subsequent declines in value are charged to expense through a valuation
allowance. Costs related to holding real estate are charged to operations as incurred.
Goodwill. At December 31, 2017 and 2016, the amount of goodwill was $82.2 million. The goodwill is with respect to ASB
and is the Company’s only intangible asset with an indefinite useful life and is tested for impairment annually at December 31.
ASC Topic 350 "Intangibles-Goodwill and Other" (ASC 350) permits an entity to first assess qualitative factors to
determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less
than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity
has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
test. An entity shall assess relevant events and circumstances and determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount.
If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair
value of a reporting unit is less than its carrying amount, then the quantitative impairment test is unnecessary. ASB performed a
qualitative analysis and determined that it was not more than likely than not that the fair value of ASB was less than its carrying
amount and, accordingly, a quantitative impairment analysis was not considered necessary. For the three years ended
December 31, 2017, there has been no impairment of goodwill.
Mortgage banking. Mortgage loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis.
Premiums, discounts and net deferred loan fees are not amortized while a loan is classified as held for sale. A sale is recognized
only when the consideration received is other than beneficial interests in the assets sold and control over the assets is transferred
irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the
difference between the net sales proceeds and the allocated basis of the loans sold. ASB is obligated to subsequently repurchase
a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility
requirements, customer fraud or servicing violations. This primarily occurs during a loan file review. ASB considers and
records a reserve for loan repurchases if appropriate.
ASB recognizes a mortgage servicing asset when a mortgage loan is sold with servicing rights retained. This mortgage
servicing right (MSR) is initially capitalized at its presumed fair value based on market data at the time of sale and accounted
for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing assets or liabilities are included as a
component of gain on sale of loans. Under ASC Topic 860, “Transfers and Servicing,” ASB amortizes the MSRs in proportion
to and over the period of estimated net servicing income and assess for impairment at each reporting date.
ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as
fixed-rate 15 and 30 year mortgages and note rate in bands primarily of 50 to 100 basis points. For each stratum, fair value is
calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets.
Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and
expenses associated with servicing residential mortgage loans for others.
ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Because
observable market prices with exact terms and conditions may not be readily available, ASB compares the fair value of MSRs
to an estimated value calculated by an independent third-party on a semi-annual basis. The third-party relies on both published
and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses
the third-party value only to assess the reasonableness of fair value generated by the valuation model.
Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value,
with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated
statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be
unrecoverable.
Loan servicing fee income represents income earned for servicing mortgage loans owned by investors. It includes
mortgage servicing fees and other ancillary servicing income, net of guaranty fees. Servicing fees are generally calculated on
the outstanding principal balances of the loans serviced and are recorded as income when earned.
Tax credit investments. ASB invests in limited liability entities formed to operate qualifying affordable housing projects.
The affordable housing investments provide tax benefits to investors in the form of tax deductions from operating losses
and tax credits. As a limited partner, ASB has no significant influence over the operations. These investments are initially
recorded at the initial capital contribution with a liability recognized for the commitment to contribute additional capital over
the term of the investment.
The Company uses the proportional amortization method of accounting for its investments. Under the proportional
amortization method, the Company amortizes the cost of its investments in proportion to the tax credits and other tax benefits it
receives. The amortization, tax credits and tax benefits are reported as a component of income tax expense.
For these limited liability entities, ASB assesses whether it is the primary beneficiary of the limited liability entity, which is
a variable interest entity (VIE). The primary beneficiary of a VIE is determined to be the party that meets both of the following
criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the
obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Generally, ASB, as a limited partner, is not deemed to be the primary beneficiary as it does not meet the power criterion, i.e., no
power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and no direct ability to
unilaterally remove the general partner.
All tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or
conditions indicate that it is deemed probable that ASB will not recover its investment. If an investment is determined to be
impaired, it is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent
recoveries in value. As of December 31, 2017, ASB did not have any impairment losses resulting from forfeiture or ineligibility
of tax credits or other circumstances related to its low income housing tax credit (LIHTC) investments.
At December 31, 2017 and 2016, the carrying amount of qualifying affordable housing investments was $59.0 million and
$47.1 million, respectively, and included in other assets in the consolidated balance sheets.
ASB’s unfunded commitments to fund to its qualifying affordable housing investments were $15.8 million and $14.0
million as of December 31, 2017 and 2016, respectively. These unfunded commitments are unconditional and legally binding
and are recorded in accounts payable and other liabilities with an increase in other assets in the consolidated balance sheets.
The table below summarizes the amounts in income tax expense related to ASB's investments in qualifying affordable
housing projects:
Years ended December 31
(in millions)
2017
2016
2015
Amounts in income taxes related to investments in qualifying affordable housing projects
Amortization recognized in the provision for income taxes
Tax credits and other tax benefits recognized in the provision for income taxes
Net benefit to income tax expense
$
$
(7.4) $
(5.8) $
10.7
3.3
$
8.4
2.6
$
(5.4)
8.0
2.6
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 · Segment financial information
The electric utility and bank segments are strategic business units of the Company that offer different products and services
and operate in different regulatory environments. The accounting policies of the segments are the same as those described for
the Company in the summary of significant accounting policies, except as otherwise indicated and except that federal and state
income taxes for each segment are calculated on a “stand-alone” basis. HEI evaluates segment performance based on net
income. Each segment accounts for intersegment sales and transfers as if the sales and transfers were to third parties, that is, at
current market prices. Intersegment revenues consist primarily of Hamakua Energy revenues, interest, rent and preferred stock
dividends.
Electric utility
Hawaiian Electric and its wholly-owned operating subsidiaries, Hawaii Electric Light and Maui Electric, are public electric
utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in
Hawaii other than Kauai, and are regulated by the PUC. The utility subsidiaries are aggregated within the electric utility
segment because they: (1) are involved in the business of supplying electric energy in the same geographical location (i.e., the
State of Hawaii), (2) have similar production processes that include electric generators (e.g., conventional oil-fired steam units
and combustion turbines), (3) serve similar customers within their franchise territories (e.g., residential, commercial and
industrial customers), (4) use similar electric grids to distribute the energy to their customers, (5) are regulated by the PUC and
undergo similar rate-making processes, (6) have similar economic characteristics and (7) perform financial reporting oversight
and management of the business at the consolidated level.
Bank
ASB is a federally chartered savings bank providing a full range of banking services to individual and business customers
through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Office of the
Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), and is subject to reserve
requirements established by the Board of Governors of the Federal Reserve System.
Other
“Other” includes amounts for the holding companies (HEI and ASB Hawaii, Inc.), other subsidiaries not qualifying as
reportable segments and intercompany eliminations.
Acquisition of Hamakua power plant. In September 2017, HEI formed new 100% owned subsidiaries--Pacific Current, LLC
and its subsidiary Hamakua Holdings, LLC and its subsidiary, Hamakua Energy, LLC. On November 24, 2017, Hamakua
Energy, LLC acquired Hamakua Energy Partners, L.P.’s 60-MW combined cycle power plant and other assets from affiliates of
ArcLight Capital Partners, a private equity firm focused on energy infrastructure investments. The plant sells the power it
produces only to Hawaii Electric Light under an existing power purchase agreement (PPA) that expires in 2030. On December
26, 2017, Hamakua Energy, LLC closed on $67 million of non-recourse project financing in the form of 4.02% senior secured
notes due December 31, 2030.
Acquisition of a Solar + Storage Power Purchase Agreement (PPA). In November 2017, HEI, through its wholly-owned
subsidiary Pacific Current, LLC, formed a new subsidiary, Mauo Holdings, LLC and its subsidiary Mauo, LLC. On February 2,
2018, Mauo, LLC executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project
that will provide 8.6 MW of solar capacity and 42.3 MWH of storage capacity on the islands of Maui and Oahu. The PPA has a
15-year term with an option to extend for an additional five years. The system will be constructed by a third party contractor
under an Engineering, Procurement and Construction (EPC) contract that was contemporaneously negotiated and executed by
Mauo, LLC. The EPC contract provides a fixed price for the purchase of the completed system, a project completion schedule
and performance obligations designed to match the requirements of the PPA. Mauo, LLC plans to fund the construction of the
project with a construction facility that will be repaid at the commercial operation date (ultimately with cash from investment
tax credits, state renewable tax credits and non-recourse project debt). The facilities are expected to be operational in 2019.
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment financial information was as follows:
(in thousands)
2017
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) for common stock
Capital expenditures
Assets (at December 31, 2017)
2016
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income for common stock
Capital expenditures
Assets (at December 31, 2016)
2015
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) for common stock
Capital expenditures
Assets (at December 31, 2015)
Electric utility
Bank
Other
Total
$
2,257,455
$
297,640
$
530
$
2,555,625
111
2,257,566
201,282
69,637
205,145
83,199
121,946
1,995
119,951
441,598
—
297,640
19,416
12,156
98,716
31,719
66,997
—
66,997
53,272
6,196,281
6,798,659
(111)
419
1,300
9,335
(27,281)
(5,525)
(21,756)
(105)
(21,651)
317
104,888
—
2,555,625
221,998
91,128
276,580
109,393
167,187
1,890
165,297
495,187
13,099,828
$
2,094,224
$
285,924
$
506
$
2,380,654
144
2,094,368
193,996
66,824
229,113
84,801
144,312
1,995
142,317
320,437
—
285,924
9,813
12,755
87,352
30,073
57,279
—
57,279
9,394
5,975,428
6,421,357
(144)
362
937
8,979
57,376
8,821
48,555
(105)
48,660
212
28,721
—
2,380,654
204,746
88,558
373,841
123,695
250,146
1,890
248,256
330,043
12,425,506
$
2,335,135
$
267,733
$
114
$
2,602,982
31
2,335,166
186,319
66,370
217,131
79,422
137,709
1,995
135,714
350,161
—
267,733
7,928
11,326
83,812
29,082
54,730
—
54,730
13,470
5,672,210
6,014,755
(31)
83
1,338
10,780
(46,155)
(15,483)
(30,672)
(105)
(30,567)
173
95,053
—
2,602,982
195,585
88,476
254,788
93,021
161,767
1,890
159,877
363,804
11,782,018
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 profit on electricity sales to Hawaii Electric Light are not eliminated because profit on sales to regulated
affiliates is not required to be eliminated because the PPA was approved by the PUC and it is probable that, through the
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ratemaking process, future revenue from Hawaii Electric Light’s sale of the electricity will approximate its purchase price from
Hamakua Energy under the PPA.
3 · Electric utility segment
Regulatory assets and liabilities. Regulatory assets represent deferred costs and accrued decoupling revenues which are
expected to be recovered through rates over PUC-authorized periods. Generally, the Utilities do not earn a return on their
regulatory assets; however, they have been allowed to recover interest on certain regulatory assets and to include certain
regulatory assets in rate base. Regulatory liabilities represent amounts included in rates and collected from ratepayers for costs
expected to be incurred in the future, or amounts collected in excess of costs incurred that are refundable to customers. For
example, the regulatory liability for cost of removal in excess of salvage value represents amounts that have been collected
from ratepayers for costs that are expected to be incurred in the future to retire utility plant. Generally, the Utilities include
regulatory liabilities in rate base or are required to apply interest to certain regulatory liabilities. In the table below, noted in
parentheses are the original PUC authorized amortization or recovery periods and, if different, the remaining amortization or
recovery periods as of December 31, 2017 are noted.
Regulatory assets were as follows:
December 31
(in thousands)
2017
2016
Retirement benefit plans (balance primarily varies with plans’ funded statuses)
$
637,204
$
745,367
Income taxes (1 to 55 years)
Decoupling revenue balancing account and RAM regulatory asset (1 to 2 years)
Unamortized expense and premiums on retired debt and equity issuances (19 to 30 years; 6 to 18 years
remaining)
Vacation earned, but not yet taken (1 year)
Other (1 to 50 years; 1 to 46 years remaining)
Included in:
Current assets
Long-term assets
Regulatory liabilities were as follows:
December 31
(in thousands)
Cost of removal in excess of salvage value (1 to 60 years)
Income taxes (1 to 55 years)
Retirement benefit plans (5 years beginning with respective utility’s next rate case)
Other (5 years; 1 to 2 years remaining)
Included in:
Current liabilities
Long-term liabilities
118,201
64,087
11,993
11,224
26,588
869,297
88,390
780,907
869,297
$
$
$
90,100
73,485
12,299
10,970
25,230
957,451
66,032
891,419
957,451
$
$
$
2017
2016
$
453,986
$
394,072
406,324
9,961
10,499
880,770
3,401
877,369
880,770
$
$
$
—
10,824
5,797
410,693
3,762
406,931
410,693
$
$
$
The regulatory asset and liability relating to retirement benefit plans was recorded as a result of pension and OPEB
tracking mechanisms adopted by the PUC in rate case decisions for the Utilities in 2007 (see Note 8).
Major customers. The Utilities received 11% ($239 million), 11% ($226 million) and 11% ($265 million) of their operating
revenues from the sale of electricity to various federal government agencies in 2017, 2016 and 2015, respectively.
Cumulative preferred stock. The following series of cumulative preferred stock are redeemable only at the option of the
respective company at the following prices in the event of voluntary liquidation or redemption:
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2017
Series
C, D, E, H, J and K (Hawaiian Electric)
I (Hawaiian Electric)
G (Hawaii Electric Light)
H (Maui Electric)
Voluntary
liquidation
price
Redemption
price
$
$
20
20
100
100
21
20
100
100
Hawaiian Electric is obligated to make dividend, redemption and liquidation payments on the preferred stock of each of its
subsidiaries if the respective subsidiary is unable to make such payments, but this obligation is subordinated to Hawaiian
Electric's obligation to make payments on its own preferred stock.
Related-party transactions. HEI charged the Utilities $6.2 million, $6.5 million and $6.5 million for general management and
administrative services in 2017, 2016 and 2015, respectively. The amounts charged by HEI to its subsidiaries for services
provided by HEI employees are allocated primarily on the basis of time expended in providing such services.
From November 24, 2017 to December 31, 2017, Hamakua Energy, LLC (an indirect subsidiary of HEI) sold energy and
capacity to Hawaii Electric Light (subsidiary of Hawaiian Electric and indirect subsidiary of HEI) under a PPA in the amount of
$3 million.
Hawaiian Electric’s short-term borrowings totaled nil at December 31, 2017 and 2016. The interest charged on short-term
borrowings from HEI is based on the lower of HEI’s or Hawaiian Electric’s effective weighted average short-term external
borrowing rate. If both HEI and Hawaiian Electric do not have short-term external borrowings, the interest is based on the
average of the effective rate for 30-day dealer-placed commercial paper quoted by the Wall Street Journal plus 0.15%.
Borrowings among the Utilities are eliminated in consolidation. Interest charged by HEI to Hawaiian Electric was not
material for the years ended December 31, 2017 and 2016.
Unconsolidated variable interest entities.
HECO Capital Trust III. Trust III was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000
6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate
liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian
Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal
amount of$31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million,
(iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto.
The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034,
which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without
premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian
Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric
under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the
Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense
agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of
amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric.
Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not have the power to direct the activities
that most significantly impact the economic performance of Trust III nor the obligation to absorb 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 sheet as of December 31, 2017
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 statement for 2017 consisted of $3.4 million of interest income received from the 2004
Debentures; $3.3 million of distributions to holders of the Trust Preferred Securities; and $0.1 million of common dividends on
the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian
Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination
provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations
under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any
of their respective 2004 Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition
on the payment of dividends on its common stock.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Power purchase agreements. As of December 31, 2017, the Utilities had five PPAs for firm capacity and other PPAs with
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 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 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 Hamakua Energy in
its consolidated financial statements. HEI, however, owns Hamakua Energy and consolidates it in the HEI consolidated
financial statements.
For the other IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the
Utilities do not have variable interests in the IPPs due to the absence of obligation in the PPAs for the Utilities to absorb any
variability of the IPPs, or the IPPs were either a “business” or “governmental organization,” and thus excluded from the scope
of accounting standards for VIEs. Two IPPs of as-available energy declined to provide the information necessary for Utilities to
determine the applicability of accounting standards for VIEs.
If information is ultimately received from the IPPs, a possible outcome of future analyses of such information is the
consolidation of one or both of such IPPs in the Consolidated Financial Statements. The consolidation of any significant IPP
could have a material effect on the Consolidated Financial Statements, including the recognition of a significant amount of
assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential
recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and
the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs.
Commitments and contingencies.
Fuel contracts. The Utilities have contractual agreements to purchase minimum quantities of low sulfur fuel oil (LSFO),
industrial fuel oil (IFO), diesel fuel and biodiesel for multi-year periods, some through December 2019. Fossil fuel prices are
tied to the market prices of crude oil and petroleum products in the Far East and U.S. West Coast and the biodiesel price is tied
to the market prices of animal fat feedstocks in the U.S. West Coast and U.S. Midwest. Based on the average price per barrel as
of December 31, 2017, the estimated cost of minimum purchases under the fuel supply contracts is $130 million in 2018 and
$130 million in 2019. The actual cost of purchases in 2018 and future years could vary substantially from this estimate of
minimum purchases as a result of changes in market prices, quantities actually purchased, entry into new supply contracts and/
or other factors. The Utilities purchased $0.6 billion, $0.4 billion and $0.6 billion of fuel under contractual agreements in 2017,
2016 and 2015, respectively.
On February 18, 2016, the Utilities signed two fuel supply contracts with Chevron Products Company (Chevron) for: (1)
Oahu’s LSFO and diesel (for purposes of blending with LSFO) to meet the Environmental Protection Agency’s Mercury and
Air Toxic Standards; and (2) IFO, diesel and ultra-low sulfur diesel for Oahu, Maui, Molokai and the island of Hawaii. The
contract began on January 1, 2017, terminates on December 31, 2019 and may automatically renew for annual terms thereafter
unless terminated earlier by either party. Both of these fuel contracts were recently assigned by Chevron to Island Energy
Services, LLC, a subsidiary of One Rock Capital Partners, L.P., who purchased Chevron’s Hawaii assets on November 1, 2016.
Both of these fuel contracts replace prior fuel supply contracts with Chevron and Par Hawaii Refining, LLC (Par), which both
expired on December 31, 2016.
Hawaii Electric Light also signed a contract with Chevron, now Island Energy Services, LLC, for terminalling services in
Hilo, Hawaii for 2017 through 2019. The terminalling services were provided by Chevron as part of the fuel supply contract but
as mentioned above, that contract expired December 31, 2016. Now Hilo terminalling services are contracted in a stand-alone
contract.
The PUC approved all of the contracts with Chevron, now Island Energy Services, LLC. All of the costs incurred under
these contracts are included in the Utilities’ respective Energy Cost Adjustment Clauses (ECACs) to the extent such costs are
not recovered through the base rates.
Hawaiian Electric also has three contracts for biodiesel. Two of the contracts are with Pacific Biodiesel Technologies, LLC
(PBT) and one contingency contract is in place with REG Marketing & Logistics, LLC (REG). PBT has agreed to supply
biodiesel to Hawaiian Electric’s Campbell Industrial Park (CIP) generating facility through November 2018. While fuel is
delivered to CIP, the contract provides that biodiesel can be trucked to the Honolulu International Airport Emergency Facility
and to any other generating facility on Oahu owned by Hawaiian Electric. Hawaiian Electric intends to shift the biodiesel
supply to Schofield generating station when that new facility comes online and as long as the PBT contract remains in effect.
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 27, 2017, Hawaiian Electric signed a new biodiesel supply contract with PBT that will replace the existing PBT
contract in November 2018, upon PUC approval. PBT also has a spot buy contract with Hawaiian Electric to purchase
additional quantities of biodiesel at or below the price of diesel. Very few purchases of “at parity” biodiesel have been
purchased, however the contract remains in effect and was recently extended through June 2018.
Hawaiian Electric also has a contingency contract with REG. REG will supply biodiesel in the event PBT is unable to
supply quantities above the contract maximum volume, should something unexpected occur. Hawaiian Electric did not
purchase any biofuel from REG during 2016 and 2017. Hawaiian Electric has secured a one-year extension of this contract
through November 2018.
The costs incurred under the Utilities’ biodiesel contracts are included in their respective ECACs, to the extent such costs
are not recovered through the Utilities’ base rates.
The energy charge for energy purchased from Kalaeloa Partners, L.P. (Kalaeloa) under Hawaiian Electric’s purchase power
agreement (PPA) with Kalaeloa is based in part on the price Kalaeloa pays PAR (formerly known as Hawaii Independent
Energy, LLC) for LSFO in a fuel contract between the two parties.
The costs incurred for LSFO under Hawaiian Electric's fuel contract with Kalaeloa is included in Hawaiian Electric's
ECAC, to the extent such costs are not recovered through base rates.
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 year ended December 31, 2017, the Utilities recognized $3 million of revenues with respect to
interim orders related to general rate increase requests. Such amounts recorded are subject to refund, with interest, if they
exceed amounts in a final order.
Power purchase agreements. Purchases from all IPPs were as follows:
Years ended December 31
(in millions)
Kalaeloa
AES Hawaii
HPOWER
Puna Geothermal Venture
Hamakua Energy
Hawaiian Commercial & Sugar
Other IPPs
Total IPPs
2017
2016
2015
$
$
$
180
140
$
152
149
67
38
35
—
71
28
29
1
127
587
$
133
563
$
187
134
66
29
44
8
126
594
As of December 31, 2017, the Utilities had five firm capacity PPAs for a total of 551 megawatts (MW) of firm capacity.
The PUC allows rate recovery for energy and firm capacity payments to IPPs under these agreements. Assuming that each of
the agreements remains in place for its current term (and as amended) and the minimum availability criteria in the PPAs are
met, aggregate minimum fixed capacity charges are expected to be approximately $0.1 billion per year for 2018 through 2022
and a total of $0.9 billion in the period from 2023 through 2048.
In general, the Utilities base their payments under the PPAs upon available capacity and actually supplied energy and they
are generally not required to make payments for capacity if the contracted capacity is not available, and payments are reduced,
under certain conditions, if available capacity drops below contracted levels. In general, the payment rates for capacity have
been predetermined for the terms of the agreements. Energy payments will vary over the terms of the agreements. The Utilities
pass on changes in the fuel component of the energy charges to customers through the ECAC in their rate schedules. The
Utilities do not operate, or participate in the operation of, any of the facilities that provide power under the agreements. Title to
the facilities does not pass to Hawaiian Electric or its subsidiaries upon expiration of the agreements, and the agreements do not
contain bargain purchase options for the facilities.
Purchase power adjustment clause. The PUC has approved purchased power adjustment clauses (PPACs) for the
Utilities. Purchased power capacity, O&M and other non-energy costs previously recovered through base rates are now
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recovered in the PPACs and, subject to approval by the PUC, such costs resulting from new purchased power agreements can
be added to the PPACs outside of a rate case. Purchased energy costs continue to be recovered through the ECAC to the extent
they are not recovered through base rates.
Kalaeloa Partners, L.P. In October 1988, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved
by the PUC, which provided that Hawaiian Electric would purchase 180 MW of firm capacity for a period of 25 years
beginning in May 1991. In October 2004, Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently
approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW.
Hawaiian Electric and Kalaeloa are in negotiations to address the PPA term that ended on May 23, 2016. The PPA
automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith, but would end 60 days
after either party notifies the other in writing that negotiations have terminated. Hawaiian Electric and Kalaeloa have agreed
that neither party will terminate the PPA prior to October 31, 2018. 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, 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. Per the terms of the PPA, the Hu Honua plant was scheduled to
be in service in 2016. However, Hu Honua encountered construction delays, failed to meet its obligations under the PPA and
failed to provide adequate assurances that it could perform or had the financial means to perform. Hawaii Electric Light
terminated the PPA on March 1, 2016. On November 30, 2016, Hu Honua filed a civil complaint in the United States District
Court for the District of Hawaii that included claims purportedly arising out of the termination of Hu Honua’s PPA. On May
26, 2017, Hawaii Electric Light and Hu Honua entered into a settlement agreement that will settle all claims related to the
termination of the original PPA. The settlement agreement was contingent on the PUC’s approval of an amended and restated
PPA between Hawaii Electric Light and Hu Honua dated May 5, 2017. In July 2017, the PUC approved the amended and
restated PPA. On August 25, 2017, the PUC’s approval was appealed by a third party. The appeal is still pending. Hu Honua is
expected to be on-line by the end of 2018.
Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies.
Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased
project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will
disallow cost recovery for all or part of a project, or if PUC imposed caps on project costs are expected to be exceeded, project
costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net
income.
Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) implementation project. On August 11,
2016, the PUC approved the Utilities’ request to commence the ERP/EAM implementation project, subject to certain
conditions, including a $77.6 million cap on cost recovery as well as a requirement that the Utilities pass onto customers a
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
updated low-level benefits analysis provided in the response estimated total benefits to be as much as $256 million. 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 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.
Monthly reports on the status and costs of the project continue to be filed.
The ERP/EAM Implementation Project is expected to go-live by October 1, 2018. As of December 31, 2017, the Project
incurred costs of $35.3 million of which $6.7 million were charged to other operation and maintenance expense, $2.6 million
relate to capital costs and $26.0 million are deferred costs.
Schofield Generating Station Project. In August 2012, the PUC approved a waiver from the competitive bidding
framework to allow Hawaiian Electric to negotiate with the U.S. Army for the construction of a 50 MW utility-owned and
operated firm, renewable and dispatchable generation facility at Schofield Barracks. In September 2015, the PUC approved
Hawaiian Electric’s application to expend $167 million for the project. In approving the project, the PUC placed a cost cap of
$167 million for the project, stated 90% of the cap is allowed for cost recovery through cost recovery mechanisms other than
base rates, and stated the $167 million cap will be adjusted downward due to any reduction in the cost of the engine contract
due to a reduction in the foreign exchange rate. Hawaiian Electric was required to take all necessary steps to lock in the lowest
possible exchange rate. On January 5, 2016, Hawaiian Electric executed window forward contracts which lowered the cost of
the engine contract by $9.7 million, resulting in a revised project cost cap of $157.3 million. Hawaiian Electric has received all
of the major permits for the project, including a 35-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 December 31, 2017 amounted to $121.6 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 December 31, 2017 amounted to $6.4 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.
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.
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hawaiian Electric has initiated a dispute resolution process to collect the unpaid amounts from Hawaiian Telcom as
specified by the joint pole agreement. This dispute resolution process is stayed pending settlement negotiations. For Hawaii
Electric Light, the agreement does not specify an alternative dispute resolution process, and thus a complaint for payment was
filed with the Circuit Court in June 2016. This complaint is stayed pending settlement negotiations. Maui Electric has not yet
commenced any legal action to recover the delinquent amounts. The Utilities and Hawaiian Telcom have entered into a non-
binding memorandum of understanding to endeavor to negotiate agreements, subject to PUC approval, for purchase by the
Utilities of Hawaiian Telcom’s interest in all the joint poles, with payment of the purchase price of such interest in the poles to
be offset in part by the receivables owed by Hawaiian Telcom to the Utilities. As of December 31, 2017, total receivables under
the joint pole agreement, including interest, from Hawaiian Telcom are $22.3 million ($15.0 million at Hawaiian Electric, $6.0
million at Hawaii Electric Light, and $1.3 million at Maui Electric). Management expects to prevail on these claims but has
reserved for the accrued interest of $4.9 million on the receivables.
Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of
existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and
toxic substances.
Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other
chemical releases into the environment associated with current or previous operations. The Utilities report and take action on
these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such
releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated
results of operations, financial condition or liquidity.
Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger Molokai Electric
Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site
under a lease until 1985. The 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 DOH Maui Electric agreed
to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment
storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric
contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the
subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel
to determine the extent of impacts of PCBs, residual fuel oils, and other subsurface contaminants. Maui Electric has a reserve
balance of $3.0 million as of December 31, 2017, representing the probable and reasonably estimated cost to complete the
additional investigation and estimated cleanup costs at the Site and the Adjacent Parcel; however, final costs of remediation will
depend on the results of continued investigation.
Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that
Hawaiian Electric is a Potentially Responsible Party responsible for cleanup of PCB contamination in sediment in the area
offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. The Navy has also requested that Hawaiian
Electric reimburse the costs incurred by the Navy to investigate the area. The Navy has completed a remedial investigation and
a feasibility study (FS) for the remediation of contaminated sediment at several locations in Pearl Harbor and issued its Final
FS Report on June 29, 2015. On February 2, 2016, the Navy released the Proposed Plan for Pearl Harbor Sediment
Remediation and Hawaiian Electric submitted comments. The extent of the contamination, the appropriate remedial measures
to address it and Hawaiian Electric’s potential responsibility for any associated costs have not been determined.
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 December 31, 2017, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination
was $4.8 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.
Asset retirement obligations. AROs represent legal obligations associated with the retirement of certain tangible long-lived
assets, are measured as the present value of the projected costs for the future retirement of specific assets and are recognized in
the period in which the liability is incurred if a reasonable estimate of fair value can be made. The Utilities’ recognition of
AROs have no impact on their earnings. The cost of the AROs is recovered over the life of the asset through depreciation.
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AROs recognized by the Utilities relate to legal obligations associated with the retirement of plant and equipment, including
removal of asbestos and other hazardous materials.
The Utilities recorded AROs related to the removal of retired generating units at Hawaiian Electric’s Honolulu and Waiau
power plants, certain types of transformers and underground storage tanks, and the abandonment of fuel pipelines, underground
injection and supply wells. In 2017, for the retired generating unit removal projects, the AROs were reassessed (resulting in a
downward revision in estimated cash flows), the removal projects were completed and the AROs were reduced to nil.
Changes to the ARO liability included in “Other liabilities” on Hawaiian Electric’s balance sheet were as follows:
(in thousands)
Balance, January 1
Accretion expense
Liabilities incurred
Liabilities settled
Revisions in estimated cash flows
Balance, December 31
2017
2016
$
25,589
$
26,848
10
5,370
(527)
(24,407)
10
—
(1,269)
—
$
6,035
$
25,589
The Utilities have not recorded AROs for assets that are expected to operate indefinitely or where the Utilities cannot
estimate a settlement date (or range of potential settlement dates). As such ARO liabilities are not recorded for certain asset
retirement activities, including various Utilities-owned generating facilities and certain electric transmission, distribution and
telecommunications assets resulting from easements over property not owned by the Utilities.
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 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, and RAM revenues for the year 2017 were approximately $20 million lower
than 2016 as a result of the reversion.
2015 decoupling order. On March 31, 2015, the PUC issued an Order (the 2015 Decoupling Order) that modified the
RAM portion of the decoupling mechanism to be capped at the lesser of the RAM revenue adjustment as then determined
(based on an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes) and a
RAM revenue adjustment calculated based on the cumulative annual compounded increase in Gross Domestic Product Price
Index applied to annualized target revenues (the RAM Cap). The 2015 Decoupling Order provided a specific basis for
calculating the target revenues until the next rate case, at which time the target revenues will reset upon the issuance of an
interim or final D&O in a rate case. The triennial rate case cycle required under the decoupling mechanism continues to serve
as the maximum period between the filing of general rate cases.
The RAM Cap impacted the Utilities' recovery of capital investments as follows:
• Hawaiian Electric's RAM revenues were limited to the RAM Cap in 2015, 2016 and 2017.
• Maui Electric's RAM revenues were limited to the RAM Cap in 2015 and 2016; however, the 2017 RAM revenues
were below the RAM Cap.
• Hawaii Electric Light’s RAM revenues were below the RAM Cap in 2015, 2016 and 2017.
2017 decoupling order. On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order) that 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.
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Measurement of performance under the following performance incentive mechanisms began January 1, 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 million penalty for both in total for the three utilities).
• Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is
based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above
and below the target. The maximum penalty or incentive is 8 basis points applied to the common equity share of each
respective utility’s rate base (or approximately $1.2 million penalty or incentive in total for the three utilities).
The 2017 Decoupling Order also established guidelines for MPIR. Projects eligible for recovery through the MPIR
adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of
$2.5 million), including but not restricted to renewable energy, energy efficiency, utility scale generation, grid modernization
and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity
to recover revenues for net costs of approved eligible projects placed in service between general rate cases wherein cost
recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval
must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism shall be
offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be
collected from customers through the annual RBA tariff. Capital projects which are not recovered through the MPIR would be
included in the RAM and be subject to the RAM cap, until the next rate case when the utilities would request recovery in base
rates.
In the 2017 Decoupling Order, the PUC indicated that, in pending and subsequent rate cases, the PUC intends to require all
fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment
mechanism rather than through base rates, and will consider adopting processes to periodically reset fuel efficiency measures
embedded in the energy cost adjustment mechanism to account for changes in the generating system.
Annual decoupling filings. On March 31, 2017, the Utilities submitted to the PUC, their annual decoupling filings.
Maui Electric amended its annual decoupling filing on May 22, 2017, to update and revise certain cost information. On May
31, 2017, the PUC approved the annual decoupling filings for tariffed rates that are effective from June 1, 2017 through May
31, 2018. The net annual incremental amounts to be collected (refunded) are as follows:
($ in millions)
2017 Annual incremental RAM adjusted revenues
Annual change in accrued RBA balance as of December 31,
2016 (and associated revenue taxes) (refunded)
Net annual incremental amount to be collected under the tariffs
Hawaiian Electric
12.7
$
$
$
$
(2.4) $
10.3
$
Hawaii Electric
Light
Maui Electric
3.2
$
(2.5) $
0.7
$
1.6
(0.2)
1.4
Most recent rate proceedings.
Hawaiian Electric consolidated 2014 and 2017 test year rate cases. On June 27, 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. On
December 16, 2016, Hawaiian Electric filed an application with the PUC for a general rate increase of $106.4 million over
revenues at current effective rates, based on a 2017 test year and an 8.28% rate of return (which incorporated a ROACE of
10.6%).
On December 23, 2016, the PUC issued an order consolidating the Hawaiian Electric filings for the 2014 and 2017 test
year rate cases. The order concluded that Hawaiian Electric's 2014 rate case filing did not comply with the requirement in the
decoupling order that Hawaiian Electric file an application for a general rate case every three years.
On November 15, 2017, Hawaiian Electric and the Consumer Advocate filed a Stipulated Settlement Letter indicating that
it had resolved all issues in this proceeding, except for the narrow issue on whether the stipulated ROACE should be reduced
from 9.75% (by up to 25 basis points) based solely on the impact of decoupling. Hawaiian Electric and the Consumer Advocate
also agreed to certain revisions to the ECAC tariff, including increasing the LSFO target sales heat rate, the pass-through of
minor energy generation for 100% fuel recovery, and the removal of target heat rates for the company-owned minor energy
composite costs for diesel and biodiesel fuel.
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 ROR of
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 (estimated to be approximately $6 million in revenue requirement) the pension regulatory asset (and
increased the post-retirement benefits other than pension (OPEB) regulatory liability) (net pension regulatory asset) that have
accrued under the PUC-approved tracking mechanisms since Hawaiian Electric’s last base rate increase in 2011 and the
corresponding amortization expense, based on the PUC’s rationale that by Hawaiian Electric’s request to forego a base rate
increase in the 2014 test year rate case, Hawaiian Electric relinquished a part of the recovery of the net pension regulatory asset
that would have been recovered as a result of the 2014 rate case; (2) reduced (estimated to be approximately $5 million in
revenue requirement) the pension contribution regulatory asset established in 2011 by $17.2 million and the corresponding
amortization expense, based on a finding that Hawaiian Electric should have begun amortizing the regulatory asset on July 22,
2011, the date of the interim rate increase for Hawaiian Electric’s 2011 test year rate case; 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. The interim D&O indicated that the PUC intends to further review Hawaiian
Electric’s ROACE, Hawaiian Electric’s change in methodology for allocation of indirect costs, modifications to the ECAC and
the components of target revenues used in the decoupling mechanism in the remainder of the proceeding.
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 11, 2018, the PUC issued an amended procedural order, which narrowed the statement of issues for the
remainder of the proceeding and included the issue of what adjustments are necessary as a result of the Tax Cuts and Jobs Act
(Tax Act). Evidentiary hearings are now scheduled for March 12 to 16, 2018.
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, to be effective on
February 16, 2018.
On February 14, 2018, the Parties and Participants filed simultaneous testimonies on the amended statement of issues.
Hawaiian Electric’s testimonies proposed an increase of $15.6 million over revenues at current effective rates, which reflected
an ROACE of 9.75%, an alternative proposed treatment of the pension contributions regulatory asset and the reduction of the
corporate income tax rate from 35% to 21% due to the Tax Act, and excluded any disallowance of baseline plant.
Maui Electric consolidated 2015 and 2018 test year rate cases. On December 30, 2014, Maui Electric submitted its
2015 test year rate case filing, proposing no change to its base rates. On June 9, 2017, Maui Electric filed a notice of intent with
the PUC to file a general rate case application by December 30, 2017 for a 2018 test year. On August 4, 2017, the PUC issued
an order consolidating the Maui Electric filings for the 2015 and 2018 test year rate cases. Similar to the PUC’s conclusion
regarding Hawaiian Electric’s 2014 rate case filing, the order also found and concluded that Maui Electric’s 2015 rate case
filing did not comply with the Mandatory Triennial Rate Case Cycle requirement in the decoupling order that Maui Electric file
an application for a general rate case every three years. The order further stated that the PUC is not initiating an investigation/
enforcement proceeding against Maui Electric regarding its compliance with the decoupling order, and the transfer and
consolidation of Maui Electric’s 2015 rate case with the 2018 rate case is intended to ensure that ratepayers receive the
attendant benefits of Maui Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2015 test
year. The order stated that: “[T]he determination and disposition of any rates, accounts, adjustment mechanisms, and practices
that would have been subject to review in the context of a 2015 test year rate case proceeding are subject to appropriate
adjustment based on evidence and findings in the consolidated rate case proceeding.”
On October 12, 2017, Maui Electric filed its 2018 test year rate case application with the PUC for a general rate increase of
$30.1 million over revenues at current effective rates (for a 9.3% increase in revenues) based on a 2018 test year and an 8.05%
rate of return (which incorporates a ROACE of 10.6% and a capital structure that includes a 56.9% common equity
capitalization) on a $473 million rate base. The requested rate increase is primarily to pay for operating costs, including system
upgrades to increase reliability, integrate more renewable energy, and improve customer service. Further, Maui Electric
requested that if a decision in a docket (filed in December 2016) seeking approval of new depreciation rates is rendered prior to
new rates being established in the Maui Electric 2018 test year rate case, the new electric rates be based on the depreciation
rates as a result of that docket. If the proposed depreciation rates are used to calculate Maui Electric’s 2018 test year revenue
requirement, the requested revenue increase would be $46.6 million (14.3%) over revenues at current effective rates.
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
On December 26, 2017, the PUC issued a procedural schedule that includes Maui Electric and the Consumer Advocate
submitting statements of probable entitlement on June 25, 2018, an evidentiary hearing from July 16 to 20, 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 of $19.3 million, based on an 8.44% rate of return (which incorporated a ROACE of
10.60%).
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.
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).
In accordance with the order, on January 31, 2018, the Utilities filed estimated impacts of the Tax Act. The filing stated
that the lower corporate income tax rate would decrease the Utilities’ income tax expense starting in 2018 and accordingly
reduce the income tax expense, net of rate base impacts, in revenue requirements by approximately $28.0 million for Hawaiian
Electric, $6.6 million for Hawaii Electric Light, and $2.5 million for Maui Electric. The filing stated that the Utilities would
propose reflecting the reduction in income tax expense into rates through the Hawaiian Electric 2017 rate case interim increase,
the Hawaii Electric Light 2016 rate case interim increase, and through a separate sur-credit in advance of the interim D&O in
the Maui Electric 2018 rate case. The filing further provided estimates of the impacts on revenue requirements due to the
amortization of the credit for excess accumulated deferred income taxes (ADIT) and the offsetting rate base impact of a
decrease in ADIT from the loss of bonus depreciation and the loss of the exclusion from taxability of contributions in aid of
construction received from governmental entities (included in the income tax expense impact above). The Utilities indicated
that they will track all of these impacts and begin to roll them into rates at a future date, when the methodology of the return to
customers is decided. The Utilities will consider additional tax items as the Internal Revenue Service and Joint Committee on
Taxation issue additional guidance.
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 HECO Capital Trust III (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' Consolidated Statements of
Capitalization) and (c) relating to the trust preferred securities of Trust III (see above under unconsolidated variable interest
entities). 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.
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2017
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Total expenses
Operating income
Allowance for equity funds used during
construction
Equity in earnings of subsidiaries
Interest expense and other charges, net
Allowance for borrowed funds used during
construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian
Electric
Preferred stock dividends of Hawaiian
Electric
Hawaiian
Electric
$ 1,598,504
Hawaii
Electric
Light
333,467
Maui
Electric
325,678
Other
subsidiaries
—
Consolidating
adjustments
(83) [1]
Hawaiian
Electric
Consolidated
2,257,566
$
408,204
454,189
279,440
130,889
152,933
1,425,655
172,849
10,896
38,057
(48,277)
4,089
177,614
56,583
121,031
—
63,894
87,772
66,277
38,741
31,184
287,868
45,599
554
—
(11,799)
238
34,592
13,912
20,680
534
115,670
44,673
72,193
23,154
30,832
286,522
39,156
1,033
—
(9,644)
451
30,996
12,704
18,292
381
121,031
20,146
17,911
1,080
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(83)
—
(38,057) [2]
83 [1]
—
(38,057)
—
(38,057)
—
(38,057)
—
587,768
586,634
417,910
192,784
214,949
2,000,045
257,521
12,483
—
(69,637)
4,778
205,145
83,199
121,946
915
121,031
1,080
(38,057)
$
119,951
Net income for common stock
$
119,951
20,146
17,911
Consolidating statement of comprehensive income
Year ended December 31, 2017
(in thousands)
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income for common stock
$
119,951
20,146
17,911
—
(38,057)
$
119,951
Other comprehensive income (loss), net of
taxes:
Derivatives qualified as cash flow hedges:
Reclassification adjustment to net income,
net of taxes
Retirement benefit plans:
Net gains arising during the period, net of
taxes
Adjustment for amortization of prior
service credit and net losses recognized
during the period in net periodic benefit
cost, net of tax benefits
Reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets, net of taxes
Other comprehensive income (loss), net of
taxes
Comprehensive income attributable to
common shareholder
454
—
—
63,105
3,093
7,329
14,477
1,903
1,619
(78,724)
(4,994)
(9,003)
(688)
2
(55)
$
119,263
20,148
17,856
—
—
—
—
—
—
—
454
(10,422) [1]
63,105
(3,522) [1]
14,477
13,997 [1]
(78,724)
53
(688)
(38,004)
$
119,263
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2016
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Total expenses
Operating income
Allowance for equity funds used
during construction
Equity in earnings of subsidiaries
Interest expense and other charges, net
Allowance for borrowed funds used during
construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian
Electric
Preferred stock dividends of Hawaiian Electric
Net income for common stock
$
Hawaiian
Electric
$ 1,474,384
Hawaii
Electric
Light
311,385
Maui
Electric
308,705
Other
subsidiaries
—
Consolidating
adjustments
(106) [1]
Hawaiian
Electric
Consolidated
2,094,368
$
305,359
431,009
273,176
126,086
141,615
1,277,245
197,139
6,659
42,391
(45,839)
2,484
202,834
59,437
143,397
—
143,397
1,080
142,317
55,094
81,018
63,897
37,797
29,017
266,823
44,562
765
—
(11,555)
294
34,066
12,277
21,789
534
21,255
—
21,255
94,251
50,713
68,460
23,178
29,230
265,832
42,873
901
—
(9,536)
366
34,604
13,087
21,517
381
21,136
—
21,136
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(106)
—
(42,391) [2]
106 [1]
—
(42,391)
—
(42,391)
—
(42,391)
—
(42,391)
$
454,704
562,740
405,533
187,061
199,862
1,809,900
284,468
8,325
—
(66,824)
3,144
229,113
84,801
144,312
915
143,397
1,080
142,317
Consolidating statement of comprehensive income
Year ended December 31, 2016
(in thousands)
Hawaiian
Electric
Hawaii
Electric Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income for common stock
$ 142,317
21,255
21,136
—
(42,391)
$
142,317
Other comprehensive income (loss), net of
taxes:
Derivatives qualified as cash flow hedges:
Effective portion of foreign currency hedge
net unrealized losses arising during the
period, net of tax benefits
Reclassification adjustment to net income, net
of taxes
Retirement benefit plans:
Net losses arising during the period, net of
tax benefits
Adjustment for amortization of prior service
credit and net losses recognized during the
period in net periodic benefit cost, net of
tax benefits
Reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets, net of taxes
Other comprehensive loss, net of tax benefits
Comprehensive income attributable to common
(281)
(173)
—
—
—
—
(42,631)
(5,141)
(5,447)
13,254
1,718
1,549
28,584
(1,247)
3,269
(154)
3,852
(46)
shareholder
$ 141,070
21,101
21,090
126
—
—
—
—
—
—
—
—
—
(281)
(173)
10,588 [1]
(42,631)
(3,267) [1]
13,254
(7,121) [1]
200
28,584
(1,247)
(42,191)
$
141,070
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2015
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Total expenses
Operating income
Allowance for equity funds used
during construction
Equity in earnings of subsidiaries
Interest expense and other charges, net
Allowance for borrowed funds used during
construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian
Electric
Preferred stock dividends of Hawaiian Electric
Net income for common stock
$
Hawaiian
Electric
$ 1,644,181
Hawaii
Electric
Light
345,549
Maui
Electric
345,517
Other
subsidiaries
—
Consolidating
adjustments
(81) [1]
Hawaiian
Electric
Consolidated
2,335,166
$
458,069
440,983
284,583
117,682
156,871
1,458,188
185,993
5,641
42,920
(45,899)
1,967
190,622
53,828
136,794
—
136,794
1,080
135,714
71,851
97,503
63,098
37,250
32,312
302,014
43,535
604
—
(10,773)
215
33,581
12,292
21,289
534
20,755
—
20,755
124,680
55,610
65,408
22,448
32,702
300,848
44,669
683
—
(9,779)
275
35,848
13,302
22,546
381
22,165
—
22,165
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(81)
—
(42,920) [2]
81 [1]
—
(42,920)
—
(42,920)
—
(42,920)
—
(42,920)
$
654,600
594,096
413,089
177,380
221,885
2,061,050
274,116
6,928
—
(66,370)
2,457
217,131
79,422
137,709
915
136,794
1,080
135,714
Consolidating statement of comprehensive income
Year ended December 31, 2015
(in thousands)
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income for common stock
$ 135,714
20,755
22,165
—
(42,920)
$
135,714
Other comprehensive income (loss), net of
taxes:
Retirement benefit plans:
Net gains (losses) arising during the period,
net of taxes
Adjustment for amortization of prior service
credit and net losses recognized during the
period in net periodic benefit cost, net of
tax benefits
Reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets, net of tax benefits
Other comprehensive income, net of taxes
Comprehensive income attributable to common
5,638
(2,710)
(1,352)
20,381
2,728
2,503
(25,139)
880
104
122
(1,107)
44
shareholder
$ 136,594
20,877
22,209
—
—
—
—
—
4,062 [1]
5,638
(5,231) [1]
20,381
1,003 [1]
(25,139)
(166)
880
(43,086)
$
136,594
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hawaiian
Electric
Hawaii
Electric Light Maui Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian Electric
Consolidated
Consolidating balance sheet
December 31, 2017
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less
accumulated depreciation
Total property, plant and equipment, net
Investment in wholly-owned subsidiaries, at equity
Current assets
Cash and cash equivalents
Advances to affiliates
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization
Common stock equity
Cumulative preferred stock–not subject to
mandatory redemption
Long-term debt, net
Total capitalization
Current liabilities
Current portion of long-term debt
Short-term borrowings-non-affiliate
Short-term borrowings-affiliate
Accounts payable
Interest and preferred dividends payable
Taxes accrued
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other postretirement
benefit plans liability
Other
Total deferred credits and other liabilities
Contributions in aid of construction
$
43,972
6,189
3,016
4,492,568
1,299,920
1,154,075
(1,451,612)
(528,024)
(496,716)
245,995
3,330,923
5,933
3,336,856
557,013
2,059
—
86,987
77,176
11,376
64,972
28,325
17,928
76,203
11,922
790,007
115
790,122
—
4,025
—
22,510
15,940
2,268
8,698
8,041
4,514
5,038
365,026
71,034
25,322
685,697
1,532
687,229
—
6,332
12,000
18,392
13,938
1,210
13,203
18,031
2,913
7,149
93,168
557,464
122,783
100,660
436
59,721
617,621
77
16,234
139,094
$ 4,876,516
1,000,250
98
14,963
115,721
896,118
$ 1,845,283
286,647
270,265
22,293
924,979
2,792,555
7,000
202,701
496,348
5,000
190,836
466,101
10,992
8,993
29,978
4,999
12,000
121,328
15,677
133,839
607
43,121
361,549
281,223
613,329
59,039
340,983
61,738
1,356,312
366,100
—
—
17,855
4,174
34,950
1,245
9,818
79,034
56,955
169,139
16,167
66,447
19,276
327,984
96,884
—
—
20,427
2,735
30,312
1,549
14,197
78,213
55,863
94,901
15,163
65,518
17,675
249,120
102,684
896,118
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
—
101
—
—
—
—
101
101
—
—
101
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(557,013) [2]
—
(12,000) [1]
—
—
(7,691) [1]
—
—
—
—
(19,691)
—
—
—
—
$
53,177
6,946,563
(2,476,352)
283,239
4,806,627
7,580
4,814,207
—
12,517
—
127,889
107,054
7,163
86,873
54,397
25,355
88,390
509,638
780,907
611
90,918
872,436
(576,704)
$
6,196,281
(557,013) [2]
$
1,845,283
—
—
(557,013)
34,293
1,318,516
3,198,092
—
—
(12,000) [1]
—
(11) [1]
—
—
(7,680) [1]
(19,691)
—
—
—
—
—
—
—
49,963
4,999
—
159,610
22,575
199,101
3,401
59,456
499,105
394,041
877,369
90,369
472,948
98,689
1,933,416
565,668
101
(576,704)
$
6,196,281
Total capitalization and liabilities
$ 4,876,516
1,000,250
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Consolidating balance sheet
December 31, 2016
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less
accumulated depreciation
Total property, plant and equipment, net
Investment in wholly-owned subsidiaries, at equity
Current assets
Cash and cash equivalents
Advances to affiliates
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization
Common stock equity
Cumulative preferred stock–not subject to mandatory
redemption
Long-term debt, net
Total capitalization
Current liabilities
Short-term borrowings-affiliate
Accounts payable
Interest and preferred dividends payable
Taxes accrued
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other postretirement
benefit plans liability
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total capitalization and liabilities
$ 4,720,158
$
43,956
6,181
3,016
4,241,060
1,255,185
1,109,487
(1,382,972)
(507,666)
(478,644)
180,194
3,082,238
12,510
766,210
5,760
115
3,087,998
766,325
550,946
—
61,388
—
86,373
65,821
7,652
47,239
29,928
16,502
60,185
10,749
3,500
20,055
13,564
2,445
8,229
7,380
5,352
3,483
375,088
74,757
19,038
652,897
1,532
654,429
—
2,048
10,000
17,260
12,308
1,416
10,962
16,371
2,179
2,364
74,908
662,232
120,863
108,324
151
43,743
706,126
$ 4,720,158
23
13,573
134,459
975,541
34
13,592
121,950
851,287
$ 1,799,787
291,291
259,554
22,293
915,437
2,737,517
7,000
213,703
511,994
5,000
190,120
454,674
13,500
86,369
15,761
120,176
—
41,352
277,158
524,433
281,112
57,844
444,458
49,191
1,357,038
348,445
—
18,126
4,206
28,100
2,219
7,637
60,288
—
13,319
2,882
25,387
1,543
12,501
55,632
108,052
100,911
31,845
15,123
80,263
14,969
243,111
97,870
851,287
93,974
15,994
75,005
13,024
306,049
97,210
975,541
129
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(550,946) [2]
—
(13,500) [1]
—
—
(6,280) [1]
—
—
(933) [3]
—
101
(20,713)
—
—
—
—
—
—
—
—
$
53,153
6,605,732
(2,369,282)
211,742
4,501,345
7,407
4,508,752
—
74,286
—
123,688
91,693
5,233
66,430
53,679
23,100
66,032
504,141
891,419
208
70,908
962,535
101
(571,659)
$
5,975,428
101
—
—
101
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(550,946) [2]
$
1,799,787
—
—
(550,946)
(13,500) [1]
—
(11) [1]
(933) [3]
—
(6,269) [1]
(20,713)
263 [1]
—
—
—
(263) [1]
—
—
34,293
1,319,260
3,153,340
—
117,814
22,838
172,730
3,762
55,221
372,365
733,659
406,931
88,961
599,726
76,921
1,906,198
543,525
101
(571,659)
$
5,975,428
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statements of changes in common stock equity
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
(in thousands)
Balance, December 31, 2014
Net income for common stock
Other comprehensive income, net of taxes
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2015
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2016
Net income for common stock
Other comprehensive income (loss), net of taxes
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2017
Hawaiian
Electric
$ 1,682,144
135,714
880
(8)
Hawaii
Electric
Light
281,846
20,755
122
—
256,692
22,165
44
(1)
(90,405)
(10,021)
(15,175)
$ 1,728,325
142,317
(1,247)
23,991
292,702
21,255
263,725
21,136
(154)
(5)
(46)
—
(93,599)
(22,507)
(25,261)
$ 1,799,787
119,951
(688)
14,000
291,291
20,146
2
4
259,554
17,911
(55)
4,801
(87,767)
(24,796)
(11,946)
101
(538,639) $
1,682,144
—
—
—
—
(42,920)
135,714
(166)
1
880
(8)
25,196
(90,405)
101
(556,528) $
1,728,325
—
—
—
—
(42,391)
200
5
47,768
142,317
(1,247)
23,991
(93,599)
101
(550,946) $
1,799,787
—
—
—
—
(38,057)
53
(4,805)
36,742
119,951
(688)
14,000
(87,767)
$ 1,845,283
286,647
270,265
101
(557,013) $
1,845,283
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2017
(in thousands)
Cash flows from operating activities
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income
$
121,031
20,680
18,292
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of subsidiaries
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Deferred income taxes
Allowance for equity funds used during
construction
Other
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
Increase in accrued unbilled revenues
Increase in fuel oil stock
Decrease (increase) in materials and supplies
Increase in regulatory assets
Increase (decrease) in accounts payable
Change in prepaid and accrued income taxes, tax
credits and revenue taxes
Increase (decrease) in defined benefit pension and
other postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from (to) affiliates
Other
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Funds transferred for redemption of special purpose
revenue bonds
Net increase in short-term borrowings from non-
affiliates and affiliate with original maturities of
three months or less
Other
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
$
(38,157)
36,867
130,889
2,398
26,342
(10,896)
(1,154)
1,817
(11,355)
(17,733)
1,603
(8,395)
23,519
—
—
38,741
3,225
3,954
(554)
430
(359)
(2,376)
(469)
(661)
(4,007)
(3,547)
—
—
23,154
2,875
8,004
(1,033)
(342)
45
(1,630)
(2,241)
(1,660)
(4,854)
5,762
16,716
7,961
5,362
709
(16,213)
257,988
52
(433)
(157)
166
62,637
51,743
(339,279)
(52,077)
(50,242)
57,527
—
(1,711)
4,293
3,500
649
2,913
(2,000)
400
(283,463)
(43,635)
(48,929)
(87,767)
(24,796)
(11,946)
(1,080)
14,000
(534)
—
202,000
28,000
(381)
4,800
85,000
(162,000)
(28,000)
(75,000)
3,499
(2,506)
(33,854)
(59,329)
61,388
2,059
—
(396)
(25,726)
(6,724)
10,749
4,025
—
(1,003)
1,470
4,284
2,048
6,332
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
101
(38,057) [2]
$
121,946
38,057 [2]
(100)
(36,742) [2]
—
—
(263) [1]
—
—
1,411 [1]
—
—
—
—
—
125
192,784
8,498
38,037
(12,483)
(1,066)
2,914
(15,361)
(20,443)
(718)
(17,256)
25,734
(177) [1]
29,862
—
(1,411) [1]
(37,182)
—
—
(1,500) [1]
[1],
[2]
5,240
3,740
604
(17,891)
335,186
(441,598)
64,733
—
4,578
(372,287)
36,742 [2]
(87,767)
—
(4,800) [2]
—
—
1,500 [1]
—
33,442
—
—
—
$
(1,995)
14,000
315,000
(265,000)
4,999
(3,905)
(24,668)
(61,769)
74,286
12,517
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2016
(in thousands)
Cash flows from operating activities
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
101
(42,391) [2]
$
144,312
42,391 [2]
(100)
(47,768) [2]
—
—
(23) [1]
—
—
(2,682) [1]
—
—
—
—
—
23 [1]
—
2,682 [1]
(47,768)
—
—
(9,500) [1]
—
(9,500)
75
187,061
6,935
74,386
(8,325)
(3,700)
8,551
(7,184)
4,786
750
(18,273)
(10,614)
2,123
484
(11,350)
369,917
(320,437)
30,100
—
2,138
(288,199)
47,768 [2]
(93,599)
—
—
—
9,500 [1]
—
57,268
—
—
—
$
(1,995)
24,000
40,000
—
(287)
(31,881)
49,837
24,449
74,286
Net income
$
143,397
21,789
21,517
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of subsidiaries
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Deferred income taxes
Allowance for equity funds used during
construction
Other
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
Increase in accrued unbilled revenues
Decrease in fuel oil stock
Decrease (increase) in materials and supplies
Increase in regulatory assets
Increase (decrease) in accounts payable
Change in prepaid and accrued income taxes, tax
credits and revenue taxes
Increase (decrease) in defined benefit pension and
other postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from (to) affiliates
Other
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
(42,491)
47,843
126,086
2,979
54,721
(6,659)
(2,517)
10,175
(5,741)
2,216
993
(16,161)
(10,247)
2,933
599
(11,682)
296,444
—
—
37,797
1,817
7,027
(765)
(750)
(718)
(1,033)
81
(515)
(1,243)
768
—
—
23,178
2,139
12,661
(901)
(433)
1,776
(410)
2,489
272
(869)
(1,135)
2,645
(3,478)
53
(78)
66,875
(168)
(2,272)
54,366
(236,425)
(51,344)
(32,668)
23,611
—
1,932
3,412
12,000
175
3,077
(2,500)
31
(210,882)
(35,757)
(32,060)
(93,599)
(22,507)
(25,261)
(534)
(381)
—
—
—
(10)
—
—
—
(1)
(25,643)
(3,337)
5,385
2,048
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from the issuance of common stock
Proceeds from the issuance of long-term debt
Net decrease in short-term borrowings from non-
affiliates and affiliate with original maturities of
three months or less
Other
(1,080)
24,000
40,000
(9,500)
(276)
Net cash used in financing activities
(40,455)
(23,051)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
$
45,107
16,281
61,388
8,067
2,682
10,749
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2015
(in thousands)
Cash flows from operating activities
Hawaiian
Electric
Hawaii
Electric Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income
$
136,794
21,289
22,546
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of subsidiaries
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Impairment of assets
Deferred income taxes
Allowance for equity funds used during
construction
Other
Changes in assets and liabilities:
Decrease in accounts receivable
Decrease in accrued unbilled revenues
Decrease in fuel oil stock
Decrease (increase) in materials and supplies
Decrease (increase) in regulatory assets
Decrease in accounts payable
Change in prepaid and accrued income taxes,
tax credits and revenue taxes
Decrease in defined benefit pension and other
postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from (to) affiliates
Other
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
(43,020)
25,296
117,682
4,678
4,573
53,338
(5,641)
8,687
15,652
29,733
25,060
2,233
(20,356)
(42,751)
—
—
37,250
2,124
724
8,295
(604)
(1,949)
3,420
4,593
5,490
(201)
(3,930)
(6,425)
—
—
22,448
2,137
724
13,707
(683)
(222)
4,617
5,767
4,280
789
104
(5,379)
(50,382)
(6,166)
(6,548)
870
(24,197)
238,249
(161)
(3,545)
60,204
416
(4,554)
60,149
(267,621)
(48,645)
(33,895)
35,955
16,100
924
2,160
(15,500)
132
2,124
(7,500)
84
(214,642)
(61,853)
(39,187)
(90,405)
(10,021)
(15,175)
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from the issuance of long-term debt
Net increase (decrease) in short-term borrowings
from non-affiliates and affiliate with original
maturities of three months or less
Other
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
$
(1,080)
50,000
23,000
(1,257)
(19,742)
3,865
12,416
16,281
(534)
25,000
(10,500)
(226)
3,719
2,070
612
2,682
(381)
5,000
(5,600)
(54)
(16,210)
4,752
633
5,385
Explanation of consolidating adjustments on consolidating schedules:
[1] Eliminations of intercompany receivables and payables and other intercompany transactions.
[2] Elimination of investment in subsidiaries, carried at equity.
[3] Reclassification of accrued income taxes for financial statement presentation.
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
101
133
(42,920) [2]
$
137,709
42,920 [2]
(100)
(25,196) [2]
—
—
—
286 [1]
—
—
38 [1]
—
—
—
—
—
100
177,380
8,939
6,021
75,626
(6,928)
6,516
23,727
40,093
34,830
2,821
(24,182)
(54,555)
—
(63,096)
—
(324) [1]
(25,196)
—
—
6,900 [1]
—
6,900
1,125
(32,620)
333,406
(350,161)
40,239
—
1,140
(308,782)
25,196 [2]
(90,405)
—
—
(6,900) [1]
—
18,296
—
—
—
$
(1,995)
80,000
—
(1,537)
(13,937)
10,687
13,762
24,449
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4· Bank segment (HEI only)
Selected financial information
American Savings Bank, F.S.B.
Statements of Income Data
Years ended December 31
(in thousands)
Interest and dividend income
Interest and fees on loans
Interest and dividends on investment securities
Total interest and dividend income
Interest expense
Interest on deposit liabilities
Interest on other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Fees from other financial services
Fee income on deposit liabilities
Fee income on other financial products
Bank-owned life insurance
Mortgage banking income
Gains on sale of investment securities, net
Other income, net
Total noninterest income
Noninterest expense
Compensation and employee benefits
Occupancy
Data processing
Services
Equipment
Office supplies, printing and postage
Marketing
FDIC insurance
Other expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
134
2017
2016
2015
$
207,255
$
199,774
$
184,782
28,823
236,078
9,660
2,496
12,156
223,922
10,901
213,021
22,796
22,204
7,205
5,539
2,201
—
1,617
61,562
95,751
16,699
13,280
10,994
7,232
6,182
3,501
2,904
19,324
175,867
98,716
31,719
19,184
218,958
7,167
5,588
12,755
206,203
16,763
189,440
22,384
21,759
8,707
4,637
6,625
598
2,256
66,966
90,117
16,321
13,030
11,054
6,938
6,075
3,489
3,543
18,487
169,054
87,352
30,073
$
66,997
$
57,279
$
15,120
199,902
5,348
5,978
11,326
188,576
6,275
182,301
22,211
22,368
8,094
4,078
6,330
—
4,750
67,831
90,518
16,365
12,103
10,204
6,577
5,749
3,463
3,274
18,067
166,320
83,812
29,082
54,730
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation to amounts per HEI Consolidated Statements of Income*:
Years ended December 31
Interest and dividend income
Noninterest income
*Revenues-Bank
Total interest expense
Provision for loan losses
Total noninterest expense
*Expenses-Bank
2017
2016
2015
$
236,078
$
218,958
$
199,902
61,562
297,640
12,156
10,901
175,867
198,924
66,966
285,924
12,755
16,763
169,054
198,572
67,831
267,733
11,326
6,275
166,320
183,921
Income before income taxes/*Operating income-Bank
$
98,716
$
87,352
$
83,812
Statements of Comprehensive Income Data
Years ended December 31
(in thousands)
Net income
Other comprehensive income (loss), net of taxes:
Net unrealized losses on available-for sale investment securities:
Net unrealized losses on available-for sale investment securities arising during the
period, net of tax benefits of $2,886, $3,763 and $1,541 for 2017, 2016 and 2015,
respectively
Reclassification adjustment for net realized gains included in net income, net of
taxes of nil, $238 and nil for 2017, 2016 and 2015, respectively
Retirement benefit plans:
Net gains arising during the period, net of taxes of nil, nil and $59 for 2017, 2016
and 2015, respectively
Adjustment for amortization of prior service credit and net losses recognized during
the period in net periodic benefit cost, net of tax benefits of $812, $566 and
$1,011 for 2017, 2016 and 2015, respectively
Other comprehensive loss, net of tax benefits
Comprehensive income
2017
2016
2015
$
66,997
$
57,279
$
54,730
(4,370)
(5,699)
(2,334)
—
—
(360)
—
—
90
1,231
(3,139)
857
(5,202)
1,531
(713)
$
63,858
$
52,077
$
54,017
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Balance Sheets Data
December 31
(in thousands)
Assets
Cash and due from banks
Interest-bearing deposits
Restricted cash
Investment securities
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (fair value of $44,412 and nil, respectively)
Stock in Federal Home Loan Bank, at cost
Loans receivable held for investment
Allowance for loan losses
Net loans
Loans held for sale, at lower of cost or fair value
Other
Goodwill
Total assets
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing
Deposit liabilities–interest-bearing
Other borrowings
Other
Total liabilities
Commitments and contingencies
Common stock
Additional paid in capital
Retained earnings
2017
2016
$
140,934
$
137,083
93,165
—
1,401,198
44,515
9,706
4,670,768
(53,637)
4,617,131
11,250
398,570
82,190
52,128
1,764
1,105,182
—
11,218
4,738,693
(55,533)
4,683,160
18,817
329,815
82,190
$ 6,798,659
$ 6,421,357
$ 1,760,233
4,130,364
190,859
110,356
6,191,812
1
345,018
292,957
$ 1,639,051
3,909,878
192,618
101,635
5,843,182
1
342,704
257,943
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities
Retirement benefit plans
Total shareholder’s equity
Total liabilities and shareholder’s equity
$
(14,951)
$
(7,931)
(16,178)
(31,129)
(14,542)
(22,473)
606,847
$ 6,798,659
578,175
$ 6,421,357
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31
(in thousands)
Other assets
Bank-owned life insurance
Premises and equipment, net
Prepaid expenses
Accrued interest receivable
Mortgage-servicing rights
Low-income housing investments
Real estate acquired in settlement of loans, net
Other
Other liabilities
Accrued expenses
Federal and state income taxes payable
Cashier’s checks
Advance payments by borrowers
Other
2017
2016
$
$
$
$
148,775
136,270
3,961
18,724
8,639
59,016
133
23,052
398,570
39,312
3,736
27,000
10,245
30,063
110,356
$
$
$
$
143,197
90,570
3,348
16,824
9,373
47,081
1,189
18,233
329,815
36,754
4,728
24,156
10,335
25,662
101,635
Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the
beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the
policies and insurance proceeds paid to ASB upon an insured’s death.
The increase in premises and equipment, net was due to the expenditures of $32.7 million for the new campus project.
Investment securities. The major components of investment securities were as follows:
Gross
Gross
Estimated
Less than 12 months
12 months or longer
Amortized
cost
unrealized
gains
unrealized
losses
fair
value
Number
of issues
Fair value
Amount
Number
of issues
Fair value
Amount
Gross unrealized losses
$ 185,891
$
438
$
(2,031) $
184,298
15
$ 83,137
$
(825)
8
$
62,296
$
(1,206)
Mortgage revenue bond
15,427
1,220,304
793
—
(19,624)
1,201,473
—
15,427
$ 1,421,622
$
1,231
$ (21,655) $ 1,401,198
$
$
44,515
44,515
$
$
1
1
$
$
(104) $
44,412
(104) $
44,412
67
—
82
2
2
653,635
(6,839)
—
—
$ 736,772
$ (7,664)
$ 35,744
$ 35,744
$
$
(104)
(104)
77
—
85
—
—
459,912
(12,785)
—
—
$ 522,208
$ (13,991)
$
$
— $
— $
—
—
$ 193,515
$
920
$
(2,154) $
192,281
18
$ 123,475
$ (2,010)
1
$
3,485
$
(144)
909,408
15,427
1,742
(13,676)
897,474
—
—
15,427
88
—
709,655
(12,143)
—
—
$ 1,118,350
$
2,662
$ (15,830) $ 1,105,182
106
$ 833,130
$ (14,153)
13
—
14
47,485
(1,533)
—
—
$
50,970
$
(1,677)
ASB did not have any investment securities classified as held-to-maturity as of December 31, 2016.
ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2017,
represent an OTTI. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the
137
(dollars in thousands)
December 31, 2017
Available-for-sale
U.S. Treasury and federal
agency obligations
Mortgage-related
securities- FNMA,
FHLMC and GNMA
Held-to-maturity
Mortgage-related
securities- FNMA,
FHLMC and GNMA
December 31, 2016
Available-for-sale
U.S. Treasury and federal
agency obligations
Mortgage-related
securities- FNMA,
FHLMC and GNMA
Mortgage revenue bond
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows
of the U.S. Treasury, federal agency obligations and mortgage-related securities are backed by the full faith and credit guaranty
of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery
of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities.
ASB did not recognize OTTI for 2017, 2016 and 2015.
U.S. Treasury, federal agency obligations, and the mortgage revenue bond have contractual terms to maturity. Mortgage-
related securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected
maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.
The contractual maturities of investment securities were as follows:
December 31, 2017
(in thousands)
Available-for-sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-related securities-FNMA, FHLMC and GNMA
Held-to-maturity
Mortgage-related securities-FNMA, FHLMC and GNMA
Amortized
Cost
Fair
value
$
5,000
$
87,404
80,161
28,753
4,992
87,020
79,358
28,355
201,318
199,725
1,220,304
1,201,473
$ 1,421,622
$ 1,401,198
$
$
44,515
44,515
$
$
44,412
44,412
The proceeds, gross gains and losses from sales of available-for-sale investment securities were as follows:
Years ended December 31
2017
2016
2015
(in millions)
Proceeds
Gross gains
Gross losses
Interest income from taxable and non-taxable investment securities were as follows:
Years ended December 31
(in thousands)
Taxable
Non-taxable
$
— $
16.4
$
—
—
0.6
—
—
—
—
2017
2016
2015
$ 28,398
$ 19,166
$ 15,120
425
18
—
$ 28,823
$ 19,184
$ 15,120
ASB pledged securities with a market value of approximately $411.4 million and $277.1 million as of December 31, 2017
and 2016, respectively, as collateral for public funds and other deposits, automated clearinghouse transactions with Bank of
Hawaii, borrowing at the discount window of the Federal Reserve Bank of San Francisco, and deposits in ASB’s bankruptcy
account with the Federal Reserve Bank of San Francisco. As of December 31, 2017 and 2016, securities with a carrying value
of $165.1 million and $114.9 million, respectively, were pledged as collateral for securities sold under agreements to
repurchase.
Stock in FHLB. As of December 31, 2017 and 2016, ASB’s stock in FHLB was carried at cost ($9.7 million and $11.2
million, respectively) because it can only be redeemed at par and it is a required investment based on measurements of ASB’s
capital, assets and borrowing levels.
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Periodically and as conditions warrant, ASB reviews its investment in the stock of the FHLB for impairment. ASB
evaluated its investment in FHLB stock for OTTI as of December 31, 2017, consistent with its accounting policy. ASB did not
recognize an OTTI loss for 2017 based on its evaluation of the underlying investment.
Future deterioration in the FHLB's financial position and/or negative developments in any of the factors considered in
ASB's impairment evaluation may result in future impairment losses.
Loans receivable. The components of loans receivable were summarized as follows:
December 31
(in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Total loans
Less: Deferred fees and discounts
Allowance for loan losses
Total loans, net
2017
2016
$
2,118,047
$
2,048,051
733,106
913,052
15,797
108,273
14,910
800,395
863,163
18,889
126,768
16,080
3,903,185
3,873,346
544,828
223,564
692,051
178,222
4,671,577
4,743,619
(809)
(53,637)
(4,926)
(55,533)
$
4,617,131
$
4,683,160
ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property
exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential
properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. ASB
is subject to the risk that the insurance company cannot satisfy the bank's claim on policies.
ASB services real estate loans for investors (principal balance of $1.2 billion, $1.2 billion and $1.5 billion as of
December 31, 2017, 2016 and 2015, respectively), which are not included in the accompanying balance sheets data. ASB
reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan
servicing cost to expense as incurred.
As of December 31, 2017 and 2016, ASB had pledged loans with an amortized cost of approximately $2.4 billion as
collateral to secure advances from the FHLB.
As of December 31, 2017 and 2016, the aggregate amount of loans to directors and executive officers of ASB and its
affiliates and any related interests (as defined in Federal Reserve Board (FRB) Regulation O) of such individuals, was $23.8
million and $22.9 million, respectively. As of December 31, 2017 and 2016, $18.7 million and $19.0 million of the loan
balances, respectively, were to related interests of individuals who are directors of ASB. All such loans were made at ASB’s
normal credit terms.
Allowance for loan losses. As discussed in Note 1, ASB must maintain an allowance for loan losses that is adequate to absorb
estimated probable credit losses associated with its loan portfolio.
139
Charge-offs
Recoveries
Provision
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Financing Receivables:
$
$
$
Charge-offs
Recoveries
Provision
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Financing Receivables:
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for loan losses (balances and changes) and financing receivables were as follows:
Residential
1-4 family
Commercial
real estate
Home equity
line of credit
Residential
land
Commercial
construction
Residential
construction
Commercial
Consumer
Unallo-
cated
Total
(in thousands)
December 31, 2017
Allowance for loan losses:
Beginning balance
$
2,873
$
16,004
$
5,039
$
1,738
$
6,449
$
(826)
157
698
—
—
(14)
308
(210)
482
—
—
(208)
2,189
(1,114)
(1,778)
2,902
$
15,796
$
7,522
$
896
$
4,671
$
12
—
—
—
12
$
16,618
$
6,800
$
— $
55,533
(4,006)
(11,757)
1,852
1,217
(3,613)
14,727
—
—
—
(16,813)
4,016
10,901
$
10,851
$ 10,987
$
— $
53,637
1,248
$
65
$
647
$
47
$
— $
— $
694
$
29
$
2,730
Ending balance
$ 2,118,047
1,654
$
$
15,731
733,106
$
$
6,875
913,052
$
$
849
15,797
$
$
4,671
108,273
$
$
12
$
10,157
$ 10,958
$
— $
50,907
14,910
$
544,828
$ 223,564
$ 4,671,577
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
December 31, 2016
Allowance for loan losses:
$
18,284
$
1,016
$
8,188
$
1,265
$
— $
— $
4,574
$
66
$
33,393
$ 2,099,763
$
732,090
$
904,864
$
14,532
$
108,273
$
14,910
$
540,254
$ 223,498
$ 4,638,184
Beginning balance
$
4,186
$
11,342
$
7,260
$
1,671
$
4,461
$
(639)
421
—
—
(112)
59
(1,095)
4,662
(2,168)
(138)
461
(256)
—
—
1,988
13
—
—
(1)
$
17,208
$
3,897
$
— $
50,038
(5,943)
(7,413)
1,093
4,260
943
9,373
—
—
—
(14,245)
2,977
16,763
2,873
$
16,004
$
5,039
$
1,738
$
6,449
$
12
$
16,618
$
6,800
$
— $
55,533
1,352
$
80
$
215
$
789
$
— $
— $
1,641
$
6
$
4,083
Ending balance
$ 2,048,051
1,521
$
$
15,924
800,395
$
$
4,824
863,163
$
$
949
18,889
$
$
6,449
126,768
$
$
12
$
14,977
$
6,794
$
— $
51,450
16,080
$
692,051
$ 178,222
$ 4,743,619
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
December 31, 2015
Allowance for loan losses:
$
19,854
$
1,569
$
6,158
$
3,629
$
— $
— $
20,539
$
10
$
51,759
$ 2,028,197
$
798,826
$
857,005
$
15,260
$
126,768
$
16,080
$
671,512
$ 178,212
$ 4,691,860
Beginning balance
$
4,662
$
8,954
$
6,982
$
1,875
$
5,471
$
Charge-offs
Recoveries
Provision
(356)
226
(346)
—
—
2,388
(205)
80
403
—
507
(711)
—
—
(1,010)
28
—
—
(15)
$
14,017
$
3,629
$
— $
45,618
(1,074)
(4,791)
2,773
1,492
985
4,074
—
—
—
(6,426)
4,571
6,275
4,186
$
11,342
$
7,260
$
1,671
$
4,461
$
13
$
17,208
$
3,897
$
— $
50,038
1,453
$
— $
442
$
891
$
— $
— $
3,527
$
7
$
6,320
Ending balance
$ 2,069,665
2,733
$
$
11,342
690,561
$
$
6,818
846,294
$
$
780
18,229
$
$
4,461
100,796
$
$
13
$
13,681
$
3,890
$
— $
43,718
14,089
$
758,659
$ 123,775
$ 4,622,068
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
$
22,457
$
1,188
$
3,225
$
5,683
$
— $
— $
21,119
$
13
$
53,685
$ 2,047,208
$
689,373
$
843,069
$
12,546
$
100,796
$
14,089
$
737,540
$ 123,762
$ 4,568,383
140
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Financing Receivables:
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management
with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The
objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so
that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include
commercial, commercial real estate and commercial construction loans.
Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that
loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The
AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which
impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance,
litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the
current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans
have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-
defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may
sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance
as a bankable asset is not warranted.
The credit risk profile by internally assigned grade for loans was as follows:
December 31
(in thousands)
Grade:
2017
2016
Commercial
real estate
Commercial
construction
Commercial
Total
Commercial
real estate
Commercial
construction
Commercial
Total
Pass
$
630,877
$
83,757
$
492,942
$ 1,207,576
$
701,657
$
102,955
$
614,139
$ 1,418,751
Special mention
Substandard
Doubtful
Loss
Total
49,347
52,882
—
—
22,500
2,016
—
—
27,997
23,421
468
—
99,844
78,319
468
—
65,541
33,197
—
—
—
23,813
—
—
25,229
52,683
—
—
90,770
109,693
—
—
$
733,106
$
108,273
$
544,828
$ 1,386,207
$
800,395
$
126,768
$
692,051
$ 1,619,214
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The credit risk profile based on payment activity for loans was as follows:
(in thousands)
December 31, 2017
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total loans
December 31, 2016
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total loans
30-59
days
past due
60-89
days
past due
Greater
than
90 days
Total
past due
Current
Total
financing
receivables
Recorded
investment>
90 days and
accruing
$
1,532
$
1,715
$
5,071
$
8,318
$ 2,109,729
$
2,118,047
$
$
$
—
425
23
—
—
1,825
3,432
—
114
—
—
—
2,025
2,159
—
2,051
625
—
—
730
1,876
—
2,590
648
—
—
4,580
7,467
733,106
910,462
15,149
108,273
14,910
540,248
216,097
733,106
913,052
15,797
108,273
14,910
544,828
223,564
7,237
$
6,013
$
10,353
$
23,603
$ 4,647,974
$
4,671,577
$
5,467
$
2,338
$
3,505
$
11,310
$ 2,036,741
$
2,048,051
$
2,416
1,263
—
—
—
413
1,945
—
381
—
—
—
510
1,001
—
1,342
255
—
—
1,303
963
2,416
2,986
255
—
—
2,226
3,909
797,979
860,177
18,634
126,768
16,080
689,825
174,313
800,395
863,163
18,889
126,768
16,080
692,051
178,222
$
11,504
$
4,230
$
7,368
$
23,102
$ 4,720,517
$
4,743,619
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due, and TDR loans was as follows:
December 31
(in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total nonaccrual loans
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total accruing loans 90 days or more past due
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total troubled debt restructured loans not included above
2017
2016
$
$
$
$
$
$
12,598
$
—
4,466
841
—
—
3,069
2,617
23,591
$
— $
—
—
—
—
—
—
—
— $
10,982
$
1,016
6,584
425
—
—
1,741
66
20,814
$
11,154
223
3,080
878
—
—
6,708
1,282
23,325
—
—
—
—
—
—
—
—
—
14,450
1,346
4,934
2,751
—
—
14,146
10
37,637
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
December 31
(in thousands)
With no related allowance recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
With an allowance recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
2017
Unpaid
principal
balance
Recorded
investment
Related
allowance
Recorded
investment
2016
Unpaid
principal
balance
Related
allowance
$
9,097
$
9,644
$
— $
9,571
$
10,400
$
—
1,496
1,143
—
—
2,328
8
14,072
9,187
1,016
6,692
122
—
—
2,246
58
19,321
—
1,789
1,434
—
—
3,166
8
16,041
9,390
1,016
6,736
122
—
—
2,252
58
19,574
—
—
—
—
—
—
—
—
223
1,500
1,218
—
—
6,299
—
18,811
228
1,900
1,803
—
—
8,869
—
23,200
—
—
—
—
—
—
—
—
—
1,248
10,283
10,486
1,352
65
647
47
—
—
694
29
1,346
4,658
2,411
—
—
1,346
4,712
2,411
—
—
14,240
14,240
10
10
2,730
32,948
33,205
80
215
789
—
—
1,641
6
4,083
18,284
19,034
1,248
19,854
20,886
1,352
1,016
8,188
1,265
—
—
4,574
66
1,016
8,525
1,556
—
—
5,418
66
65
647
47
—
—
694
29
1,569
6,158
3,629
—
—
1,574
6,612
4,214
—
—
20,539
23,109
10
10
80
215
789
—
—
1,641
6
$
33,393
$
35,615
$
2,730
$
51,759
$
56,405
$
4,083
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASB's average recorded investment of, and interest income recognized from, impaired loans were as follows:
December 31
(in thousands)
With no related allowance recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
With an allowance recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
2017
2016
2015
Average
recorded
investment
Interest
income
recognized*
Average
recorded
investment
Interest
income
recognized*
Average
recorded
investment
Interest
income
recognized*
$
9,440
$
316
$
10,136
$
324
$
11,215
$
91
1,976
1,094
—
—
2,776
1
15,378
9,818
1,241
5,045
1,308
—
—
3,691
57
21,160
19,258
1,332
7,021
2,402
—
—
6,467
58
11
101
117
—
—
54
—
599
493
54
251
97
—
—
723
3
1,621
809
65
352
214
—
—
777
3
1,124
1,105
1,518
—
—
8,694
2
22,579
11,589
1,962
3,765
2,964
—
—
16,106
12
36,398
21,725
3,086
4,870
4,482
—
—
24,800
14
—
23
66
—
—
370
—
783
457
15
137
206
—
—
456
—
1,271
781
15
160
272
—
—
826
—
370
484
2,397
—
—
5,185
—
19,651
11,578
1,699
1,597
4,337
—
—
12,507
14
31,732
22,793
2,069
2,081
6,734
—
—
17,692
14
332
74
4
137
—
—
157
—
704
562
—
49
318
—
—
211
—
1,140
894
74
53
455
—
—
368
—
$
36,538
$
2,220
$
58,977
$
2,054
$
51,383
$
1,844
* Since loan was classified as impaired.
Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be
experiencing financial difficulties and ASB grants a concession it would not otherwise consider. When a borrower experiencing
financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to
improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure
a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the
borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an
alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.
ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended
amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants
principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction,
extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance.
Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment
due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan
modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral or
reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications.
Occasionally, additional collateral and/or guaranties are obtained.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the
allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash
flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable
market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the
modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses),
these amounts are charged off against the allowance for loan losses.
Loan modifications that occurred during 2017, 2016, and 2015 and the impact on the allowance for loan losses were as
follows:
(dollars in thousands)
Years ended
December 31, 2017
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
December 31, 2016
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
December 31, 2015
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Outstanding recorded investment
Number of
contracts
Pre-
modification
Post-
modification
Net increase in
ALLL
7
—
46
1
—
—
9
1
$
742
$
750
$
—
3,016
92
—
—
889
59
—
3,002
92
—
—
889
59
64
$
4,798
$
4,792
$
26,937
$
27,052
$
1,756
$
3,131
$
3,245
$
—
3,337
203
—
—
20,266
—
—
3,337
204
—
—
20,266
—
3,594
$
3,668
$
1,500
2,441
218
—
—
2,267
—
1,500
2,441
218
—
—
2,267
—
$
10,020
$
10,094
$
$
$
14
—
36
2
—
—
15
—
67
19
1
39
1
—
—
8
—
68
146
45
—
557
—
—
—
248
27
877
337
—
554
—
—
—
865
—
87
—
370
—
—
—
486
—
943
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loans modified in TDRs that experienced a payment default of 90 days or more in 2017, 2016, and 2015 and for which the
payment default occurred within one year of the modification, were as follows:
Years ended December 31
(dollars in thousands)
2017
2016
2015
Number of
contracts
Recorded
investment
Number of
contracts
Recorded
investment
Number of
contracts
Recorded
investment
Troubled debt restructurings that subsequently defaulted
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
1
—
—
—
—
—
—
—
1
$
222
—
—
—
—
—
—
—
$
222
1
—
—
—
—
—
1
—
2
$
239
— $
—
—
—
—
—
24
—
$
263
—
1
—
—
—
1
—
2
—
—
6
—
—
—
1,056
—
$
1,062
If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation,
adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the
carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR
totaled nil and $2.6 million at December 31, 2017 and 2016, respectively.
The Company had $4.3 million and $3.9 million of consumer mortgage loans collateralized by residential real estate
property that were in the process of foreclosure at December 31, 2017 and 2016, respectively.
Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-
sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests
in these loans other than the servicing rights of certain loans sold.
ASB received $128.0 million, $236.1 million and $275.3 million of proceeds from the sale of residential mortgages in
2017, 2016, and 2015, respectively, and recognized gains on such sales of $2.2 million, $6.6 million, and $6.3 million in 2017,
2016, and 2015, respectively. Repurchased mortgage loans were nil for 2017, 2016 and 2015.
Mortgage servicing fees, a component of other income, net, were $3.0 million, $2.9 million, and $3.5 million for the years
ended December 31, 2017, 2016, and 2015, respectively.
Changes in the carrying value of mortgage servicing rights were as follows:
(in thousands)
December 31, 2017
December 31, 2016
Gross
carrying amount1
Accumulated
amortization1
Valuation allowance
Net
carrying amount
$
$
17,511
17,271
$
$
(8,872)
(7,898)
$
$
— $
— $
8,639
9,373
1 Reflects impact of loans paid in full.
147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes related to mortgage servicing rights were as follows:
(in thousands)
Mortgage servicing rights
Balance, January 1
Amount capitalized
Amortization
Sale of mortgage servicing rights
Other-than-temporary impairment
Carrying amount before valuation allowance, December 31
Valuation allowance for mortgage servicing rights
Balance, January 1
Provision (recovery)
Other-than-temporary impairment
Balance, December 31
2017
2016
2015
$
9,373
$
8,884
$
1,239
(1,973)
—
—
2,740
(2,251)
—
—
8,639
9,373
—
—
—
—
—
—
—
—
11,749
3,123
(2,682)
(3,302)
(4)
8,884
209
(205)
(4)
—
Net carrying value of mortgage servicing rights
$
8,639
$
9,373
$
8,884
The estimated aggregate amortization expenses of mortgage servicing rights for 2018, 2019, 2020, 2021 and 2022 are $1.3
million, $1.1 million, $1.0 million, $0.9 million and $0.8 million, respectively.
ASB capitalizes mortgage servicing rights acquired upon the sale of mortgage loans with servicing rights retained. On a
monthly basis, ASB compares the net carrying value of the mortgage servicing rights to its fair value to determine if there are
any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB's MSRs
are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30
year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting
expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest
rates impact the value of ASB's mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in
the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates
typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization
of the mortgage servicing rights. Expected net income streams are estimated based on industry assumptions regarding
prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.
ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs.
Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with
any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated
statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be
unrecoverable.
Key assumptions used in estimating the fair value of ASB’s mortgage servicing rights used in the impairment analysis were
as follows:
December 31
(dollars in thousands)
Unpaid principal balance
Weighted average note rate
Weighted average discount rate
Weighted average prepayment speed
2017
2016
$
1,195,454
$
1,188,380
3.94%
10.0%
9.0%
3.96%
9.4%
8.5%
148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key
assumptions was as follows:
December 31
(in thousands)
Prepayment rate:
25 basis points adverse rate change
50 basis points adverse rate change
Discount rate:
25 basis points adverse rate change
50 basis points adverse rate change
2017
2016
$
(869) $
(1,828)
(111)
(220)
(567)
(1,154)
(128)
(254)
The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This
analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair
value of MSRs typically is not linear.
Deposit liabilities. The summarized components of deposit liabilities were as follows:
December 31
(dollars in thousands)
Savings
Checking
Interest-bearing
Noninterest-bearing
Commercial checking
Money market
Time certificates
2017
Weighted-
average
stated rate
Amount
2016
Weighted-
average
stated rate
Amount
0.07% $
2,303,450
0.07% $
2,208,594
0.03
—
—
0.09
1.26
944,833
896,292
863,941
114,797
767,284
0.02
—
—
0.12
1.00
890,633
817,867
821,184
153,126
657,525
0.20% $
5,890,597
0.15% $
5,548,929
As of December 31, 2017 and 2016, time certificates of $100,000 or more totaled $433.4 million and $328.1 million,
respectively.
The approximate scheduled maturities of time certificates outstanding at December 31, 2017 were as follows:
(in thousands)
2018
2019
2020
2021
2022
Thereafter
$
$
401,650
114,434
123,310
71,729
52,860
3,301
767,284
Overdrawn deposit accounts are classified as loans and totaled $1.7 million and $1.8 million at December 31, 2017 and
2016, respectively.
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest expense on deposit liabilities by type of deposit was as follows:
Years ended December 31
(in thousands)
Time certificates
Savings
Money market
Interest-bearing checking
Other borrowings.
2017
2016
2015
$
7,687
$
5,390
$
1,567
168
238
1,402
202
173
3,747
1,257
205
139
$
9,660
$
7,167
$
5,348
Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are accounted for as
financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance
sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements
are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party;
however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following
tables present information about the securities sold under agreements to repurchase, including the related collateral received
from or pledged to counterparties:
(in millions)
Repurchase agreements
December 31, 2017
December 31, 2016
(in millions)
December 31, 2017
Commercial account holders
Total
December 31, 2016
Government entities
Commercial account holders
Total
Gross amount of
recognized liabilities
Gross amount
offset in the
Balance Sheet
Net amount of
liabilities presented
in the Balance Sheet
$
141
$
93
— $
—
Gross amount not offset in the Balance Sheet
Net amount of
liabilities presented
in the Balance Sheet
Financial
instruments
Cash
collateral
pledged
$
$
$
$
141
141
14
79
93
$
$
$
$
165
165
15
101
116
$
$
$
$
141
93
—
—
—
—
—
The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry
into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the
agreements to repurchase continue to be reflected in ASB’s asset accounts. The counterparties or tri-parties may determine that
additional collateral is required based on movements in the fair value of the collateral. Typically, a five percent discount is taken
from the fair value of the investment securities to determine the value of the collateral pledged for the repurchase agreements.
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical
securities, was as follows:
(dollars in millions)
Amount outstanding as of December 31
Average amount outstanding during the year
Maximum amount outstanding as of any month-end
Weighted-average interest rate as of December 31
Weighted-average interest rate during the year
Weighted-average remaining days to maturity as of December 31
Securities sold under agreements to repurchase were summarized as follows:
2016
2015
93
170
229
0.23%
1.43%
6
$
$
$
229
219
277
1.24%
1.29%
117
$
$
$
$
$
$
2017
141
98
141
0.65%
0.26%
1
2016
December 31
Maturity
(dollars in thousands)
Overnight
1 to 29 days
30 to 90 days
Over 90 days
2017
Weighted-
average
interest
rate
Collateralized by
mortgage-related
securities and federal
agency obligations at
fair value plus
accrued interest
Repurchase
liability
Repurchase
liability
Weighted-
average
interest
rate
Collateralized by
mortgage-related
securities and federal
agency obligations at
fair value plus
accrued interest
$
140,859
0.65% $
165,464
$
79,083
0.15% $
—
—
—
—
—
—
—
—
—
—
13,535
—
—
0.70
—
$
140,859
0.65% $
165,464
$
92,618
0.23% $
100,305
—
15,239
—
115,544
Advances from Federal Home Loan Bank. FHLB advances are fixed rate for a specific term and consist of the following:
December 31, 2017
(dollars in thousands)
Due in
2018
2019
2020
2021
2022
Thereafter
Weighted-average
stated rate
Amount
1.95% $
50,000
—
—
—
—
—
—
—
—
—
—
1.95% $
50,000
ASB and the FHLB are parties to an Advances, Pledge and Security Agreement (Advances Agreement), which applies to
currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB
makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB’s credit
policies, and makes certain warranties and representations to the FHLB. Upon the occurrence of and during the continuation of
an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or
failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties),
the FHLB may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to
be immediately due and payable. Advances from the FHLB are collateralized by loans and stock in the FHLB. As of December
31, 2017 and 2016, ASB’s available FHLB borrowing capacity was $1.8 billion. ASB is required to obtain and hold a specific
number of shares of capital stock of the FHLB. ASB was in compliance with all Advances Agreement requirements as of
December 31, 2017 and 2016.
Common stock equity. ASB is regulated and supervised by the OCC. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on ASB's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
corrective action, ASB must meet specific capital guidelines that involve quantitative measures of ASB's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The prompt corrective action provisions impose certain restrictions on institutions that are undercapitalized. The
restrictions imposed become increasingly more severe as an institution's capital category declines from "undercapitalized" to
"critically undercapitalized." The regulators have substantial discretion in the corrective actions that might direct and could
include restrictions on dividends and other distributions that ASB may make to ASB Hawaii and the requirement that ASB
develop and implement a plan to restore its capital. In 1988, HEI agreed with the OTS predecessor regulatory agency at the
time, to contribute additional capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital
Maintenance Agreement). As of December 31, 2017, as a result of capital contributions in prior years, HEI’s maximum
obligation to contribute additional capital under the Capital Maintenance Agreement has been reduced to approximately $28.3
million.
To be categorized as "well capitalized," ASB must maintain minimum total capital, Tier 1 capital, and Tier 1 leverage ratios
as set forth in the table below. As of December 31, 2017, and 2016 ASB was in compliance with the minimum capital
requirements under OCC regulations, and was categorized as "well capitalized" under the regulatory framework for prompt
corrective action. There are no conditions or events that management believes have changed the institution's category under the
capital guidelines.
The tables below set forth actual and minimum required capital amounts and ratios:
(dollars in thousands)
December 31, 2017
Tier 1 leverage
Common equity tier 1
Tier 1 capital
Total capital
December 31, 2016
Tier 1 leverage
Common equity tier 1
Tier 1 capital
Total capital
Actual
Minimum required
Required to be well
capitalized
Capital
Ratio
Capital
Ratio
Capital
Ratio
571,810
571,810
571,810
626,987
542,239
542,239
542,239
597,940
8.58%
12.95%
12.95%
14.20%
8.59%
12.17%
12.17%
13.42%
266,430
198,628
264,838
353,117
252,515
200,455
267,273
356,364
4.00%
4.50%
6.00%
8.00%
4.00%
4.50%
6.00%
8.00%
333,038
286,907
353,117
441,396
315,644
289,545
356,364
445,455
5.00%
6.50%
8.00%
10.00%
5.00%
6.50%
8.00%
10.00%
ASB is subject to a range of bank regulatory compliance obligations and is unable to predict what actions, if any, may be
initiated by the OCC and other governmental authorities against ASB as a result of deficiencies, or the impact of any such
measures or actions on ASB.
In 2017, ASB paid cash dividends of $37.5 million to HEI, compared to cash dividends of $36.0 million in 2016. The FRB
and OCC approved the dividends.
Related-party transactions. HEI charged ASB $2.1 million, $2.3 million and $2.1 million for general management and
administrative services in 2017, 2016 and 2015, respectively. The amounts charged by HEI for services performed by HEI
employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward
commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest
rate and pricing risks associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a
specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be
held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose
ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage
interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are
carried at fair value with changes recorded in mortgage banking income.
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and
closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed
securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory
delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is
utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with
changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair
value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will
fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
December 31
(in thousands)
Interest rate lock commitments
Forward commitments
2017
2016
Notional amount
Fair value
Notional amount
Fair value
$
13,669
$
14,465
131
$
(24)
25,883
$
30,813
421
(177)
ASB’s derivative financial instruments, their fair values, and balance sheet location were as follows:
Derivative Financial Instruments Not Designated
as Hedging Instruments 1
December 31
(in thousands)
Interest rate lock commitments
Forward commitments
2017
2016
Asset
derivatives
Liability
derivatives
Asset
derivatives
Liability
derivatives
$
$
133
4
137
$
$
2
28
30
$
$
445
8
453
$
$
24
185
209
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.
The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses
recognized in ASB's statements of income:
Derivative Financial Instruments Not Designated
as Hedging Instruments
(in thousands)
Interest rate lock commitments
Forward commitments
Location of net gains
(losses) recognized in
the Statements of Income
Mortgage banking income
Mortgage banking income
Years ended December 31
2017
2016
2015
$
$
(290) $
37
$
153
(148)
(137) $
(111) $
(6)
77
71
Commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the commitments. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. ASB minimizes its exposure to loss under these
commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if any, is
based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and
property, plant and equipment.
Letters of credit are conditional commitments issued by ASB to guarantee payment and performance of a customer to a
third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to customers. ASB holds collateral supporting those commitments for which collateral is deemed necessary.
153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of outstanding off-balance sheet arrangements:
December 31
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit
Commercial and commercial real estate
Consumer
Residential 1-4 family
Commercial and financial standby letters of credit
Total
2017
2016
$
1,214,103
$
1,146,339
466,510
68,053
18,635
13,136
577,410
64,762
38,271
16,017
$
1,780,437
$
1,842,799
Contingency. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of
Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part
of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial
responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving
Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa
over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade
organizations filed a notice of appeal shortly after the approval was issued. As of December 31, 2017, ASB had accrued a
reserve of $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely
upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.
Federal Deposit Insurance Corporation assessment. In February 2011, the Federal Deposit Insurance Corporation (FDIC)
finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity,
as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were
reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category.
Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was
effective April 1, 2011. As of June 30, 2016, the deposit insurance fund surpassed a target of 1.15 percent of estimated insured
deposits that triggered important changes in the FDIC assessments for all banks. The changes took effect for premiums billed
and paid in December 2016. Banks with less than $10 billion in assets saw their overall schedule decline by two basis points for
banks paying the lowest premiums and up to five points for those at the top end of the assessment scale. In addition, a new
formula for calculating risk-based assessment rates is now in effect. For the years ended December 31, 2017 and 2016, ASB’s
FDIC insurance assessments were $2.6 million and $3.2 million, respectively. The FDIC may impose special assessments in the
future if it is deemed necessary to ensure the Deposit Insurance Fund ratio does not decline to a level that is close to zero or that
could otherwise undermine public confidence in federal deposit insurance.
5 · Short-term borrowings
As of December 31, 2017, HEI had $63 million of outstanding commercial paper, with a weighted-average interest rate of
2.5% and Hawaiian Electric had $5 million of outstanding commercial paper, with a weighted-average interest rate of 2.3%. As
of December 31, 2016, HEI and Hawaiian Electric had no commercial paper outstanding.
On October 6, 2017, HEI entered into a 364-day, $125 million unsecured loan agreement with The Bank of Tokyo-
Mitsubishi UFJ, Ltd., which includes substantially the same financial covenant and customary conditions as the loan agreement
with The Bank of Tokyo-Mitsubishi UFJ, Ltd. and U.S. Bank, National Association that matured on the same date. On October
6, 2017, HEI drew a $125 million Eurodollar loan for a term of 364 days at resetting 1-month interest periods, with interest
rates that ranged from 1.99% to 2.14% through December 31, 2017. The proceeds from this loan were used to pay off a $125
million long-term loan maturing on the same date. Further, $75 million of this loan was repaid in November 2017 with proceeds
from a $150 million long-term loan (described in Note 6 below).
As of December 31, 2017, HEI and Hawaiian Electric maintained syndicated credit facilities of $150 million and $200
million, respectively (see description of credit agreements below). Both HEI and Hawaiian Electric had no borrowings under
their respective facilities during 2016 and 2017. None of the facilities are collateralized.
In December 2017, HEI entered into three letters of credit in the aggregate amount of $6.7 million on behalf of Hamakua
Energy.
154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Credit agreements. HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight financial
institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Facilities), effective July 3, 2017, to
amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility
extended the term of the facility to June 30, 2022. The $200 million Hawaiian Electric Facility has an initial term that expires
on June 29, 2018, but its term will extend to June 30, 2022 upon approval by the PUC during the initial term, which approval is
currently being requested.
Under the Facilities, draws would generally bear interest, based on each company’s respective current long-term credit
ratings, at the “Adjusted LIBO Rate,” as defined in the agreement, plus 1.375% and annual fees on undrawn commitments,
excluding swingline borrowings, of 20 basis points. The Facilities contain provisions for pricing adjustments in the event of a
long-term ratings change based on the respective Facilities’ ratings-based pricing grid, which includes the ratings by Fitch,
Moody’s and S&P. Certain modifications were made to incorporate some updated terms and conditions customary for facilities
of this type. The Facilities continue to contain customary conditions that must be met in order to draw on them, including
compliance with covenants (such as covenants preventing HEI’s/Hawaiian Electric’s subsidiaries from entering into agreements
that restrict the ability of the subsidiaries to pay dividends to, or to repay borrowings from, HEI/Hawaiian Electric; and a
covenant in Hawaiian Electric’s facility restricting Hawaiian Electric’s ability, as well as the ability of any of its subsidiaries, to
guarantee additional indebtedness of the subsidiaries if such additional debt would cause the subsidiary’s “Consolidated
Subsidiary Funded Debt to Capitalization Ratio” to exceed 65%).
Under the HEI Facility, it is an event of default if HEI fails to maintain an unconsolidated “Capitalization Ratio” (funded
debt) of 50% or less or if HEI no longer owns Hawaiian Electric or ASB. Under the Hawaiian Electric Facility, it is an event of
default if Hawaiian Electric fails to maintain a “Consolidated Capitalization Ratio” (equity) of at least 35%, or if Hawaiian
Electric is no longer owned by HEI.
The Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be
drawn on to meet each company’s respective working capital needs and general corporate purposes.
6 · Long-term debt
December 31
(dollars in thousands)
Long-term debt of Utilities, net of unamortized debt issuance costs 1
Hamakua Energy 4.02% notes, due 2030
HEI 2.99% term loan, due 2022
HEI 5.67% senior notes, due 2021
HEI 3.99% senior notes, due 2023
HEI term loans LIBOR + 0.75%, paid 2017
Less unamortized debt issuance costs
2017
2016
$
1,368,479
$
1,319,260
67,325
150,000
50,000
50,000
—
(2,007)
—
—
50,000
50,000
200,000
(241)
$
1,683,797
$
1,619,019
1 See components of “Total long-term debt” and unamortized debt issuance costs in Hawaiian Electric and subsidiaries’
Consolidated Statements of Capitalization.
As of December 31, 2017, the aggregate principal payments required on the Company’s long-term debt for 2018 through
2022 are $54 million in 2018, $4 million in 2019, $100 million in 2020, $54 million in 2021 and $206 million in 2022. As of
December 31, 2017, the aggregate payments of principal required on the Utilities' long-term debt for 2018 through 2022 are
$50 million in 2018, nil in 2019, $96 million in 2020, nil in 2021 and $52 million in 2022.
The HEI term loans and senior notes contain customary representation and warranties, affirmative and negative covenants
and events of default (the occurrence of which may result in some or all of the notes then outstanding becoming immediately
due and payable). The HEI term loans and senior notes also contain provisions requiring the maintenance by HEI of certain
financial ratios generally consistent with those in HEI’s existing second amended revolving noncollateralized credit agreement,
expiring on June 30, 2022. Upon a change of control or certain dispositions of assets (as defined in the Master Note Purchase
Agreement dated March 24, 2011), HEI is required to offer to prepay the senior notes.
155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Utilities’ senior notes contain customary representations and warranties, affirmative and negative covenants, and
events of default (the occurrence of which may result in some or all of the notes of each and all of the utilities then outstanding
becoming immediately due and payable) and provisions requiring the maintenance by Hawaiian Electric, and each of Hawaii
Electric Light and Maui Electric, of certain financial ratios generally consistent with those in Hawaiian Electric’s existing
second amended revolving noncollateralized credit agreement, expiring on June 29, 2018, but its term will extend to June 30,
2022, upon approval by the PUC during the initial term. (See Note 5 of the Consolidated Financial Statements).
Changes in long-term debt.
HEI. On October 6, 2017, HEI entered into a loan agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd. and drew a
$125 million unsecured Eurodollar loan for a term of 364 days at resetting interest periods and rates (described in Note 5
above). HEI used the proceeds of this short-term loan to pay off a $125 million long-term loan maturing on the same date.
On November 20, 2017, HEI entered into a $150 million unsecured loan agreement with Bank of America, N.A. (BOA
Loan Agreement) at a fixed interest rate of 2.99% with a maturity date of November 20, 2022. The BOA Loan Agreement
includes substantially the same financial covenant and customary conditions as the HEI credit agreement described in Note 5
above. Proceeds of the loan were used to repay a $75 million term loan ahead of its March 2018 maturity and to repay $75
million of the $125 million short-term loan drawn on October 6, 2017. The loan under the BOA Loan Agreement may be
prepaid in full or in part at any time with a prepayment fee calculated by Bank of America, N.A.
Hamakua Energy. On December 26, 2017, Hamakua Energy issued $67.3 million of senior secured notes at a fixed
interest rate of 4.02% with quarterly principal and interest payments as defined in the note purchase agreement and a final
maturity date of December 31, 2030. The net proceeds were used to pay down an intercompany loan from HEI. HEI used the
proceeds primarily to pay down commercial paper. The loan may be prepaid in full or in part with a "make-whole" amount as
defined in the agreement.
Hawaiian Electric. On June 29, 2017, the DBF for the benefit of the Utilities, issued, at par:
Aggregate principal amount
Fixed coupon interest rate
Maturity date
DBF loaned the proceeds to:
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Refunding Series 2017A Special
Purpose Revenue Bonds
Refunding Series 2017B Special
Purpose Revenue Bonds
$125 million
3.10%
May 1, 2026
$62 million
$8 million
$55 million
$140 million
4.00%
March 1, 2037
$100 million
$20 million
$20 million
Proceeds from the sale were applied to redeem at par bonds previously issued by the DBF for the benefit of the Utilities:
Aggregate principal amount
Fixed coupon interest rate
Maturity date
Refunding Series 2007B Special
Purpose Revenue Bonds
Series 2007A Special Purpose
Revenue Bonds
$125 million
4.60%
May 1, 2026
$140 million
4.65%
March 1, 2037
On December 14, 2017, Hawaiian Electric and Maui Electric issued, through a private placement pursuant to separate Note
Purchase Agreements (the Note Purchase Agreements), $40 million and $10 million, respectively, of Series 2017A unsecured
senior notes bearing taxable interest of 4.31%, which are due December 1, 2047 (the Notes) and include substantially the same
financial covenants and customary conditions as Hawaiian Electric's credit agreement as described above. Hawaiian Electric is
also a party as guarantor under the Note Purchase Agreement entered into by Maui Electric. All the proceeds of the Notes were
used by Hawaiian Electric and Maui Electric to finance their capital expenditures and/or to reimburse funds used for the
payment of capital expenditures. The Notes may be prepaid in whole or in part at any time at the prepayment price of the
principal amount plus a “Make-Whole Amount.”
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7 · Shareholders’ equity
Reserved shares. As of December 31, 2017, HEI had reserved a total of 12,158,460 shares of common stock for future
issuance under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), the Hawaiian Electric Industries Retirement
Savings Plan (HEIRSP), the HEI 2011 Nonemployee Director Stock Plan, the ASB 401(k) Plan and the 2010 Executive
Incentive Plan.
Equity forward transaction. On March 19, 2013, HEI entered into an equity forward transaction in connection with a
public offering on that date for 6.1 million shares of HEI common stock at $26.75 per share. On March 20, 2015, HEI settled
the remaining 4.7 million shares under the equity forward for proceeds of $104.5 million (net of the underwriting discount of
$4.7 million), which funds were used for the reduction of debt and for general corporate purposes. The proceeds were recorded
in equity at the time of settlement. Prior to their settlement, the shares remaining under the equity forward transactions were
reflected in HEI’s diluted EPS calculations using the treasury stock method. For 2015, the equity forward transactions did not
have a material dilutive effect on HEI’s EPS.
Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other
comprehensive income/(loss) (AOCI) were as follows:
(in thousands)
HEI Consolidated
Hawaiian Electric Consolidated
Net
unrealized
gains (losses)
on securities
Unrealized
gains (losses)
on
derivatives
Retirement
benefit
plans
Unrealized
gains (losses)
on derivatives
Retirement
benefit
plans
AOCI
AOCI
Balance, December 31, 2014
$
462
$
(289) $ (27,551) $ (27,378) $
— $
45
$
45
Current period other comprehensive
income (loss), net of taxes
Balance, December 31, 2015
Current period other comprehensive
income (loss), net of taxes
Balance, December 31, 2016
Current period other comprehensive
income (loss), net of taxes
Reclass of AOCI for tax rate reduction
impact
(2,334)
(1,872)
(6,059)
(7,931)
(4,370)
(2,650)
235
(54)
(400)
(454)
454
—
3,215
1,116
(24,336)
(26,262)
(408)
(6,867)
(24,744)
(33,129)
2,544
(1,372)
(4,790)
(7,440)
—
—
(454)
(454)
454
—
880
925
880
925
(793)
(1,247)
132
(322)
(1,142)
(688)
(209)
(209)
Balance, December 31, 2017
$
(14,951) $
— $ (26,990) $ (41,941) $
— $
(1,219)
(1,219)
157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reclassifications out of AOCI were as follows:
Years ended December 31
2017
2016
2015
Income/Balance Sheet
Amount reclassified from AOCI
Affected line item in the Statement of
(in thousands)
HEI consolidated
Net realized gains on securities included in net
income
Derivatives qualifying as cash flow hedges:
Window forward contracts
Interest rate contracts (settled in 2011)
Retirement benefit plans:
Amortization of prior service credit and net
losses recognized during the period in net
periodic benefit cost
Impact of D&Os of the PUC included in
regulatory assets
$
— $
(360) $
—
Revenues-bank (gains on sale of investment
securities, net)
454
—
(173)
54
Property, plant and equipment-electric utilities
(2017); Revenues-electric utilities (gains on
window forward contracts (2016)
—
235
Interest expense
15,737
14,518
22,465 See Note 8 for additional details
(78,724)
28,584
(25,139) See Note 8 for additional details
Total reclassifications
$ (62,533) $ 42,623
$
(2,439)
Hawaiian Electric consolidated
Derivatives qualifying as cash flow hedges
Window forward contracts
Retirement benefit plans:
Amortization of prior service credit and net
losses recognized during the period in net
periodic benefit cost
Impact of D&Os of the PUC included in
regulatory assets
454
(173)
Property, plant and equipment (2017); Revenues
(gains on window forward contracts (2016)
—
$ 14,477
$ 13,254
$ 20,381 See Note 8 for additional details
(78,724)
28,584
(25,139) See Note 8 for additional details
Total reclassifications
$ (63,793) $ 41,665
$
(4,758)
8 · Retirement benefits
Defined benefit plans. Substantially all of the employees of HEI and the Utilities participate in the Retirement Plan for
Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI Pension Plan). Substantially all of the
employees of ASB participated in the American Savings Bank Retirement Plan (ASB Pension Plan) until it was frozen on
December 31, 2007. The HEI Pension Plan and the ASB Pension Plan (collectively, the Plans) are qualified, noncontributory
defined benefit pension plans and include, in the case of the HEI Pension Plan, benefits for utility union employees determined
in accordance with the terms of the collective bargaining agreements between the Utilities and the union. The Plans are subject
to the provisions of ERISA. In addition, some current and former executives and directors of HEI and its subsidiaries
participate in noncontributory, nonqualified plans (collectively, Supplemental Plans). In general, benefits are based on the
employees’ or directors’ years of service and compensation.
The continuation of the Plans and the Supplemental Plans and the payment of any contribution thereunder are not assumed
as contractual obligations by the participating employers. The Supplemental Plan for directors has been frozen since 1996. The
ASB Pension Plan was frozen as of December 31, 2007. The HEI Supplemental Executive Retirement Plan and ASB
Supplemental Executive Retirement, Disability, and Death Benefit Plan (noncontributory, nonqualified, defined benefit plans)
were frozen as of December 31, 2008. No participants have accrued any benefits under these plans after the respective plan’s
freeze and the plans will be terminated at the time all remaining benefits have been paid.
Each participating employer reserves the right to terminate its participation in the applicable plans at any time, and HEI and
ASB reserve the right to terminate their respective plans at any time. If a participating employer terminates its participation in
the Plans, the interest of each affected participant would become 100% vested to the extent funded. Upon the termination of the
Plans, assets would be distributed to affected participants in accordance with the applicable allocation provisions of ERISA and
158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
any excess assets that exist would be paid to the participating employers. Participants’ benefits in the Plans are covered up to
certain limits under insurance provided by the Pension Benefit Guaranty Corporation.
Postretirement benefits other than pensions. HEI and the Utilities provide eligible employees health and life insurance
benefits upon retirement under the Postretirement Welfare Benefits Plan for Employees of Hawaiian Electric Company, Inc. and
participating employers (Hawaiian Electric Benefits Plan). Eligibility of employees and dependents is based on eligibility to
retire at termination, the retirement date and the date of hire. The plan was amended in 2011, changing eligibility for certain
bargaining unit employees hired prior to May 1, 2011, based on new minimum age and service requirements effective
January 1, 2012, per the collective bargaining agreement, and certain management employees hired prior to May 1, 2011 based
on new eligibility minimum age and service requirements effective January 1, 2012. The minimum age and service
requirements for management and bargaining unit employees hired May 1, 2011 and thereafter have increased and their
dependents are not eligible to receive postretirement benefits. Employees may be eligible to receive benefits from the HEI
Pension Plan but may not be eligible for postretirement welfare benefits if the different eligibility requirements are not met.
The executive death benefit plan was frozen on September 10, 2009 for participants at benefit levels as of that date.
The Company’s and Utilities' cost for OPEB has been adjusted to reflect the plan amendments, which reduced benefits and
created prior service credits to be amortized over average future service of affected participants. The amortization of the prior
service credit will reduce benefit costs over the next few years until the various credit bases are fully recognized. Each
participating employer reserves the right to terminate its participation in the Hawaiian Electric Benefits Plan at any time.
Balance sheet recognition of the funded status of retirement plans. Employers must recognize on their balance sheets the
funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity
(using the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO), to calculate the
funded status).
The PUC allowed the Utilities to adopt pension and OPEB tracking mechanisms in previous rate cases. The amount of the
net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in
each rate case. Under the Utilities’ tracking mechanisms, any actual costs determined in accordance with GAAP that are over/
under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility
will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit
expenses (except for executive life and nonqualified pension plan expenses, which amounted to $1.1 million and $0.9 million in
2017 and 2016, respectively) determined in accordance with GAAP will be recovered.
Under the tracking mechanisms, amounts that would otherwise be recorded in AOCI (excluding amounts for executive life
and nonqualified pension plans), net of taxes, as well as other pension and OPEB charges, are allowed to be reclassified as a
regulatory asset, as those costs will be recovered in rates through the NPPC and NPBC in the future. The Utilities have
reclassified to a regulatory asset/(liability) charges for retirement benefits that would otherwise be recorded in AOCI
(amounting to the elimination of a potential charge to AOCI of $(128) million pretax and $47 million pretax for 2017 and 2016,
respectively).
Under the pension tracking mechanism, the Utilities are required to make contributions to the pension trust in the amount
of the actuarially calculated NPPC, except when limited by the ERISA minimum contribution requirements or the maximum
deductible contribution limit imposed by the Internal Revenue Code.
The OPEB tracking mechanisms generally require the Utilities to make contributions to the OPEB trust in the amount of
the actuarially calculated NPBC, (excluding amounts for executive life), except when limited by material, adverse
consequences imposed by federal regulations.
159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Defined benefit pension and other postretirement benefit plans information. The changes in the obligations and assets of
the Company’s and Utilities' retirement benefit plans and the changes in AOCI (gross) for 2017 and 2016 and the funded status
of these plans and amounts related to these plans reflected in the Company’s and Utilities' consolidated balance sheet as of
December 31, 2017 and 2016 were as follows:
(in thousands)
HEI consolidated
Benefit obligation, January 1
Service cost
Interest cost
Actuarial losses (gains)
Participants contributions
Benefits paid and expenses
Benefit obligation, December 31
Fair value of plan assets, January 1
Actual return on plan assets
Employer contributions
Participants contributions
Benefits paid and expenses
Fair value of plan assets, December 31
Accrued benefit asset (liability), December 31
Other assets
Defined benefit pension and other postretirement benefit plans
liability
Accrued benefit asset (liability), December 31
AOCI debit, January 1 (excluding impact of PUC D&Os)
Recognized during year – prior service credit
Recognized during year – net actuarial losses
Occurring during year – net actuarial losses (gains)
AOCI debit before cumulative impact of PUC D&Os, December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Net actuarial loss
Prior service gain
AOCI debit before cumulative impact of PUC D&Os, December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Income taxes (benefits)
2017
2016
Pension
benefits
Other
benefits
Pension
benefits
Other
benefits
$
1,935,494
$
233,835
$
1,798,030
$
221,540
64,906
81,185
87,399
—
(74,628)
2,094,356
1,369,701
255,324
66,983
—
(73,305)
1,618,703
3,374
9,453
(25,557)
2,078
(10,582)
212,601
174,251
28,248
—
2,078
(10,582)
193,995
60,555
81,549
67,741
—
(72,381)
1,935,494
1,271,474
103,836
65,463
—
(71,072)
1,369,701
3,331
9,670
7,831
1,405
(9,942)
233,835
170,687
11,352
42
1,405
(9,235)
174,251
$
$
$
$
$
$
(475,653) $
(18,606) $
(565,793) $
(59,584)
15,443
$
— $
13,477
$
—
(491,096)
(18,606)
(579,270)
(475,653) $
(18,606) $
(565,793) $
619,451
$
42,290
$
581,763
$
55
(26,496)
(65,180)
527,830
(489,894)
1,793
(1,130)
(41,479)
1,474
(2,767)
57
(24,832)
62,463
619,451
(576,933)
37,936
527,907
$
$
(1,293) $
10,183
$
42,518
619,582
$
$
(77)
527,830
(489,894)
37,936
(9,986)
(8,709)
1,474
(2,767)
(1,293)
333
(131)
619,451
(576,933)
42,518
(16,746)
(59,584)
(59,584)
32,550
1,793
(804)
8,751
42,290
(43,974)
(1,684)
52,792
(10,502)
42,290
(43,974)
(1,684)
656
AOCI debit/(credit), net of taxes (benefits), December 31
$
27,950
$
(960) $
25,772
$
(1,028)
As of December 31, 2017 and 2016, the other postretirement benefit plans shown in the table above had ABOs in
excess of plan assets.
160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
Hawaiian Electric consolidated
Benefit obligation, January 1
Service cost
Interest cost
Actuarial losses (gains)
Participants contributions
Benefits paid and expenses
Transfers
Benefit obligation, December 31
Fair value of plan assets, January 1
Actual return on plan assets
Employer contributions
Participants contributions
Benefits paid and expenses
Other
Fair value of plan assets, December 31
Accrued benefit liability, December 31
Other liabilities (short-term)
Defined benefit pension and other postretirement benefit plans
liability
Accrued benefit liability, December 31
AOCI debit, January 1 (excluding impact of PUC D&Os)
Recognized during year – prior service credit (cost)
Recognized during year – net actuarial losses
Occurring during year – net actuarial losses (gains)
AOCI debit before cumulative impact of PUC D&Os, December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Net actuarial loss
Prior service cost (gain)
AOCI debit before cumulative impact of PUC D&Os, December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Income taxes (benefits)
$
$
$
$
$
2017
2016
Pension
benefits
Other
benefits
Pension
benefits
Other
benefits
$
1,779,626
$
225,723
$
1,649,690
$
213,990
63,059
74,632
80,186
—
(68,691)
(164)
1,928,648
1,233,184
237,830
65,669
—
(68,225)
(55)
3,353
9,115
(25,172)
2,047
(10,419)
(3)
204,644
171,383
27,806
—
2,047
58,796
74,808
63,121
—
(66,789)
—
1,779,626
1,141,833
93,441
64,236
—
(10,419)
(66,326)
(3)
—
3,284
9,337
7,545
1,389
(9,822)
—
225,723
167,930
11,168
11
1,389
(9,115)
—
1,468,403
190,814
1,233,184
171,383
(460,245) $
(13,830) $
(546,442) $
(54,340)
(494)
(633)
(460)
(596)
(459,751)
(13,197)
(545,982)
(460,245) $
(13,830) $
(546,442) $
579,725
$
40,967
$
541,118
$
(8)
(24,392)
(61,861)
493,464
(489,894)
1,804
(1,102)
(40,830)
839
(2,767)
(13)
(22,693)
61,313
579,725
(576,933)
3,570
493,439
$
$
(1,928) $
9,531
$
2,792
579,691
$
$
25
493,464
(489,894)
3,570
(920)
(8,692)
839
(2,767)
(1,928)
497
34
579,725
(576,933)
2,792
(1,087)
(53,744)
(54,340)
31,485
1,803
(793)
8,472
40,967
(43,974)
(3,007)
51,463
(10,496)
40,967
(43,974)
(3,007)
1,170
(1,837)
AOCI debit/(credit), net of taxes (benefits), December 31
$
2,650
$
(1,431) $
1,705
$
As of December 31, 2017 and 2016, the other postretirement benefit plan shown in the table above had ABOs in excess of
plan assets.
The dates used to determine retirement benefit measurements for the defined benefit plans were December 31 of 2017,
2016 and 2015.
The Pension Protection Act of 2006 (Pension Protection Act), amended the Employee Retirement Income Security Act of
1974 (ERISA). Among other things, the Pension Protection Act changed the funding rules for qualified pension plans. In 2014,
the Highway and Transportation Funding Act of 2014 (HATFA) further amended the Pension Protection Act. HATFA resulted in
an increase of the Adjusted Funding Target Attainment Percentage (AFTAP) for benefit distribution purposes and eased funding
requirements effective with the 2014 plan year. The funding relief was extended by the Bipartisan Budget Act of 2015. As a
result, the minimum funding requirements for the HEI Retirement Plan under ERISA are less than the net periodic cost for 2016
161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and 2017. Nevertheless, to satisfy the requirements of the Utilities pension tracking mechanism, the Utilities contributed the net
periodic cost in 2016 and 2017 and expect to contribute the net periodic cost in 2018.
For purposes of calculating NPPC and NPBC, the Company and the Utilities have determined the market-related value of
retirement benefit plan assets by calculating the difference between the expected return and the actual return on the fair value of
the plan assets, then amortizing the difference over future years – 0% in the first year and 25% in each of years two through five
– and finally adding or subtracting the unamortized differences for the past four years from fair value. The method includes a
15% range restriction around the fair value of such assets (i.e., 85% to 115% of fair value).
A primary goal of the plans is to achieve long-term asset growth sufficient to pay future benefit obligations at a reasonable
level of risk. The investment policy target for defined benefit pension and OPEB plans reflects the philosophy that long-term
growth can best be achieved by prudent investments in equity securities while balancing overall fund volatility by an
appropriate allocation to fixed income securities. In order to reduce the level of portfolio risk and volatility in returns, efforts
have been made to diversify the plans’ investments by asset class, geographic region, market capitalization and investment
style.
The asset allocation of defined benefit retirement plans to equity and fixed income securities and related investment policy
targets and ranges were as follows:
December 31
Assets held by category
Equity securities
Fixed income securities
Pension benefits1
Other benefits2
Investment policy
Investment policy
2017
2016
Target
Range
2017
2016
Target
Range
73%
27
100%
71%
29
100%
70%
30
100%
65-75
25-35
73%
27
100%
70%
30
100%
70%
30
100%
65-75
25-35
1 Asset allocation is applicable to only HEI and the Utilities. As of December 31, 2017 and 2016, nearly all of ASB's pension assets were
invested in fixed income securities.
2 Asset allocation is applicable to only HEI and the Utilities. ASB does not fund its other benefits.
162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets held in various trusts for the retirement benefit plans are measured at fair value on a recurring basis and were as
follows:
Pension benefits
Other benefits
Fair value measurements using
Fair value measurements using
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
December 31
December 31
Level 1
Level 2
Level 3
$
568
435
76
1,079
297
203
500
36
568
435
—
1,003
81
—
81
—
$
— $
— $
—
—
—
216
—
216
—
—
—
—
—
—
—
—
$
75
52
12
139
46
4
50
5
75
52
—
127
43
—
43
—
1,615
$
1,084
$
216
$
— $
194
$
170
$
$ — $ —
—
—
—
3
—
3
—
3
—
—
—
—
—
—
—
$ —
$
4
1,619
692
129
56
877
276
180
456
33
692
129
—
821
84
—
84
—
$
$
— $
— $
—
—
—
192
—
192
—
—
—
—
—
—
—
—
—
—
194
94
17
9
$
94
17
—
120
111
44
4
48
6
42
—
42
—
174
$
153
$
$ — $ —
—
—
—
2
—
2
—
2
—
—
—
—
—
—
—
$ —
$
$
$
$
(in millions)
2017
Equity securities
Equity index funds
Equity investments at net asset value
(NAV)
Total equity investments
Fixed income securities and public
mutual funds
Fixed income investments at NAV
Total fixed income investments
Cash equivalents at NAV
Total
Cash, receivables and payables, net
Fair value of plan assets
2016
Equity securities
Equity index funds
Equity investments at NAV
Total equity investments
Fixed income securities and public
mutual funds
Fixed income investments at NAV
Total fixed income investments
Cash equivalents at NAV
Total
1,366
$
905
$
192
$
Cash, receivables and payables, net
4
Fair value of plan assets
$
1,370
—
174
$
Measured at net asset value
December 31
Redemption
frequency
Redemption
notice period
December 31
Redemption
frequency
Redemption
notice period
Pension benefits
Other benefits
(in millions)
2017
Non U.S. equity funds (a)
Fixed income investments (b)
Cash equivalents (c)
2016
Non U.S. equity funds (a)
Fixed income investments (b)
Cash equivalents (c)
$
$
Daily-Monthly
5 - 30 days
Monthly
Daily
15 days
0-1 day
76
203
36
315
56 Daily - Quarterly
0 - 30 days
180
33
269
Monthly
Daily
10 days
0-1 day
$
$
163
Daily-Monthly
5-30 days
Monthly
Daily
15 days
0-1 day
12
4
5
21
9 Monthly - Quarterly
10-30 days
4
6
19
Monthly
Daily
10 days
0-1 day
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
None of the investments presented in the tables above have unfunded commitments.
(a) Represents investments in funds that primarily invest in non-U.S., emerging markets equities. Redemption frequency for pension
benefits assets as of December 31, 2017 were: daily, 32% and monthly, 68% and as of December 31, 2016 were: daily, 31%; monthly,
31%; and quarterly, 38%. Redemption frequency for other benefits assets as of December 31, 2017 were: daily, 26% and monthly, 74%
and as of December 31, 2016 were: monthly, 57%; and quarterly, 42%.
(b ) Represents investments in fixed income securities invested in a US-dollar denominated fund that seeks to exceed the Barclays Capital
Long Corporate A or better Index through investments in US-dollar denominated fixed income securities and commingled vehicles.
(c) Represents investments in cash equivalent funds. This class includes funds that invest primarily in securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities. For pension benefits, the fund may also invest in fixed income securities of
investment grade issuers.
The fair values of the investments shown in the table above represent the Company’s best estimates of the amounts that
would be received upon sale of those assets in an orderly transaction between market participants at that date. Those fair value
measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the
asset at the measurement date, the fair value measurement reflects the Company’s judgments about the assumptions that market
participants would use in pricing the asset. Those judgments are developed by the Company based on the best information
available in the circumstances.
The fair value of investments measured at net asset value presented in the tables above are intended to permit reconciliation
to the fair value of plan assets amounts.
The Company used the following valuation methodologies for assets measured at fair value. There have been no changes in
the methodologies used at December 31, 2017 and 2016.
Equity securities, equity index funds, U.S. Treasury fixed income securities and public mutual funds (Level 1). Equity
securities, equity index funds, U.S. Treasury fixed income securities and public mutual funds are valued at the closing price
reported on the active market on which the individual securities or funds are traded.
Fixed income securities (Level 2). Fixed income securities, other than those issued by the U.S. Treasury, are valued based
on yields currently available on comparable securities of issuers with similar credit ratings.
The following weighted-average assumptions were used in the accounting for the plans:
December 31
Benefit obligation
Discount rate
Rate of compensation increase
Net periodic pension/benefit cost (years ended)
Discount rate
Expected return on plan assets1
Rate of compensation increase2
NA Not applicable
Pension benefits
Other benefits
2017
2016
2015
2017
2016
2015
3.74%
4.26%
3.5
3.5
4.60%
3.5
3.72%
4.22%
4.57%
NA
NA
NA
4.26
7.50
3.5
4.60
7.75
3.5
4.22
7.75
3.5
4.22
7.50
4.57
7.75
4.17
7.75
NA
NA
NA
1 For 2017 and 2016, HEI's and Utilities' plan assets only. For 2017 and 2016, ASB's expected return on plan assets was 4.46% and 4.80%,
respectively.
2 The Company and the Utilities use a graded rate of compensation increase assumption based on age. The rate provided above is an average
across all future years of service for the current population.
The Company and the Utilities based their selection of an assumed discount rate for 2018 NPPC and NPBC and
December 31, 2017 disclosure on a cash flow matching analysis that utilized bond information provided by Bloomberg for all
non-callable, high quality bonds (generally rated Aa or better) as of December 31, 2017. In selecting the expected rate of return
on plan assets for 2018 NPPC and NPBC: a) HEI and the Utilities considered economic forecasts for the types of investments
held by the plans (primarily equity and fixed income investments), the Plans’ asset allocations, industry and corporate surveys
and the past performance of the plans’ assets in selecting 7.50% and b) ASB considered its liability driven investment strategy
164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
in selecting 3.94%, which is consistent with the assumed discount rate as of December 31, 2017 with a 20 basis point active
manager premium. For 2017, retirement benefit plans' assets of HEI and the Utilities had a net return of 19.3%.
The Company and the Utilities adopted mortality tables published in October 2014 by the Society of Actuaries as its
mortality assumptions as of December 31, 2014. The use of the RP-2014 Tables and the Mortality Improvement Scale MP-2014
had a significant effect on the Company’s and the Utilities’ benefit obligations and increased their costs and required
contributions for 2015. The Company and the Utilities adopted revised mortality tables for their mortality assumptions as of
December 31, 2017 and 2016 (based on information published by the Society of Actuaries in October 2016 and 2015,
respectively), the use of which lowered obligations of the Company and Utilities as of December 31, 2017 and 2016.
As of December 31, 2017, the assumed health care trend rates for 2018 and future years were as follows: medical, 7.5%,
grading down to 5% for 2028 and thereafter; dental, 5%; and vision, 4%. As of December 31, 2016, the assumed health care
trend rates for 2017 and future years were as follows: medical, 7.75%, grading down to 5% for 2028 and thereafter; dental, 5%;
and vision, 4%.
The components of NPPC and NPBC were as follows:
Pension benefits
Other benefits
2017
2016
2015
2017
2016
2015
$
64,906
$
60,555
$
66,260
$
3,374
$
3,331
$
(in thousands)
HEI consolidated
Service cost
Interest cost
Expected return on plan assets
Amortization of net prior service (gain) cost
Amortization of net actuarial losses
Net periodic pension/benefit cost
81,185
(102,745)
(55)
26,496
69,787
81,549
(98,559)
(57)
24,832
68,320
76,960
(88,554)
4
36,800
91,470
Impact of PUC D&Os
(18,004)
(18,117)
(40,011)
Net periodic pension/benefit cost (adjusted for
impact of PUC D&Os)
Hawaiian Electric consolidated
Service cost
Interest cost
$
$
$
$
51,783
63,059
74,632
$
$
50,203
58,796
74,808
$
$
51,459
64,262
70,529
Expected return on plan assets
(95,892)
(91,633)
(82,541)
Amortization of net prior service (gain) cost
Amortization of net actuarial losses
Net periodic pension/benefit cost
Impact of PUC D&Os
Net periodic pension/benefit cost (adjusted for
impact of PUC D&Os)
8
24,392
66,199
13
22,693
64,677
40
33,371
85,661
(18,004)
(18,117)
(40,011)
9,453
(12,326)
(1,793)
1,130
(162)
1,211
1,049
3,353
9,115
(12,147)
(1,804)
1,102
(381)
1,211
$
$
9,670
(12,273)
(1,793)
804
(261)
1,343
1,082
3,284
9,337
(12,096)
(1,803)
793
(485)
1,343
$
$
3,927
9,011
(11,664)
(1,793)
1,796
1,277
(240)
1,037
3,870
8,700
(11,495)
(1,804)
1,754
1,025
(240)
$
48,195
$
46,560
$
45,650
$
830
$
858
$
785
The estimated prior service credit and net actuarial loss for defined benefit plans that will be amortized from AOCI or
regulatory assets into NPPC and NPBC during 2018 is as follows:
(in millions)
Estimated prior service credit
Net actuarial loss
HEI consolidated
Hawaiian Electric
consolidated
Pension
benefits
Other
benefits
Pension
benefits
Other
benefits
$
— $
(1.8) $
— $
29.6
—
26.8
(1.8)
—
The Company recorded pension expense of $33 million, $33 million and $35 million and OPEB expense of $1.0 million,
$1.0 million and $0.9 million in 2017, 2016 and 2015, respectively, and charged the remaining amounts primarily to electric
utility plant. The Utilities recorded pension expense of $30 million, $30 million and $29 million and OPEB expense of $0.8
million, $0.7 million and $0.7 million in 2017, 2016 and 2015, respectively, and charged the remaining amounts primarily to
electric utility plant.
165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The health care cost trend rate assumptions can have a significant effect on the amounts reported for other benefits. As of
December 31, 2017, for the Company, a one-percentage-point increase in the assumed health care cost trend rates would have
increased the total service and interest cost by $0.1 million and the accumulated postretirement benefit obligation (APBO) by
$2.7 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.2 million and the
APBO by $3.1 million. As of December 31, 2017, for the Utilities, a one-percentage-point increase in the assumed health care
cost trend rates would have increased the total service and interest cost by $0.1 million and the APBO by $2.7 million, and a
one-percentage-point decrease would have reduced the total service and interest cost by $0.2 million and the APBO by $3.1
million.
Additional information on the defined benefit pension plans' accumulated benefit obligations (ABOs), which do not
consider projected pay increases (unlike the PBOs shown in the table above), PBOs and assets were as follows:
December 31
(in billions)
Defined benefit plans - ABOs
Defined benefit plans with ABO in excess of plan assets
ABOs
Plan assets
Defined benefit plans with PBOs in excess of plan assets
PBOs
Plan assets
HEI consolidated
2016
2017
Hawaiian Electric
consolidated
2017
2016
$
1.8
$
1.7
$
1.7
$
1.7
1.5
2.0
1.5
1.6
1.3
1.8
1.3
1.7
1.5
1.9
1.5
1.5
1.5
1.2
1.8
1.2
HEI consolidated. The Company estimates that the cash funding for the qualified defined benefit pension plans in 2018
will be $62 million, which should fully satisfy the minimum required contributions to those plans, including requirements of
the Utilities’ pension tracking mechanisms and the Plan’s funding policy. The Company's current estimate of contributions to
its other postretirement benefit plans in 2018 is nil.
As of December 31, 2017, the benefits expected to be paid under all retirement benefit plans in 2018, 2019, 2020, 2021,
2022 and 2023 through 2027 amount to $86 million, $89 million, $92 million, $95 million, $99 million and $552 million,
respectively.
Hawaiian Electric consolidated. The Utilities estimate that the cash funding for the qualified defined benefit pension plan
in 2018 will be $61 million, which should fully satisfy the minimum required contributions to that Plan, including requirements
of the pension tracking mechanisms and the Plan’s funding policy. The Utilities' current estimate of contributions to its other
postretirement benefit plans in 2018 is nil.
As of December 31, 2017, the benefits expected to be paid under all retirement benefit plans in 2018, 2019, 2020, 2021,
2022 and 2023 through 2027 amounted to $79 million, $81 million, $84 million, $87 million, $90 million and $504 million,
respectively.
Defined contribution plans information. For 2017, 2016 and 2015, the Company’s expenses for its defined contribution
pension plans under the HEIRSP and the ASB 401(k) Plan were $7 million, $5 million and $6 million, respectively, and cash
contributions were $6 million, $5 million and $5 million, respectively. The Utilities’ expenses and cash contributions for its
defined contribution pension plan under the HEIRSP Plan for 2017, 2016 and 2015 were $2.0 million, $1.5 million and $1.5
million, respectively.
166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9 · Share-based compensation
Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation
to selected employees in the form of stock options, stock appreciation rights (SARs), restricted shares, restricted stock units,
performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was
amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares was added to the shares available for
issuance under these programs.
As of December 31, 2017, approximately 3.3 million shares remained available for future issuance under the terms of the
EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an
estimated 0.4 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of
performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved
at maximum levels).
Restricted stock units awarded under the 2010 Equity and Incentive Plan in 2017, 2016, 2015 and 2014 will vest and be
issued in unrestricted stock in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent
they have not become vested for terminations of employment during the vesting period, except that pro-rata vesting is provided
for terminations due to death, disability and retirement. Restricted stock units expense has been recognized in accordance with
the fair-value-based measurement method of accounting. Dividend equivalent rights are accrued quarterly and are paid at the
end of the restriction period when the associated restricted stock units vest.
Stock performance awards granted under the 2017-2019 long-term incentive plan (LTIP) entitle the grantee to shares of
common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of
the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period,
except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed
months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock
performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of
accounting for performance shares.
Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as
compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. As of December 31, 2017, there were 85,428
shares remaining available for future issuance under the 2011 Director Plan.
Share-based compensation expense and the related income tax benefit were as follows:
(in millions)
HEI consolidated
Share-based compensation expense1
Income tax benefit
Hawaiian Electric consolidated
Share-based compensation expense1
Income tax benefit
2017
2016
2015
$
$
5.4
1.9
1.9
0.7
$
4.8
1.6
1.4
0.5
6.5
2.3
1.9
0.7
1
For 2017 and 2016, the Company has not capitalized any share-based compensation. In 2015, $0.15 million of this share-based
compensation expense was capitalized.
Stock awards. Nonemployee director awards totaling $0.2 million were paid in cash (in lieu of common stock) in July 2016.
HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as
follows:
(dollars in millions)
Shares granted
Fair value
Income tax benefit
2017
35,770
$
1.2
0.5
2016
19,846
$
0.6
0.2
2015
28,246
0.8
0.3
$
The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the
closing price of HEI Common Stock on the grant date.
167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:
Outstanding, January 1
Granted
Vested
Forfeited
Outstanding, December 31
Total weighted-average grant-date fair value of
shares granted ($ millions)
2017
2016
2015
Shares
(1)
Shares
(1)
Shares
(1)
220,683
$
97,873
(92,147)
(29,362)
197,047
$
29.57
33.47
28.88
31.57
31.53
210,634
$
114,431
(85,003)
(19,379)
220,683
$
28.82
29.70
27.84
29.82
29.57
261,235
$
85,772
(102,173)
(34,200)
210,634
$
25.77
33.69
25.67
27.09
28.82
$
3.3
$
3.4
$
2.9
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For 2017, 2016 and 2015, total restricted stock units and related dividends that vested had a fair value of $3.5 million, $2.8
million and $3.7 million, respectively, and the related tax benefits were $1.1 million, $0.9 million and $1.1 million,
respectively.
As of December 31, 2017, there was $4.0 million of total unrecognized compensation cost related to the nonvested
restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.4 years.
Long-term incentive plan payable in stock. The 2017-2019 LTIP provides for performance awards under the EIP of shares of
HEI common stock based on the satisfaction of performance goals including a market condition goal. The number of shares of
HEI common stock that may be awarded is fixed on the date the grants are made subject to the achievement of specified
performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target
shares depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR)
compared to the Edison Electric Institute Index over the three-year period. The other performance condition goals relate to EPS
growth, return on average common equity (ROACE) and ASB’s efficiency ratio. The 2015-2017 and 2016-2018 LTIPs provide
for performance awards payable in cash, and thus, are not included in the tables below.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:
Outstanding, January 1
Granted
Vested (issued or unissued and cancelled)
Forfeited
Outstanding, December 31
2017
2016
2015
Shares
(1)
Shares
(1)
Shares
(1)
83,106
$
37,204
(83,106)
(4,300)
32,904
$
22.95
39.51
22.95
39.51
39.51
162,500
$
27.66
257,956
$
28.45
—
(78,553)
(841)
83,106
$
—
32.69
22.95
22.95
—
(75,915)
(19,541)
162,500
$
—
30.71
26.25
27.66
Total weighted-average grant-date fair value of shares
granted ($ millions)
$
1.5
$
—
$
—
(1) Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.
The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information
for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and
estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The
expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the
annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same
three-year historical period.
168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TSR and the
resulting fair value of LTIP awards granted:
Risk-free interest rate
Expected life in years
Expected volatility
Range of expected volatility for Peer Group
Grant date fair value (per share)
2017
1.46%
3
20.1%
15.4% to 26.0%
$
39.51
For 2017, total vested LTIP awards linked to TSR and related dividends had a fair value of $1.9 million and the related tax
benefits were $0.7 million. For 2016 and 2015, all vested shares in the table above were unissued and cancelled (i.e., lapsed)
because the TSR performance goal was not met.
As of December 31, 2017, there was $0.9 million of total unrecognized compensation cost related to the nonvested
performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of
2.0 years.
LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to
other performance conditions was as follows:
Outstanding, January 1
Granted
Vested
Increase above target (cancelled)
Forfeited
Outstanding, December 31
2017
2016
2015
Shares
(1)
Shares
(1)
Shares
(1)
109,816
$
148,818
(109,816)
—
(17,202)
131,616
$
25.18
33.47
25.18
—
33.48
33.47
222,647
$
26.02
364,731
$
26.01
—
(109,097)
(1,989)
(1,745)
109,816
$
—
26.89
25.26
25.19
25.18
—
(121,249)
3,412
(24,247)
222,647
$
—
26.05
26.89
25.82
26.02
Total weighted-average grant-date fair value of shares
granted (at target performance levels) ($ millions)
$
5.0
$
—
$
—
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For 2017, 2016 and 2015, total vested LTIP awards linked to other performance conditions and related dividends had a fair
value of $4.2 million, $3.6 million and $4.7 million, respectively, and the related tax benefits were $1.6 million, $1.4 million
and $1.8 million, respectively.
As of December 31, 2017, there was $2.9 million of total unrecognized compensation cost related to the nonvested shares
linked to performance conditions other than TSR. The cost is expected to be recognized over a weighted-average period of 2.0
years.
169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10 · Income taxes
The components of income taxes attributable to net income for common stock were as follows:
Years ended December 31
(in thousands)
Federal
Current
Deferred*
Deferred tax credits, net
State
Current
Deferred
Deferred tax credits, net
Total
HEI consolidated
Hawaiian Electric consolidated
2017
2016
2015
2017
2016
2015
$ 61,534
$ 59,873
$ 44,343
$ 36,267
$
952
$
—
33,967
43,666
36,664
35,229
70,513
68,757
(20)
268
318
(20)
268
318
95,481
103,807
81,325
71,476
71,733
69,075
10,076
3,868
16,473
3,452
(32)
(37)
2,402
4,768
4,526
8,947
2,808
(32)
9,232
3,873
(37)
(1,048)
6,869
4,526
13,912
19,888
11,696
11,723
13,068
10,347
$ 109,393
$ 123,695
$ 93,021
$ 83,199
$ 84,801
$ 79,422
*
Included in the amounts for 2017 are federal deferred income tax expenses of $13.4 million and $9.2 million for the Company and
Hawaiian Electric consolidated, respectively, primarily to reduce federal accumulated deferred income tax net asset balances (not
accounted for under Utility regulatory ratemaking) to reflect the impact of the Tax Act. See “Lower tax rate” below.
A reconciliation of the amount of income taxes computed at the federal statutory rate of 35% to the amount provided in the
consolidated statements of income was as follows:
Years ended December 31
(in thousands)
HEI consolidated
Hawaiian Electric consolidated
2017
2016
2015
2017
2016
2015
Amount at the federal statutory income tax rate
$ 96,796
$ 130,844
$ 89,176
$ 71,801
$ 80,190
$ 75,996
Increase (decrease) resulting from:
State income taxes, net of federal income tax
benefit
Net deferred tax asset adjustment related to the
Tax Act
Other, net
Total
9,789
13,915
8,097
7,584
8,494
6,726
13,420
—
—
(10,612)
(21,064)
(4,252)
9,168
(5,354)
—
—
(3,883)
(3,300)
$ 109,393
$ 123,695
$ 93,021
$ 83,199
$ 84,801
$ 79,422
Effective income tax rate
39.6%
33.1%
36.5%
40.6%
37.0%
36.6%
170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:
December 31
(in thousands)
Deferred tax assets
HEI consolidated
Hawaiian Electric consolidated
2017
2016
2017
2016
Regulatory liabilities, excluding amounts attributable to
property, plant and equipment
$
104,984
$
— $
104,984
$
Net operating loss1
Allowance for bad debts
Other
Total deferred tax assets
Deferred tax liabilities
—
16,192
24,397
145,573
—
24,500
47,201
71,701
—
1,812
11,253
118,049
—
9,158
2,364
18,720
30,242
Property, plant and equipment related
415,452
642,266
413,891
640,667
Regulatory assets, excluding amounts attributable to property,
plant and equipment
Deferred RAM and RBA revenues
Retirement benefits
Other
Total deferred tax liabilities
Net deferred income tax liability
38,314
15,038
32,952
32,247
35,107
26,053
48,400
48,681
38,314
15,038
38,020
6,827
534,003
800,507
512,090
$
388,430
$
728,806
$
394,041
$
35,107
26,053
51,445
10,629
763,901
733,659
1 The Hawaiian Electric deferred tax asset for 2016 includes the tax effect of the federal net operating loss carryforward of $9 million, which
was utilized in 2017, and federal general business credit carryforwards of $3 million utilized in 2017, net of unrecognized federal tax
benefits of $3 million due to uncertain tax positions.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable
income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the
benefits of the deferred tax assets. As of December 31, 2017 and 2016, valuation allowances for deferred tax benefits was nil
and not significant, respectively. In 2017, the net deferred income tax liability increased primarily as a result of accelerated tax
deductions taken for bonus depreciation enacted in the Protecting Americans from Tax Hikes Act of 2015. However, the
December 31, 2017 balance decreased following the passage of the Tax Act as described below in "Recent tax developments".
The Utilities are included in the consolidated federal and Hawaii income tax returns of HEI and are subject to the
provisions of HEI’s tax sharing agreement, which determines each subsidiary’s (or subgroup's) income tax return liabilities and
refunds on a standalone basis as if it filed a separate return (or subgroup consolidated return). Consequently, although HEI
consolidated did not anticipate any unutilized net operating loss (NOL) as of December 31, 2016, standalone Hawaiian Electric
consolidated recognized an unutilized NOL for federal tax purposes in accordance with the HEI tax sharing agreement. In 2017,
the NOL was utilized by Hawaiian Electric consolidated, which reduced the deferred tax asset associated with this NOL to nil.
The following is a reconciliation of the Company’s liability for unrecognized tax benefits for 2017, 2016 and 2015.
(in millions)
Unrecognized tax benefits, January 1
Additions based on tax positions taken during the year
Reductions based on tax positions taken during the year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Unrecognized tax benefits, December 31
HEI consolidated
Hawaiian Electric consolidated
2017
2016
2015
2017
2016
2015
$
$
3.8
0.9
(0.2)
—
(0.5)
—
4.0
$
3.6
—
(0.1)
0.3
—
—
$
— $
—
—
3.6
—
—
$
3.8
$
3.6
$
3.8
0.4
(0.2)
—
(0.5)
—
3.5
$
3.6
—
(0.1)
0.3
—
—
$
3.8
$
—
—
—
3.6
—
—
3.6
At December 31, 2017 and 2016, there were $0.5 million and nil, respectively, of unrecognized tax benefits that, if
recognized, would affect the Company's annual effective tax rate. As of December 31, 2017 and 2016, there were no
171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
unrecognized tax benefits that, if recognized, would affect the Utilities' annual effective tax rate. The Company and Utilities
believe that the unrecognized tax benefits will not significantly increase or decrease within the next 12 months.
HEI consolidated. The Company recognizes interest accrued related to unrecognized tax benefits in “Interest expense-
other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2017, 2016 and
2015, the Company recognized approximately $0.2 million, $0.2 million and $0.1 million in interest expense. The Company
had $0.5 million and $0.3 million of interest accrued as of December 31, 2017 and 2016, respectively.
Hawaiian Electric consolidated. The Utilities recognize interest accrued related to unrecognized tax benefits in “Interest
expense and other charges, net” and penalties, if any, in operating expenses. In 2017, 2016 and 2015, the Utilities recognized
approximately $0.08 million, $0.03 million and $0.1 million, respectively, in interest expense. Additional interest expense
related to the Utilities' unrecognized tax benefits was recognized at HEI Consolidated because of the Utilities NOL position.
The Utilities had $0.2 million and $0.1 million of interest accrued as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, the disclosures above present the Company’s and the Utilities' accruals for potential tax
liabilities, which involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution
of uncertain tax positions could result in adjustments to recorded amounts. Based on information currently available, the
Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and
state tax authorities, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect
on its results of operations, financial condition or liquidity.
IRS examinations have been completed and settled through the tax year 2011 and the statute of limitations has tolled for
tax year 2013, leaving subsequent years subject to IRS examination. The tax years 2011 and subsequent are still subject to
examination by the Hawaii Department of Taxation.
Recent tax developments. On December 22, 2017, President Trump signed into law H.R. 1, originally known as the Tax Cuts
and Jobs Act, as passed by Congress (Tax Act). This Tax Act is the first comprehensive change in the law since the 1986 Tax
Reform Act and will impact all U.S. taxpayers. The changes for corporate taxpayers are numerous but the following
summarizes the provisions that have the most impact on the Company.
Lower tax rate. For the non-regulated entities (HEI corporate and ASB), the corporate income tax rate reduction from 35%
to 21% for 2018 and subsequent years had an immediate income statement impact in 2017, as all accumulated deferred income
tax balances (ADIT) were adjusted to reflect the new lower rate as of the enactment date with an offsetting net charge to income
tax expense. The Utilities’ excess ADIT that was related to items excluded from regulatory rate base or ratemaking was also
recorded as a charge to income tax expense in 2017. However, for regulated entities such as the Utilities, the excess ADIT
included in their rates is expected to be returned to customers. The method and timing of returning this benefit will be
determined with the approval of the PUC.
Going forward for years after 2017, the Company will compute its income tax expense at the new 21% federal rate. The
benefit of this lower rate will be reflected in the Utilities' rates, thereby passing the lower tax cost to their customers. The
method and timing of adjusting rates for the new tax rate will be determined with the approval of the PUC, along with the
return of excess ADIT discussed above.
100% bonus depreciation. The Tax Act allows 100% bonus depreciation through the end of 2022 for qualified property
purchased and placed in service after September 27, 2017. However, the Tax Act provides that property used in the trade or
business of a regulated utility (including the furnishing or selling electrical energy) is not qualified property. Thus, the Utilities
have not taken any bonus depreciation on property placed in service after September 27, 2017. With respect to all other
property, the Company expects to take the 100% bonus depreciation on qualified property purchased and placed in service after
September 27, 2017. It is not clear what property will be grandfathered based on previous tax law, or whether property subject
to written binding purchase contracts prior to September 28, 2017 will qualify for the 100% bonus depreciation. The Company
has assumed that bonus depreciation does not apply in the areas that have not been clarified.
Interest expense limitation. The Tax Act generally provides a limitation on the deductibility of interest expense in excess of
30% of a business’ adjusted taxable income plus interest income. Adjusted taxable income is essentially taxable income before
interest income or expense, depreciation and amortization (adjustment for depreciation and amortization phases out after 2021).
This limitation does not apply to interest properly allocable to the trade or business of furnishing or selling electricity and
various other regulated utility activities. Thus, the Utilities are not subject to the interest limitation.
With respect to the holding company and the bank activities, interest deductibility should not be limited by this new law
since the interest income of the Bank more than offsets the interest expense allocated to the non-Utility activity.
172
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other applicable provisions. There are a number of other provisions in the Tax Act that have an impact on the Company,
including the narrowing of the exclusions from taxability of certain contributions in aid of construction (CIAC), the repeal of
the domestic production activities deduction (DPAD), non-deductibility of transportation fringe benefits excluded from
employees income, and the increased limitation on the deductibility of executive compensation.
Staff Accounting Bulletin No. 118 (SAB No. 118). On December 22, 2017, the SEC staff issued SAB No. 118 to address the
application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.
In connection with its initial analysis of the impact of the Tax Act, the Company has calculated its best estimate in
accordance with its understanding of the law and guidance available as of this filing. The Company has recorded a provisional
discrete net tax expense of $13.4 million ($9.2 million at the Utilities), in the period ended December 31, 2017. The
provisional net expense primarily consists of the effect of the corporate rate reduction. The Act reduces the corporate tax rate to
21%, effective January 1, 2018 and results in a net deferred tax balance that is in excess of the taxes the Company expects to
pay or be refunded in the future when the temporary differences creating these deferred taxes reverse. The excess related to the
Utilities' deferred taxes that are expected to be refunded in rates is reclassified to a regulatory liability that will be returned to
the customers prospectively. The remaining excess must be written off through deferred tax expense. Consequently the
Company has recorded a provisional decrease in net deferred tax liabilities of $271.5 million ($275.7 million at the Utilities),
with the corresponding net adjustment to increase deferred income tax expense of $13.4 million ($9.2 million at the Utilities)
and to increase regulatory liabilities by $284.9 million.
The provisional tax impacts included in the Company’s and Utilities financial statements for the year ended December 31,
2017 may differ from the ultimate impact due to additional analysis, changes in interpretations and assumptions the Company
and Utilities have made, Internal Revenue Service and Joint Committee on Taxation guidance that may be issued, and actions
the Company and Utilities may take as a result of the Tax Act. The accounting is expected to be complete in 2018.
173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11 · Cash flows
Years ended December 31
(in millions)
Supplemental disclosures of cash flow information
HEI consolidated
Interest paid to non-affiliates
Income taxes paid (including refundable credits)
Income taxes refunded (including refundable credits)
Hawaiian Electric consolidated
Interest paid to non-affiliates
Income taxes paid (including refundable credits)
Income taxes refunded (including refundable credits)
Supplemental disclosures of noncash activities
HEI consolidated
Property, plant and equipment
Unpaid invoices and accruals for capital expenditures,
balance, end of period (investing)
Common stock dividends reinvested in HEI common stock (financing) 1
Loans transferred from held for investment to held for sale (investing)
Real estate acquired in settlement of loans (investing)
Real estate transferred from property, plant and equipment to other assets held-for-sale
(investing)
Common stock issued (gross) for director and executive/management compensation
(financing)2
Obligations to fund low income housing investments, net (investing)
Hawaiian Electric consolidated
Electric utility property, plant and equipment
Unpaid invoices and accruals for capital expenditures,
balance, end of period (investing)
HEI Consolidated and Hawaiian Electric consolidated
Electric utility property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)
Refinancing of long-term debt (financing)
$
2017
2016
2015
$
83
55
1
63
26
—
38
—
41
—
—
11
13
38
18
—
$
84
55
45
62
1
20
84
17
24
1
1
7
—
84
28
—
83
75
55
61
13
12
70
—
—
1
5
10
—
70
3
47
1 The amounts shown represents common stock dividends reinvested in HEI common stock under the HEI DRIP in noncash transactions.
2 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld
to satisfy statutory tax liabilities.
12 · Regulatory restrictions on net assets
As of December 31, 2017, the Utilities could not transfer approximately $755 million of net assets to HEI in the form of
dividends, loans or advances without PUC approval.
ASB is required to notify the FRB and OCC prior to making any capital distribution (including dividends) to HEI (through
ASB Hawaii). Generally, the FRB and OCC may disapprove or deny ASB’s request to make a capital distribution if the
proposed distribution will cause ASB to become undercapitalized, or the proposed distribution raises safety and soundness
concerns, or the proposed distribution violates a prohibition contained in any statute, regulation or agreement between ASB and
the OCC. As of December 31, 2017, in order to maintain its “well-capitalized” position, ASB could not transfer approximately
$441 million of net assets to HEI.
HEI management expects that the regulatory restrictions will not materially affect the operations of the Company nor HEI’s
ability to pay common stock dividends.
174
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13 · Significant group concentrations of credit risk
Most of the Company’s business activity is with customers located in the State of Hawaii.
The Utilities are regulated operating electric public utilities engaged in the generation, purchase, transmission, distribution
and sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of Hawaii. The Utilities provide the
only electric public utility service on the islands they serve. The Utilities grant credit to customers, all of whom reside or
conduct business in the State of Hawaii.
Most of ASB’s financial instruments are based in the State of Hawaii, except for the investment securities it owns.
Substantially all real estate loans receivable are collateralized by real estate in Hawaii. ASB’s policy is to require mortgage
insurance on all real estate loans with a loan to appraisal ratio in excess of 80% at origination.
14 · Fair value measurements
Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation
methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not
carried at fair value:
Short-term borrowings—other than bank. The carrying amount of short-term borrowings approximated fair value because of
the short maturity of these instruments.
Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from
independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent
and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB
uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to
ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that
fall under Level 2 of ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in
an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic
prepayment speeds, and other observable market factors.
To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s
price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard
vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to
the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable characteristics
of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-
affiliated broker.
The fair value of the mortgage revenue bond is estimated using a discounted cash flow model to calculate the present value of
future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market
observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the
valuation hierarchy.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which
includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes
product type, maturity dates, and the underlying interest rate of the portfolio. This information is input into the valuation models
along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These
assumptions are derived from internal and third party sources. Since the valuation is derived from model-based techniques, ASB
includes loans held for investment within Level 3 of the valuation hierarchy.
Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is
determined primarily by using an income, cost, or market approach and is normally provided through appraisals. Impaired loans
carried at fair value generally receive specific allocations within the allowance for loan losses. For collateral-dependent loans, fair
value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such
adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be
valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based
on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise
175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Generally, impaired loans are
evaluated quarterly for additional impairment and adjusted accordingly.
Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are
generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real
estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates
the fair value of collateral-dependent loans and real estate owned using the sales comparison approach.
Mortgage servicing rights. Mortgage servicing rights (MSRs) are capitalized at fair value based on market data at the time of
sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at
each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan
type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that
reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding
prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is
recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated
provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income.
A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares
the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published
and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses the
third-party value only to assess the reasonableness of its own estimate.
Time deposits. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows
using the rates currently offered for deposits of similar remaining maturities.
Other borrowings. For fixed-rate advances and repurchase agreements, fair value is estimated using quantitative discounted
cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of
similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources
including broker market transactions and third party pricing services.
Long-term debt-other than bank. Fair value of long-term debt of HEI and the Utilities was obtained from third-party
financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from
discounting the future cash flows using the current rates offered for debt of the same or similar remaining maturities.
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for
sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as
Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market
prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are
determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
Window forward contracts. The estimated fair value of the Utilities’ window forward contracts was obtained from a third-
party financial services provider based on the effective exchange rate offered for the foreign currency denominated transaction.
Window forward contracts are classified as Level 2 measurements.
The following table presents the carrying or notional amount, fair value, and placement in the fair value hierarchy of the
Company’s financial instruments. For stock in Federal Home Loan Bank, the carrying amount is a reasonable estimate of fair
value because it can only be redeemed at par. For financial liabilities such as noninterest-bearing demand, interest-bearing
demand, and savings and money market deposits, the carrying amount is a reasonable estimate of fair value as these liabilities
have no stated maturity.
176
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative assets-window forward contracts
3,240
(in thousands)
December 31, 2017
Financial assets
HEI consolidated
Available-for-sale investment securities
Held-to-maturity investment securities
Stock in Federal Home Loan Bank
Loans receivable, net
Mortgage servicing rights
Derivative assets
Hawaiian Electric consolidated
Financial liabilities
HEI consolidated
Deposit liabilities
Short-term borrowings—other than bank
Other bank borrowings
Long-term debt, net—other than bank
Derivative liabilities
Hawaiian Electric consolidated
Short-term borrowings
Long-term debt, net
December 31, 2016
Financial assets
HEI consolidated
Money market funds
Available-for-sale investment securities
Stock in Federal Home Loan Bank
Loans receivable, net
Mortgage servicing rights
Derivative assets
Financial liabilities
HEI consolidated
Deposit liabilities
Other bank borrowings
Long-term debt, net—other than bank
Derivative liabilities
Hawaiian Electric consolidated
Long-term debt, net
Derivative liabilities—window forward contracts
Estimated fair value
Carrying or
notional
amount
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$ 1,401,198
$
— $
1,385,771
$
15,427
$ 1,401,198
44,515
9,706
4,628,381
8,639
17,812
5,890,597
117,945
190,859
1,683,797
13,562
4,999
1,368,479
—
—
—
—
—
—
—
—
—
—
20
—
—
44,412
9,706
11,254
—
393
256
5,884,071
117,945
190,829
1,813,295
10
4,999
1,497,079
—
—
44,412
9,706
4,770,497
4,781,751
12,052
—
—
—
—
—
—
—
—
—
12,052
393
256
5,884,071
117,945
190,829
1,813,295
30
4,999
1,497,079
$
13,085
$
— $
13,085
$
— $
13,085
—
—
—
—
—
—
—
—
129
—
—
1,089,755
15,427
1,105,182
11,218
13,333
—
453
—
11,218
4,839,493
4,852,826
13,216
—
13,216
453
5,546,644
193,991
1,704,717
823
1,399,490
743
—
—
—
—
—
—
5,546,644
193,991
1,704,717
952
1,399,490
743
1,105,182
11,218
4,701,977
9,373
23,578
5,548,929
192,618
1,619,019
53,852
1,319,260
20,734
177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as
follows:
December 31
(in thousands)
2017
2016
Fair value measurements using
Fair value measurements using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
$
—
—
—
Money market funds (“other” segment)
$
— $
— $
— $
— $
13,085
Available-for-sale investment securities (bank segment)
Mortgage-related securities-FNMA, FHLMC and GNMA $
— $ 1,201,473
$
— $
— $ 897,474
U.S. Treasury and federal agency obligations
Mortgage revenue bond
—
—
184,298
—
—
15,427
—
—
192,281
—
15,427
Derivative assets
Interest rate lock commitments (bank segment)1
Forward commitments (bank segment)1
Window forward contracts (electric utility segment)2
Derivative liabilities
Interest rate lock commitments (bank segment)1
Forward commitments (bank segment)1
Window forward contracts (electric utility segment)2
$
$
$
$
$
— $ 1,385,771
$ 15,427
$
— $1,089,755
$ 15,427
— $
133
$
— $
— $
445
$
—
—
— $
— $
20
—
20
$
4
256
393
2
8
—
10
$
$
$
—
—
—
—
8
—
— $
— $
453
$
— $
— $
—
—
129
—
— $
129
$
24
56
743
823
$
$
—
—
—
—
—
—
—
—
1 Derivatives are carried at fair value with changes in value reflected in the balance sheet in other assets or other liabilities and included in
mortgage banking income.
2 Derivatives are included in regulatory assets and/or liabilities in the balance sheets.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the
years ended December 31, 2017 and 2016.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
(in thousands)
Mortgage revenue bond
Balance, January 1
Principal payments received
Purchases
Unrealized gain (loss) included in other comprehensive income
Balance, December 31
2017
2016
$
$
15,427 $
—
—
—
15,427 $
—
—
15,427
—
15,427
ASB holds one mortgage revenue bond issued by the Department of Budget and Finance of the State of Hawaii. The
Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future
principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate.
As of December 31, 2017, the weighted average discount rate was 3.048% which was derived by incorporating a credit spread
over the one month LIBOR rate. Significant increases (decreases) in the weighted average discount rate could result in a
significantly lower (higher) fair value measurement.
Fair value measurements on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring
basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of
cost or fair value or from impairment of individual assets. The carrying value of assets measured at fair value on a nonrecurring
178
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
basis were as follows:
(in thousands)
December 31, 2017
Loans
December 31, 2016
Loans
Real estate acquired in settlement of loans
Fair value measurements using
Balance
Level 1
Level 2
Level 3
$
2,621
$
— $
— $
2,621
2,767
1,189
—
—
—
—
2,767
1,189
For 2017 and 2016, there were no adjustments to fair value for ASB’s loans held for sale.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments
measured at fair value on a nonrecurring basis:
Fair value
Valuation technique
Significant unobservable
input
Range
Weighted
Average
Significant unobservable
input value (1)
613 Fair value of collateral
Appraised value less 7%
selling cost
2,008 Fair value of collateral
Appraised value
71-92%
71-76%
84%
75%
2,621
2,468 Sales price
Sales price
287 Fair value of property or
collateral
12 Fair value of property or
collateral
Appraised value less 7%
selling cost
Appraised value less 7%
selling cost
2,767
95-100%
42-65%
97%
61%
N/A (2)
1,189 Fair value of property or
collateral
Appraised value less 7%
selling cost
100%
100%
(dollars in
thousands)
December 31, 2017
Residential loans
Commercial loans
Total loans
December 31, 2016
Residential loans
Residential loans
Home equity lines
of credit
Total loans
Real estate acquired
in settlement of
loans
$
$
$
$
$
$
(1) Represent percent of outstanding principal balance.
(2) N/A - Not applicable. There is one loan in each fair value measurement type.
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value
measurements.
179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15 · Termination of proposed merger and other matters
On December 3, 2014, HEI, NextEra Energy, Inc. (NEE) and two subsidiaries of NEE entered into an Agreement and Plan
of Merger (the Merger Agreement), under which Hawaiian Electric was to become a subsidiary of NEE. The Merger Agreement
contemplated that, prior to the Merger, HEI would distribute to its shareholders all of the common stock of ASB Hawaii, Inc.
(ASB Hawaii), the parent company of ASB (such distribution referred to as the Spin-Off).
The closing of the Merger was subject to various conditions, including receipt of regulatory approval from the PUC. In July
2016: (1) the PUC dismissed the NEE and Hawaiian Electric's application requesting approval of the proposed Merger, (2) NEE
terminated the Merger Agreement, (3) pursuant to the terms of the Merger Agreement, NEE paid HEI a $90 million termination
fee and $5 million for the reimbursement of expenses associated with the transaction. In 2016, the Company recognized $60
million of net income ($2 million of net loss in each of the first and second quarters and $64 million of net income in the third
quarter), comprised of the termination fee ($55 million), reimbursements of expenses from NEE and insurance ($3 million), and
additional tax benefits on the previously non-tax-deductible merger- and spin-off-related expenses incurred through June 30,
2016 ($8 million), less merger- and spin-off-related expenses incurred in 2016 ($6 million) (all net of tax impacts). In 2015, the
Company recognized $16 million of merger- and spin-off-related expenses ($5 million in the first quarter, $7 million in the
second quarter and $2 million in each of the third and fourth quarters), net of tax impacts. In 2014, the Company recognized
merger- and spin-off-related expenses of $5 million, net of tax impacts, primarily in the fourth quarter. The Spin-Off of ASB
Hawaii was cancelled as it was cross-conditioned on the merger consummation.
In May 2016, the Utilities had filed an application for approval of an LNG supply and transport agreement and LNG-
related capital equipment, which application was conditioned on the PUC’s approval of the proposed Merger. Subsequently, the
Utilities terminated the agreement and withdrew the application. In 2016, Hawaiian Electric recognized expenses related to the
terminated LNG agreement of $1 million, net of tax benefits, in each of the first and second quarters.
180
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16 · Quarterly information (unaudited)
Selected quarterly information was as follows:
(in thousands, except per share amounts)
March 31
June 30
Sept. 30
Dec. 31
December 31
Quarters ended
Years ended
HEI consolidated
20171
Revenues
Operating income
Net income
Net income for common stock
Basic earnings per common share 3
Diluted earnings per common share 4
Dividends per common share
20162
Revenues
Operating income
Net income
Net income for common stock
Basic earnings per common share 3
Diluted earnings per common share 4
Dividends per common share
Hawaiian Electric consolidated
20175
Revenues
Operating income
Net income
Net income for common stock
2016
Revenues
Operating income
Net income
Net income for common stock
$
591,562
$
632,281
$
673,185
$
658,597
$
2,555,625
67,862
34,666
34,193
0.31
0.31
0.31
75,896
39,134
38,661
0.36
0.36
0.31
109,545
60,544
60,073
0.55
0.55
0.31
84,988
32,843
32,370
0.30
0.30
0.31
338,291
167,187
165,297
1.52
1.52
1.24
$
550,960
$
566,244
$
646,055
$
617,395
$
2,380,654
68,851
32,825
32,352
0.30
0.30
0.31
85,455
44,601
44,128
0.41
0.41
0.31
105,442
127,613
127,142
1.17
1.17
0.31
88,427
45,107
44,634
0.41
0.41
0.31
348,175
250,146
248,256
2.30
2.29
1.24
$
518,611
$
556,875
$
598,769
$
583,311
$
2,257,566
48,938
21,964
21,465
55,047
26,143
25,644
87,076
47,985
47,487
66,460
25,854
25,355
257,521
121,946
119,951
482,052
495,395
572,253
544,668
2,094,368
55,326
25,866
25,367
70,686
36,356
35,857
89,812
47,472
46,974
68,644
34,618
34,119
284,468
144,312
142,317
Note: HEI owns all of Hawaiian Electric's common stock, therefore per share data for Hawaiian Electric is not meaningful.
1
2
3
4
5
In the fourth quarter of 2017, the Company recorded a $14.2 million adjustment, primarily to reduce deferred tax net asset balances (not
accounted for under Utility regulatory ratemaking) to reflect the lower rates enacted by the Tax Act. Also included in this adjustment is
$0.7 million (net of tax) of non-executive bonuses paid by ASB related to the enactment of federal tax reform. See below for the impact
of the Utilities lower RAM revenues due to the expiration of the 2013 settlement agreement.
In the third quarter of 2016, HEI received a $90 million termination fee from NEE and in 2016 received and incurred other merger and
spin-off-related amounts (see Note 15 to the Consolidated Financial Statements). For the first quarter of 2016, second quarter of 2016
and third quarter of 2016, the Company recorded merger- and spin-off-related income/(expenses), net of tax impacts of $(2) million, $(2)
million and $64 million, respectively.
The quarterly basic earnings per common share are based upon the weighted-average number of shares of common stock outstanding in
each quarter.
The quarterly diluted earnings per common share are based upon the weighted-average number of shares of common stock outstanding
in each quarter plus the dilutive incremental shares at quarter end.
In the fourth quarter of 2017, Hawaiian Electric consolidated recorded a $9.2 million adjustment to reduce deferred tax net asset balances
(not accounted for under regulatory ratemaking) to reflect the lower rates enacted by the Tax Act. In the first five months of 2017, the
Utilities recorded lower RAM revenues due to the expiration of the 2013 settlement agreement that allowed the accrual of RAM
revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric. For the first and second quarters of 2017, the Utilities
recorded lower revenues of $12 million ($7 million, net of tax impacts) and $8 million ($4 million, net of tax impacts) due to this RAM
lag, respectively.
181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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, and will
correct prospectively in subsequent quarterly filings. For the nine months ended September 30, 2017, six months ended June
30, 2017 and three months ended March 31, 2017, the correction of this error will result in an increase (decrease) 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) of $33 million, ($7 million) and ($42 million), respectively, and an increase (decrease) in
Capital Expenditures and Net Cash Used in Investing Activities of ($33 million), $7 million and $42 million, respectively.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
HEI and Hawaiian Electric: None
ITEM 9A.
CONTROLS AND PROCEDURES
HEI:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Constance H. Lau, HEI Chief Executive Officer (CEO), and Gregory C. Hazelton, HEI Chief Financial Officer (CFO),
have evaluated the disclosure controls and procedures of HEI as of December 31, 2017. Based on their evaluation, as of
December 31, 2017, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be
disclosed by HEI in reports HEI files or submits under the Securities Exchange Act of 1934:
(1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and
(2) is accumulated and communicated to HEI management, including HEI’s CEO and CFO, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The
Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report which appears herein.
182
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2017 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Hawaiian Electric:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Alan M. Oshima, Hawaiian Electric CEO, and Tayne S. Y. Sekimura, Hawaiian Electric CFO, have evaluated the
disclosure controls and procedures of Hawaiian Electric as of December 31, 2017. Based on their evaluation, as of
December 31, 2017, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be
disclosed by Hawaiian Electric in reports Hawaiian Electric files or submits under the Securities Exchange Act of 1934:
(1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and
(2) is accumulated and communicated to Hawaiian Electric management, including Hawaiian Electric’s CEO and CFO, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Hawaiian
Electric’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of Hawaiian Electric’s internal control over financial reporting
as of December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Based on this evaluation, management has concluded that Hawaiian Electric’s internal control over financial reporting was
effective as of December 31, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2017 that
have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
HEI and Hawaiian Electric: None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
HEI:
Information regarding HEI's executive officers is provided in the "Executive Officers of the Registrant" section following
Item 4 of this report.
The remaining information required by this Item 10 for HEI is incorporated herein by reference to the following sections in
HEI's 2018 Proxy Statement:
•
•
•
“Nominees for Class I directors whose terms expire at the 2021 Annual Meeting”
“Continuing Class II directors whose terms expire at the 2019 Annual Meeting”
“Continuing Class III directors whose terms expire at the 2020 Annual Meeting”
183
•
•
“Committees of the Board” (portions regarding whether HEI has an audit committee and identifying its members; no
other portion of the Committees of the Board section is incorporated herein by reference)
“Audit Committee Report” (portion identifying audit committee financial experts who serve on the HEI Audit
Committee only; no other portion of the Audit Committee Report is incorporated herein by reference)
Family relationships; director arrangements
There are no family relationships between any HEI director or director nominee and any other HEI director or director
nominee or any HEI executive officer. There are no arrangements or understandings between any HEI director or director
nominee and any other person pursuant to which such director or director nominee was selected.
Section 16(a) beneficial ownership reporting compliance
Information required to be reported under this caption is incorporated herein by reference to the “Stock Ownership
Information-Section 16(a) Beneficial Ownership Reporting Compliance” section in HEI's 2018 Proxy Statement.
Code of Conduct
The HEI Board has adopted a Corporate Code of Conduct that includes a code of ethics applicable to, among others, its
principal executive officer, principal financial officer and principal accounting officer. The Corporate Code of Conduct is
available on HEI’s website at www.hei.com. HEI elects to disclose the information required by Form 8-K, Item 5.05,
“Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics,” through this website and
such information will remain available on this website for at least a 12-month period.
Hawaiian Electric:
The information required by this Item 10 for Hawaiian Electric is incorporated herein by reference to pages 1 to 7 of
Hawaiian Electric Exhibit 99.1.
ITEM 11.
EXECUTIVE COMPENSATION
HEI:
The information required by this Item 11 for HEI is incorporated herein by reference to the information relating to
executive and director compensation in HEI's 2018 Proxy Statement.
Hawaiian Electric:
The information required by this Item 11 for Hawaiian Electric is incorporated herein by reference to:
Pages 8 to 31 of Hawaiian Electric Exhibit 99.1 to this Form 10-K;
•
• The discussion of “2016-18 Long-Term Incentive Plan” at pages 15-16 of Hawaiian Electric’s Exhibit 99.1 to Annual
•
Report on Form 10-K for the year ended December 31, 2016; and
Information concerning compensation paid to directors of Hawaiian Electric who are also directors of HEI under the
section of HEI's 2018 Proxy Statement entitled, “Director Compensation.”
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
HEI:
The information required to be reported under this caption for HEI is incorporated herein by reference to the
“Compensation Committee Interlocks and Insider Participation” section in HEI's 2018 Proxy Statement.
Hawaiian Electric:
The information required to be reported under this caption for Hawaiian Electric is incorporated herein by reference to
page 21 of Hawaiian Electric Exhibit 99.1.
184
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
HEI:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information required by this Item 12 for HEI is incorporated herein by reference to the “Stock Ownership Information-
Security Ownership of Certain Beneficial Owners” section in HEI's 2018 Proxy Statement.
Equity Compensation Plan Information
Information as of December 31, 2017 about HEI Common Stock that may be issued under all of the Company’s equity
compensation plans was as follows:
Plan category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(a)
Number of
securities
to be issued upon
exercise of
outstanding
options, warrants
and rights (1)
(b)
Weighted-average
exercise price of
outstanding
options,
warrants and
rights
(c)
Number of securities
remaining available for
future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)) (2)
351,191
—
351,191
$
$
—
—
—
3,000,172
—
3,000,172
(1) This column includes the number of shares of HEI Common Stock which may be issued under the Revised and Amended HEI 2010
Equity Incentive Plan (amended EIP) on account of awards outstanding as of December 31, 2017, including:
EIP
137,186 Restricted stock units plus estimated compounded dividend equivalents (if applicable) *
214,005 Shares to be issued in February 2020 under the 2017-2019 LTIP plus compounded dividend equivalents
351,191
* Under the amended EIP as of December 31, 2017, RSUs count as one share against shares available for issuance less estimated
shares withheld for taxes under net share settlement which again become available for the issuance of new shares on a one-to-one
basis.
(2) This represents the number of shares available as of December 31, 2017 for future awards, including 2,914,744 shares available for
future awards under the amended EIP and 85,428 shares available for future awards under the 2011 Nonemployee Director Plan.
Hawaiian Electric:
The information required by this Item 12 for Hawaiian Electric is incorporated herein by reference to pages 34 to 35 of
Hawaiian Electric Exhibit 99.1.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
HEI:
The information required by this Item 13 for HEI is incorporated herein by reference to the sections relating to related
person transactions and director independence in HEI's 2018 Proxy Statement.
Hawaiian Electric:
The information required by this Item 13 for Hawaiian Electric is incorporated herein by reference to pages 35 to 36 of
Hawaiian Electric Exhibit 99.1.
185
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
HEI:
The information required by this Item 14 for HEI is incorporated herein by reference to the relevant information in the
Audit Committee Report in HEI's 2018 Proxy Statement (but no other part of the “Audit Committee Report” is incorporated
herein by reference).
Hawaiian Electric:
The information required by this Item 14 for Hawaiian Electric is incorporated herein by reference to page 37 of Hawaiian
Electric Exhibit 99.1.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial statements
See Item 8 for the Consolidated Financial Statements of HEI and Hawaiian Electric.
(a)(2) and (c) Financial statement schedules
The following financial statement schedules for HEI and Hawaiian Electric are included in this report on the
pages indicated below:
Schedule I
Schedule II
NA Not applicable.
Condensed Financial Information of Registrant, Hawaiian Electric
Industries, Inc. (Parent Company) at December 31, 2017 and 2016 and for
the years ended December 31, 2017, 2016 and 2015
Valuation and Qualifying Accounts, Hawaiian Electric Industries, Inc. and
subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries for the
years ended December 31, 2017, 2016 and 2015
Page/s in Form 10-K
HEI
Hawaiian Electric
187-189
191
NA
191
Certain schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required
information is shown in the Consolidated Financial Statements.
186
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31
(dollars in thousands)
Assets
Cash and cash equivalents
Accounts receivable
Property, plant and equipment, net
Deferred income tax assets
Other assets
Investments in subsidiaries, at equity
Total assets
Liabilities and shareholders’ equity
Liabilities
Accounts payable
Interest payable
Notes payable to subsidiaries
Commercial paper
Short-term debt, net
Long-term debt, net
Retirement benefits liability
Other
Total liabilities
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: 108,787,807
shares and 108,583,413 shares at December 31, 2017 and 2016, respectively
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
2017
2016
$
11,702
$
2,347
3,910
8,710
15,480
2,466,342
14,924
3,788
4,143
17,280
9,858
2,383,405
$
$
2,508,491
$
2,433,398
561
$
2,319
1,918
62,993
49,953
249,588
31,518
12,255
411,105
379
1,735
5,373
—
—
299,759
33,939
25,460
366,645
—
—
1,662,491
1,660,910
476,836
(41,941)
438,972
(33,129)
2,097,386
2,066,753
$
2,508,491
$
2,433,398
187
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Years ended December 31
(in thousands)
Revenues
Equity in net income of subsidiaries
Expenses:
Operating, administrative and general
Depreciation of property, plant and equipment
Taxes, other than income taxes
Total expenses
Income before merger termination fee, interest expense and income (taxes) benefits
Merger termination fee
Income before interest expense and income (taxes) benefits
Interest expense
Income before income (taxes) benefits
Income (taxes) benefits
Net income
2017
2016
2015
$
798
$
647
$
327
187,097
199,485
190,033
17,697
548
496
18,741
169,154
—
169,154
9,389
159,765
5,532
18,701
566
4,726
23,993
176,139
90,000
266,139
9,037
257,102
(8,846)
34,350
576
440
35,366
154,994
—
154,994
10,788
144,206
15,671
$
165,297
$
248,256
$
159,877
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
STATEMENTS OF COMPREHENSIVE INCOME
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Incorporated by reference are HEI and Subsidiaries’ Statements of Consolidated Comprehensive Income and Consolidated
Statements of Changes in Shareholders’ Equity in Part II, Item 8.
188
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
(in thousands)
Net cash provided by operating activities
Cash flows from investing activities
Increase in note receivable from subsidiary
Decrease in note receivable from subsidiary
Capital expenditures
Investments in subsidiaries
Other
Net cash used in investing activities
Cash flows from financing activities
Net increase (decrease) in notes payable to subsidiaries with original maturities of three
months or less
Net increase (decrease) in short-term borrowings with original maturities of three months
or less
Proceeds from issuance of short-term debt
Repayment of short-term debt
Proceeds from issuance of long-term debt
Repayment of long-term debt
Withheld shares for employee taxes on vested share-based compensation
Net proceeds from issuance of common stock
Common stock dividends
Other
Net cash used in financing activities
Net increase (decrease) in cash and equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
2017
2016
2015
$
99,600
$
191,710
$
98,119
(70,000)
66,391
(317)
(22,353)
(177)
(26,456)
—
—
(212)
(24,000)
1
(24,211)
—
—
(173)
—
—
(173)
98
(618)
87
62,993
125,000
(75,000)
150,000
(200,000)
(3,828)
—
(134,873)
(756)
(76,366)
(3,222)
14,924
11,702
$
(103,063)
—
—
75,000
(75,000)
(2,416)
13,220
(117,274)
2,460
(207,691)
(40,192)
55,116
14,924
$
(15,909)
—
—
—
—
(3,260)
104,435
(131,765)
3,306
(43,106)
54,840
276
55,116
$
189
NOTES TO CONDENSED FINANCIAL INFORMATION
The “Notes to Consolidated Financial Statements” in Part II, Item 8 should be read in conjunction with the above HEI
(Parent Company) financial statements. All HEI subsidiaries are reflected in the Condensed Financial Statements under the
equity method.
Long-term debt
The components of long-term debt, net, were as follows:
December 31
(dollars in thousands)
HEI 2.99% term loan, due 2022
HEI 5.67% senior note, due 2021
HEI 3.99% senior note, due 2023
HEI Term loans (LIBOR + 0.75%), paid in 2017
Less unamortized debt issuance costs
Long-term debt, net
2017
2016
$
150,000
$
50,000
50,000
—
(412)
—
50,000
50,000
200,000
(241)
$
249,588
$
299,759
The aggregate payments of principal required within five years after December 31, 2017 on long-term debt are nil in 2018,
2019 and 2020 and $50 million in 2021 and $150 million in 2022.
Indemnities
As of December 31, 2017, HEI has a General Agreement of Indemnity in favor of both Liberty Mutual Insurance Company
(Liberty) and Travelers Casualty and Surety Company of America (Travelers) for losses in connection with any and all bonds,
undertakings or instruments of guarantee and any renewals or extensions thereof executed by Liberty or Travelers, including,
but not limited to, a $0.2 million self-insured United States Longshore & Harbor bond and a $0.6 million self-insured
automobile bond.
Income taxes
The Company’s financial reporting policy for income tax allocations is based upon a separate entity concept whereby each
subsidiary provides income tax expense (or benefits) as if each were a separate taxable entity. The difference between the
aggregate separate tax return income tax provisions and the consolidated financial reporting income tax provision is charged or
credited to HEI’s separate tax provision.
Dividends from HEI subsidiaries
In 2017, 2016 and 2015, cash dividends received from subsidiaries were $125 million, $130 million and $121 million,
respectively.
Supplemental disclosures of noncash activities
In 2017, 2016 and 2015, $2.8 million, $2.3 million and $2.3 million, respectively, of HEI accounts receivable from ASB
Hawaii were reduced with a corresponding reduction in HEI notes payable to ASB Hawaii in noncash transactions.
In 2017, 2016 and 2015, $2.8 million, $2.3 million and $0.3 million, respectively, were contributed as equity by HEI into
ASB Hawaii with a corresponding increase in HEI notes payable to ASB Hawaii in noncash transactions.
In 2017, $3.6 million of HEI notes receivable from Hamakua Energy, LLC were converted to equity in a noncash
transaction.
Under the HEI DRIP, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions
amounted to nil, $17 million and nil in 2017, 2016 and 2015, respectively. From March 6, 2014 through January 5, 2016, and
from December 7, 2016 to date, HEI satisfied the share purchase requirements of the DRIP through open market purchases of
its common stock rather than new issuances.
190
Hawaiian Electric Industries, Inc. and subsidiaries
and Hawaiian Electric Company, Inc. and subsidiaries
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2017, 2016 and 2015
(in thousands)
Description
Col. A
2017
Allowance for uncollectible accounts – electric utility
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Deferred tax valuation allowance – HEI
2016
Allowance for uncollectible accounts – electric utility
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Deferred tax valuation allowance – HEI
2015
Allowance for uncollectible accounts – electric utility
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Allowance for mortgage-servicing assets – bank
Deferred tax valuation allowance – HEI
Col. B
Balance
at begin-
ning of
period
Col. C
Additions
Col. D
Col. E
Charged to
costs and
expenses
Charged
to other
accounts
Deductions
Balance at
end of
period
$
$
$
$
$
$
$
$
$
$
$
$
$
1,121
1,834
55,533
38
1,699
1,679
50,038
54
1,959
1,514
45,618
209
45
$
$
$
$
$
$
$
$
$
$
$
$
$
1,810
—
$
$
785 (a)
—
10,901 (d) $
4,016 (a)
—
2,383
—
$
$
$
—
877 (a)
155
16,763 (d) $
2,977 (a)
—
3,653
—
$
$
$
—
977 (a)
165
6,275 (d) $
4,571 (a)
—
9
$
$
(205)
—
$
$
$
$
$
$
$
$
$
$
$
$
$
(b),
(c)
2,538
1,467
16,813 (b)
38
(b),
(c)
3,838
—
14,245 (b)
16
(b),
(c)
4,890
—
6,426 (b)
4
—
$
$
$
$
$
$
$
$
$
$
$
$
$
1,178
367
53,637
—
1,121
1,834
55,533
38
1,699
1,679
50,038
—
54
(a) Primarily recoveries.
(b) Bad debts charged off.
(c) Reclass of allowance for one customer account into other long term assets in 2017, 2016 and 2015 were $841, $1,790 and $2,303,
respectively.
(d) Represents provision for loan loss.
191
(a)(3) and (b) Exhibits
The exhibits listed for HEI and Hawaiian Electric are listed in the index under the headings “HEI” and “Hawaiian
Electric,” respectively, except that the exhibits listed under “Hawaiian Electric” are also exhibits for HEI.
EXHIBIT INDEX
The exhibits designated by an asterisk (*) are filed herewith. The exhibits not so designated are incorporated by reference to the
indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI
Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808-0730.
Exhibit no.
Description
HEI:
3(i)
3(ii)
4.1
4.2
4.2(a)
4.3
4.4
4.4(a)
4.4(b)
4.4(c)
* 4.4(d)
4.4(e)
* 4.4(f)
* 4.4(g)
4.5
4.6
4.6(a)
10.1
10.2
10.3
HEI’s Amended and Restated Articles of Incorporation.
Amended and Restated Bylaws of HEI as last amended May 9, 2011.
Agreement to provide the SEC with instruments which define the rights of
holders of certain long-term debt of HEI and its subsidiaries.
Master Note Purchase Agreement among HEI and the Purchasers thereto,
dated March 24, 2011.
First Supplement to Note Purchase Agreement among HEI and the Purchasers
thereto, dated March 6, 2013.
Hawaiian Electric Industries Retirement Savings Plan, restatement effective
January 1, 2013.
Master Trust Agreement dated as of September 4, 2012 between HEI and ASB
and Fidelity Management Trust Company, as Trustee
Letter Amendment effective November 28, 2012 to Master Trust Agreement
dated as of September 4, 2012 between HEI and ASB and Fidelity
Management Trust Company.
Letter Amendment effective October 1, 2014 to Master Trust Agreement dated
as of September 4, 2012 between HEI and ASB and Fidelity Management
Trust Company.
First Amendment to Master Trust Agreement (dated as of September 4, 2012)
effective March 1, 2015 between HEI and ASB and Fidelity Management
Trust Company.
Letter Amendment effective August 3, 2015 to Master Trust Agreement (dated
as of September 4, 2012) between HEI and ASB and Fidelity Management
Trust Company.
Letter Amendment effective August 15, 2017 to Master Trust Agreement
(dated September 4, 2012) between HEI and ASB and Fidelity Management
Trust Company.
Second Amendment effective January 1, 2018 to Master Trust Agreement
(dated September 4, 2012) between HEI and ASB and Fidelity Management
Trust Company.
Letter of Direction effective January 2, 2018 to Master Trust Agreement (dated
September 4, 2012) between HEI and ASB and Fidelity Management Trust
Company.
Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase
Plan, as amended and restated effective October 5, 2017.
American Savings Bank 401(k) Plan, restatement effective January 1, 2013.
Amendment 2013-1 to the American Savings Bank 401(k) Plan, effective
January 1, 2014.
Conditions for the Merger and Corporate Restructuring of Hawaiian Electric
Company, Inc. dated September 23, 1982.
Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988,
between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation
(by the Federal Home Loan Bank of Seattle).
OTS letter regarding release from Part II.B. of the Regulatory Capital
Maintenance/Dividend Agreement dated May 26, 1988.
192
File
Form
Number Exhibit #
8-K
8-K
10-K
1-8503
1-8503
1-8503
3(i)
3(ii)
4.1
Filing
date
5/6/09
5/11/11
3/31/93
8-K
1-8503
4(a)
3/28/11
8-K
1-8503
4(a)
3/6/13
10-K
1-8503
4.5
2/19/13
10-Q
1-8503
4
11/8/12
10-K
1-8503
4.6(a)
2/19/13
10-Q
1-8503
10-Q
1-8503
4
4
11/6/14
5/6/15
10-Q
1-8503
4
11/2/17
S-3
10-K
10-K
333-
220842
1-8503
1-8503
4.3
4.8
4.7(a)
10/5/17
2/19/13
2/23/16
10-K
1-8503
10.1
2/28/07
8-K
1-8503
(28)-2
5/26/88**
10-K
1-8503
10.3(a)
3/31/93
Exhibit no.
Description
HEI Exhibits 10.4 through 10.21 are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 15(b) of this report. HEI Exhibits
10.4 through 10.19 are also management contracts or compensatory plans or arrangements with
Hawaiian Electric participants.
File
Form
Number Exhibit #
Filing
date
10.4
10.5
10.6
10.7
10.7(a)
10.7(b)
10.7(c)
10.7(d)
10.7(e)
10.8
10.9
10.9(a)
HEI Executive Incentive Compensation Plan amended as of February 4, 2013.
HEI Executives’ Deferred Compensation Plan.
Hawaiian Electric Industries, Inc. 2010 Equity and Incentive Plan, as amended
and restated November 16, 2010.
Hawaiian Electric Industries, Inc. 2010 Equity and Incentive Plan, as amended
and restated February 14, 2014.
Form of Non-Qualified Stock Option Agreement pursuant to 2010 Equity and
Incentive Plan.
Form of Stock Appreciation Right Agreement pursuant to 2010 Equity and
Incentive Plan.
Form of Restricted Shares Agreement pursuant to 2010 Equity and Incentive
Plan.
Form of Performance Shares Agreement pursuant to 2010 Equity and
Incentive Plan.
Form of Restricted Stock Unit Agreement, amended as of December 15, 2016,
pursuant to 2010 Equity and Incentive Plan, as amended and restated February
14, 2014.
HEI Long-Term Incentive Plan amended as of February 4, 2013.
HEI Supplemental Executive Retirement Plan amended and restated as of
January 1, 2009.
Amendments to the HEI Supplemental Executive Retirement Plan Freezing
Benefit Accruals Effective December 31, 2008.
10-K
10-Q
10-K
Proxy
(DEF
14A)
S-8
S-8
S-8
S-8
1-8503
1-8503
1-8503
10.4
10.2
10.6
2/19/13
11/5/08
2/18/11
1-8503 Appendix
3/25/14
D
4.4
4.5
4.6
4.7
5/11/10
5/11/10
5/11/10
5/11/10
333-
166737
333-
166737
333-
166737
333-
166737
10-K
1-8503
10.7(e)
2/24/17
10-K
10-Q
1-8503
1-8503
10.8
10.3
2/19/13
11/5/08
10-K
1-8503
10.9(a)
2/27/09
10.10
HEI Excess Pay Plan amended and restated as of January 1, 2009.
10.10(a)
HEI Excess Pay Plan Addendum for Constance H. Lau.
10-K
10-K
1-8503
1-8503
10.10
2/27/09
10.10(a)
2/27/09
10.10(b)
Amendment No. 1 dated December 13, 2010 to January 1, 2009 Restatement
of HEI Excess Pay Plan.
10-K
1-8503
10.10(c)
2/19/13
10.11
10.12
10.13
10.14
10.15
10.16
Form of Change in Control Agreement.
Nonemployee Director Retirement Plan, effective as of October 1, 1989.
HEI 2011 Nonemployee Director Stock Plan.
Nonemployee Director’s Compensation Schedule effective January 1, 2017.
HEI Non-Employee Directors’ Deferred Compensation Plan.
Executive Death Benefit Plan of HEI and Participating Subsidiaries
restatement effective as of January 1, 2009.
10.16(a)
Resolution of the Compensation Committee of the Board of Directors of
Hawaiian Electric Industries, Inc. Re: Adoption of Amendment No. 1 to
January 1, 2009 Restatement of the Executive Death Benefit Plan.
10-K
10-K
Proxy
(DEF
14A)
10-K
10-Q
10-Q
1-8503
1-8503
10.11
10.15
2/27/09
3/27/90**
1-8503 Appendix
3/21/11
A
10.14
10.5
10.6
2/24/17
11/5/08
11/5/08
1-8503
1-8503
1-8503
10-Q
1-8503
10.1
11/5/09
10.17
10.18
10.19
10.20
10.20(a)
10.20(b)
Severance Pay Plan for Merit Employees of HEI and affiliates, restatement
effective as of January 1, 2009.
Hawaiian Electric Industries Deferred Compensation Plan adopted on
December 13, 2010.
Form of Indemnity Agreement (HEI, Hawaiian Electric and ASB with their
respective directors and HEI with certain of its senior officers).
American Savings Bank Select Deferred Compensation Plan (Restatement
Effective January 1, 2009).
10-K
1-8503
10.17
2/27/09
10-K
1-8503
10.18
2/18/11
10-Q
1-8503
10.1
11/8/12
10-Q
1-8503
10.7
11/5/08
Amendment No. 1 to January 1, 2009 Restatement of American Savings Bank
Select Deferred Compensation Plan dated December 30, 2009.
Amendment No. 2 to January 1, 2009 Restatement of American Savings Bank
Select Deferred Compensation Plan dated December 29, 2010.
10-K
1-8503
10.20(a)
2/23/16
10-K
1-8503
10.20(b)
2/23/16
193
Exhibit no.
10.20(c)
Description
Amendment No. 3 to January 1, 2009 Restatement of American Savings Bank
Select Deferred Compensation Plan dated December 3, 2014.
* 10.20(d)
Amendment No. 4 to January 1, 2009 Restatement of American Savings Bank
Select Deferred Compensation Plan dated December 4, 2017.
File
Form
10-K
Number Exhibit #
10.20(c)
1-8503
Filing
date
2/23/16
10.21
10.21(a)
10.22
* 11
* 12.1
* 21.1
* 23.1
* 23.2
* 31.1
* 31.2
American Savings Bank Supplemental Executive Retirement, Disability, and
Death Benefit Plan, effective January 1, 2009.
10-Q
1-8503
10.8
11/5/08
10-K
1-8503
10.19(b)
2/27/09
10-Q
1-8503
10.1
8/3/17
Amendments to the American Savings Bank Supplemental Executive
Retirement, Disability, and Death Benefit Plan Freezing Benefit Accruals
Effective December 31, 2008.
Second Amended and Restated Credit Agreement, dated as of June 30, 2017,
among HEI, as Borrower, the Lenders Party Thereto and Wells Fargo Bank,
National Association, as Syndication Agent, and Bank of America, N.A.,
MUFG Union Bank, N.A., Barclays Bank PLC, U.S. Bank National
Association and Bank of Hawaii as Co-Documentation Agents, and JPMorgan
Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing
Bank, and JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as
Joint Lead Arrangers and Joint Book Runners.
HEI - Computation of Earnings per Share of Common Stock.
HEI - Computation of Ratio of Earnings to Fixed Charges.
HEI - Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm (Deloitte &
Touche LLP).
Consent of Independent Registered Public Accounting Firm
(PricewaterhouseCoopers LLP).
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of
1934 of Constance H. Lau (HEI Chief Executive Officer).
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of
1934 of Gregory C. Hazelton (HEI Chief Financial Officer).
* 32.1
HEI Certification Pursuant to 18 U.S.C. Section 1350.
* 101.INS
XBRL Instance Document.
* 101.SCH XBRL Taxonomy Extension Schema Document.
* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
* 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
* 101.LAB XBRL Taxonomy Extension Label Linkbase Document.
* 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
Hawaiian Electric:
3(i).1
3(i).2
3(i).3
3(i).4
3(ii)
4.1
4.2
4.3
4.4
4.5
Hawaiian Electric’s Certificate of Amendment of Articles of Incorporation.
Articles of Amendment to Hawaiian Electric’s Amended Articles of
Incorporation.
Articles of Amendment to Hawaiian Electric’s Amended Articles of
Incorporation.
10-K
10-K
1-4955
1-4955
3.1
3/31/89
3.1(b)
3/27/90**
10-K
1-4955
3(i).4
3/23/99
Articles of Amendment amending Article V of Hawaiian Electric’s Amended
Articles of Incorporation effective August 6, 2009.
10-Q
1-4955
3(i).4
8/7/09
Hawaiian Electric’s Amended and Restated Bylaws (as last amended August 6,
2010).
8-K
1-4955
3(ii)
8/9/10
Agreement to provide the SEC with instruments which define the rights of
holders of certain long-term debt of Hawaiian Electric, Hawaii Electric Light
and Maui Electric
Certificate of Trust of HECO Capital Trust III.
Amended and Restated Trust Agreement of HECO Capital Trust III dated as of
March 1, 2004.
Hawaiian Electric Junior Indenture with The Bank of New York, as Trustee,
dated as of March 1, 2004
6.500% Quarterly Income Trust Preferred Security issued by HECO Capital
Trust III, dated March 18, 2004.
10-K
1-4955
4.1
3/19/03
S-3
8-K
333-
111073
1-4955
4(a)
12/10/03
4(c)
3/22/04
8-K
1-4955
4(f)
3/22/04
8-K
1-4955
4(d)
3/22/04
194
Exhibit no.
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
10.1(a)
10.1(b)
10.1(c)
10.1(d)
10.1(e)
10.1(f)
10.1(g)
10.1(h)
Description
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued
by Hawaiian Electric, dated March 18, 2004.
Trust Guarantee Agreement between The Bank of New York, as Trust
Guarantee Trustee, and Hawaiian Electric dated as of March 1, 2004.
File
Form
8-K
Number Exhibit #
1-4955
4(g)
Filing
date
3/22/04
8-K
1-4955
4(l)
3/22/04
Maui Electric Junior Indenture with The Bank of New York, as Trustee,
including Hawaiian Electric Subsidiary Guarantee, dated as of March 1, 2004.
8-K
1-4955
4(h)
3/22/04
Hawaii Electric Light Junior Indenture with The Bank of New York, as
Trustee, including Hawaiian Electric Subsidiary Guarantee, dated as of
March 1, 2004.
8-K
1-4955
4(j)
3/22/04
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued
by Maui Electric, dated March 18, 2004.
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued
by Hawaii Electric Light, dated March 18, 2004.
8-K
1-4955
4(i)
3/22/04
8-K
1-4955
4(k)
3/22/04
Expense Agreement, dated March 1, 2004, among HECO Capital Trust III,
Hawaiian Electric, Maui Electric and Hawaii Electric Light.
Note Purchase Agreement among Hawaiian Electric and the Purchasers that
are parties thereto, dated April 19, 2012.
Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui
Electric and the Purchasers that are parties thereto, dated April 19, 2012.
8-K
1-4955
4(m)
3/22/04
8-K
1-4955
4(a)
4/23/12
8-K
1-4955
4(b)
4/23/12
Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii
Electric Light and the Purchasers that are parties thereto, dated April 19, 2012.
8-K
1-4955
4(c)
4/23/12
Note Purchase Agreement among Hawaiian Electric and the Purchasers that
are parties thereto, dated September 13, 2012.
Note Purchase Agreement among Hawaiian Electric Company, Inc. and the
Purchasers that are parties thereto, dated as of October 3, 2013.
Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui
Electric Company, Limited and the Purchasers that are parties thereto, dated as
of October 3, 2013.
Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii
Electric Light Company, Inc. and the Purchasers that are parties thereto, dated
as of October 3, 2013.
Note Purchase Agreement among Hawaiian Electric Company, Inc. and the
Purchasers that are parties thereto, dated as of October 15, 2015.
Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui
Electric Company, Limited and the Purchasers that are parties thereto, dated as
of October 15, 2015.
Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii
Electric Light Company, Inc. and the Purchasers that are parties thereto, dated
as of October 15, 2015.
Note Purchase Agreement among Hawaiian Electric Company, Inc. and the
Purchasers that are parties thereto, dated as of December 15, 2016.
Power Purchase Agreement between Kalaeloa Partners, L.P., and Hawaiian
Electric dated October 14, 1988.
Amendment No. 1 to Power Purchase Agreement between Hawaiian Electric
and Kalaeloa Partners, L.P., dated June 15, 1989.
Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and Hawaiian
Electric, as Lessee, dated February 27, 1989.
Restated and Amended Amendment No. 2 to Power Purchase Agreement
between Hawaiian Electric and Kalaeloa Partners, L.P., dated February 9,
1990.
Amendment No. 3 to Power Purchase Agreement between Hawaiian Electric
and Kalaeloa Partners, L.P., dated December 10, 1991.
Amendment No. 4 to Power Purchase Agreement between Hawaiian Electric
and Kalaeloa Partners, L.P., dated October 1, 1999.
Confirmation Agreement Concerning Section 5.2B(2) of Power Purchase
Agreement and Amendment No. 5 to Power Purchase Agreement between
Hawaiian Electric and Kalaeloa Partners, L.P., dated October 12, 2004.
Agreement for Increment Two Capacity and Amendment No. 6 to Power
Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P.,
dated October 12, 2004.
195
8-K
1-4955
4
9/14/12
8-K
1-4955
4(a)
10/7/13
8-K
1-4955
4(b)
10/7/13
10-Q
1-4955
4
11/7/13
8-K
1-4955
4(a)
10/16/15
8-K
1-4955
4(b)
10/16/15
8-K
1-4955
4(c)
10/16/15
8-K
1-4955
4
12/19/16
10-Q
1-4955
10(a)
11/14/88
10-Q
1-4955
10(c)
8/14/89
10-Q
1-4955
10(d)
8/14/89
10-K
1-4955
10.2(c)
3/27/90**
10-K
1-4955
10.2(e)
3/24/92
10-Q
1-4955
10.1
11/8/00
10-Q
1-4955
10.3
11/5/04
10-Q
1-4955
10.4
11/5/04
Exhibit no.
10.1(i)
Description
Letter agreement dated July 28, 2016 and executed August 1, 2016 extending
the term of the Power Purchase Agreement between Hawaiian Electric and
Kalaeloa Partners, L.P., dated October 14, 1988 (as amended).
10.2(a)
10.2(b)
10.2(c)
10.2(d)
10.2(e)
10.3(a)
10.3(b)
10.3(c)
10.3(d)
10.3(e)
10.3(f)
10.3(g)
10.4(a)
10.4(b)
10.4(c)
* 10.4(d)
10.5
10.6
10.7
10.8(a)
Power Purchase Agreement between AES Barbers Point, Inc. and Hawaiian
Electric, entered into on March 25, 1988.
Agreement between Hawaiian Electric and AES Barbers Point, Inc., pursuant
to letters dated May 10, 1988 and April 20, 1988.
Amendment No. 1, entered into as of August 28, 1988, to Power Purchase
Agreement between AES Barbers Point, Inc. and Hawaiian Electric.
Hawaiian Electric’s Conditional Notice of Acceptance to AES Barbers
Point, Inc. dated January 15, 1990.
Amendment No. 2, entered into as of May 8, 2003, to Power Purchase
Agreement between AES Hawaii, Inc. and Hawaiian Electric.
Purchase Power Contract between Hawaii Electric Light and Thermal Power
Company dated March 24, 1986.
Firm Capacity Amendment between Hawaii Electric Light and Puna
Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal
Power Company) dated July 28, 1989 to Purchase Power Contract between
Hawaii Electric Light and Thermal Power Company dated March 24, 1986.
Amendment made in October 1993 to Purchase Power Contract between
Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as
amended.
Third Amendment dated March 7, 1995 to the Purchase Power Contract
between Hawaii Electric Light and Puna Geothermal Venture dated March 24,
1986, as amended.
Performance Agreement and Fourth Amendment dated February 12, 1996 to
the Purchase Power Contract between Hawaii Electric Light and Puna
Geothermal Venture dated March 24, 1986, as amended.
Fifth Amendment dated February 7, 2011 to the Purchase Power Contract
between Hawaii Electric Light and Puna Geothermal Venture dated March 24,
1986, as amended.
Power Purchase Agreement between Puna Geothermal Venture and Hawaii
Electric Light dated February 7, 2011.
Power Purchase Agreement between Encogen Hawaii, L.P. and Hawaii
Electric Light dated October 22, 1997 (but with the following attachments
omitted: Attachment C, “Selected portions of the North American Electric
Reliability Council Generating Availability Data System Data Reporting
Instructions dated October 1996” and Attachment E, “Form of the
Interconnection Agreement between Encogen Hawaii, L.P. and Hawaii Electric
Light,” which is provided in final form as Exhibit 10.6(b)).
Interconnection Agreement between Encogen Hawaii, L.P. and Hawaii Electric
Light dated October 22, 1997.
Amendment No. 1, executed on January 14, 1999, to Power Purchase
Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated
October 22, 1997.
Notice and acknowledgment under power purchase agreement effective
November 24, 2017 by Hamakua Energy, LLC and acknowledged by Hawaii
Electric Light.
Inter-Island Supply Contract for Petroleum Fuels by and between Chevron
Products Company and Hawaiian Electric, Hawaii Electric Light and Maui
Electric dated as of February 18, 2016 (confidential treatment has been granted
for portions of this exhibit through December 31, 2019).
Supply Contract for LSFO, Diesel and MATS Fuel by and between Hawaiian
Electric and Chevron Products Company dated February 18, 2016
(confidential treatment has been granted for portions of this exhibit through
December 31, 2019).
Fuels Terminalling Agreement by and between Chevron Products Company
and Hawaii Electric Light dated February 18, 2016 (confidential treatment has
been granted for portions of this exhibit through December 31, 2019).
Contract of private carriage by and between HITI and Hawaii Electric Light
dated December 4, 2000.
196
File
Form
10-Q
Number Exhibit #
1-4955
10
Filing
date
11/4/16
10-Q
1-4955
10(a)
5/16/88
10-K
1-4955
10.4
3/31/89
10-Q
1-4955
10
11/13/89
10-K
1-4955
13(c)
3/27/90**
10-K
1-4955
10.2(e)
3/9/04
10-Q
1-4955
10(a)
8/14/89
10-Q
1-4955
10(b)
8/14/89
10-K
1-4955
10.5(b)
3/27/98
10-K
1-4955
10.5(c)
3/27/98
10-K
1-4955
10.5(b)
3/25/96
10-K
1-4955
10.4(f)
2/17/12
10-K
1-4955
10.4(g)
2/17/12
10-K
1-4955
10.7
3/27/98
10-K
1-4955
10.7(a)
3/27/98
10-K
1-4955
10.7(b)
3/23/99
10-Q
1-4955
10.1
5/4/16
10-Q
1-4955
10.2
5/4/16
10-Q
10-K
1-4955
1-4955
10.3
10.13
5/4/16
3/23/01
File
Form
10-K
Number Exhibit #
10.13(b)
1-4955
Filing
date
2/19/13
10-K
1-4955
10.14
3/23/01
10-K
1-4955
10.14(b)
2/19/13
10-Q
1-4955
10.2
8/3/17
Exhibit no.
10.8(b)
10.9(a)
10.9(b)
10.10
Description
Consent to Change of Ownership/Control of Carrier by and between K-Sea
Operating Partnership, L.P., and Hawaii Electric Light, dated July 1, 2011.
Contract of private carriage by and between HITI and Maui Electric dated
December 4, 2000.
Consent to Change of Ownership/Control of Carrier by and between K-Sea
Operating Partnership, L.P., and Maui Electric, dated July 1, 2011.
Second Amended and Restated Credit Agreement, dated as of June 30, 2017,
among Hawaiian Electric Company, Inc., as Borrower, the Lenders Party
Hereto and Wells Fargo Bank, National Association, as Syndication Agent, and
Bank of America, N.A., MUFG Union Bank, N.A., Barclays Bank PLC, U.S.
Bank National Association and Bank of Hawaii as Co-Documentation Agents,
and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender
and Issuing Bank, and JPMorgan Chase Bank, N.A. and Wells Fargo
Securities, LLC, as Joint Lead Arrangers and Joint Book Runners.
* 10.11(a)
Amended and Restated Power Purchase Agreement between Hawaiian Electric
and Hu Honua Bioenergy, LLC dated May 9, 2017.
11
* 12.2
* 21.2
* 31.3
* 31.4
* 32.2
* 99.1
Computation of Earnings Per Share of Common Stock (See note on Hawaiian
Electric’s Item 6. Selected Financial Data).
Hawaiian Electric - Computation of Ratio of Earnings to Fixed Charges.
Hawaiian Electric - Subsidiaries of the Registrant.
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of
1934 of Alan M. Oshima (Hawaiian Electric Chief Executive Officer).
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of
1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer).
Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350.
Hawaiian Electric’s Directors, Executive Officers and Corporate Governance;
Hawaiian Electric’s Executive Compensation; Hawaiian Electric’s Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters; Hawaiian Electric’s Certain Relationships and Related
Transactions, and Director Independence; and Hawaiian Electric’s Principal
Accounting Fees and Services.
** Date of transmittal letter to SEC.
197
SIGNATURES (continued)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly
caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The execution of this report by
registrant Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its
subsidiaries.
HAWAIIAN ELECTRIC INDUSTRIES, INC.
HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant)
(Registrant)
By
/s/ Gregory C. Hazelton
Gregory C. Hazelton
By
/s/ Tayne S. Y. Sekimura
Tayne S. Y. Sekimura
Executive Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer of HEI)
(Principal Financial Officer of Hawaiian Electric)
Date: March 1, 2018
Date: March 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrants and in the capacities indicated on March 1, 2018. The execution of this report by each of the
undersigned who signs this report solely in such person’s capacity as a director or officer of Hawaiian Electric Company, Inc.
shall be deemed to relate only to matters having reference to such registrant and its subsidiaries.
Signature
/s/ Constance H. Lau
Constance H. Lau
/s/ Alan M. Oshima
Alan M. Oshima
/s/ Gregory C. Hazelton
Gregory C. Hazelton
/s/ Tayne S. Y. Sekimura
Tayne S. Y. Sekimura
/s/ Patsy H. Nanbu
Patsy H. Nanbu
Title
President of HEI and Director of HEI
Chairman of the Board of Directors of Hawaiian Electric
(Chief Executive Officer of HEI)
President and Director of Hawaiian Electric
(Chief Executive Officer of Hawaiian Electric)
Executive Vice President and Chief Financial Officer of HEI
(Principal Financial and Accounting Officer of HEI)
Senior Vice President and
Chief Financial Officer of Hawaiian Electric
(Principal Financial Officer of Hawaiian Electric)
Controller of Hawaiian Electric
(Principal Accounting Officer of Hawaiian Electric)
198
Signature
/s/ Kevin M. Burke
Kevin M. Burke
/s/ Richard J. Dahl
Richard J. Dahl
/s/ Thomas B. Fargo
Thomas B. Fargo
/s/ Peggy Y. Fowler
Peggy Y. Fowler
/s/ Timothy E. Johns
Timothy E. Johns
/s/ Micah A. Kane
Micah A. Kane
/s/ Bert A. Kobayashi, Jr.
Bert A. Kobayashi, Jr.
/s/ Keith P. Russell
Keith P. Russell
/s/ James K. Scott
James K. Scott
/s/ Kelvin H. Taketa
Kelvin H. Taketa
/s/ Barry K. Taniguchi
Barry K. Taniguchi
/s/ Jeffrey N. Watanabe
Jeffrey N. Watanabe
SIGNATURES (continued)
Title
Director of Hawaiian Electric
Director of HEI and Hawaiian Electric
Director of HEI
Director of HEI
Director of Hawaiian Electric
Director of Hawaiian Electric
Director of Hawaiian Electric
Director of HEI
Director of HEI
Director of HEI and Hawaiian Electric
Director of HEI
Chairman of the Board of Directors of HEI and director of
Hawaiian Electric
199
Appendix A
Shareholder Return Performance Graph
The graph below compares the cumulative total shareholder return on HEI Common Stock against the cumulative
total return of the companies listed on the S&P 500 Stock Index and the Edison Electric Institute (EEI) Index of Investor-
Owned Electric Companies (43 companies were included as of December 31, 2017). The graph is based on the market
price of common stock for all companies in the indices at December 31 each year and assumes that $100 was invested on
December 31, 2012, in HEI Common Stock and the common stock of all companies in the indices and that dividends
were reinvested.
(cid:11)(cid:12)(cid:13)(cid:14)(cid:15)(cid:16)(cid:17)(cid:18)(cid:12)(cid:19)(cid:20)(cid:12)(cid:21)(cid:20)(cid:11)(cid:22)(cid:13)(cid:22)(cid:23)(cid:15)(cid:24)(cid:17)(cid:25)(cid:26)(cid:20)(cid:21)(cid:17)(cid:25)(cid:26)(cid:20)(cid:27)(cid:26)(cid:15)(cid:16)(cid:20)(cid:24)(cid:12)(cid:24)(cid:15)(cid:23)(cid:20)(cid:16)(cid:26)(cid:24)(cid:22)(cid:16)(cid:19)
(cid:2)(cid:6)(cid:4)(cid:3)
(cid:2)(cid:6)(cid:3)(cid:3)
(cid:2)(cid:5)(cid:4)(cid:3)
(cid:2)(cid:5)(cid:3)(cid:3)
(cid:2)(cid:4)(cid:3)
(cid:2)(cid:3)
(cid:6)(cid:3)(cid:5)(cid:6)
Source: S&P Global Inc.
(cid:6)(cid:3)(cid:5)(cid:7)
(cid:6)(cid:3)(cid:5)(cid:8)
(cid:6)(cid:3)(cid:5)(cid:4)
(cid:6)(cid:3)(cid:5)(cid:9)
(cid:6)(cid:3)(cid:5)(cid:10)
(cid:2)(cid:3)(cid:4)(cid:3)(cid:5)(cid:5)(cid:3)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:13)(cid:5)(cid:11)(cid:7)(cid:14)(cid:6)(cid:15)(cid:16)(cid:17)(cid:12)(cid:13)(cid:5)(cid:10)(cid:17)(cid:18)(cid:7)(cid:14)(cid:6)(cid:11)(cid:19)
(cid:20)(cid:21)(cid:22)(cid:7)(cid:23)(cid:24)(cid:24)(cid:7)(cid:14)(cid:6)(cid:15)(cid:10)(cid:25)
(cid:8)(cid:8)(cid:14)(cid:7)(cid:14)(cid:6)(cid:15)(cid:10)(cid:25)
Appendix B
Explanation of HEI’s Use of Certain Unaudited Non-GAAP Measures
HEI and Hawaiian Electric Company management use certain non-GAAP measures to evaluate the performance of
HEI and the utility. Management believes these non-GAAP measures provide useful information and are a better
indicator of the companies’ core operating activities given the non-recurring nature of certain items. Core earnings and
other financial measures as presented here may not be comparable to similarly titled measures used by other companies.
The accompanying tables provide a reconciliation of reported GAAP1 earnings to non-GAAP core earnings (including
diluted earnings per common share), the return on average common equity (ROACE) and the adjusted non-GAAP core
ROACE for HEI consolidated.
The reconciling adjustments from GAAP earnings to core earnings include income, costs and associated taxes
related to the terminated merger between HEI and NextEra Energy, Inc., the cancelled spin-off of ASB Hawaii, Inc. and
the terminated liquefied natural gas (LNG) contract which required the Hawaii Public Utilities Commission approval of
the merger with NextEra Energy, Inc. For more information on the transactions, see HEI’s Form 8-K filed on July 18,
2016, and HEI’s Form 8-K filed on July 19, 2016. In addition, the reconciling adjustments from GAAP earnings to core
earnings also exclude the impact of the federal tax reform act due to the adjustment of the deferred tax balances and the
$1,000 employee bonuses paid by the bank related to federal tax reform. Management does not consider these items to
be representative of the company’s fundamental core earnings. Management has shown adjusted non-GAAP (core) net
income and adjusted non-GAAP (core) diluted earnings per common share in order to provide better comparability of
core net income, EPS and ROACE between periods.
RECONCILIATION OF GAAP1 TO NON-GAAP MEASURES
Hawaiian Electric Industries, Inc. and Subsidiaries (HEI)
Unaudited
($ in millions, except per share amounts)
2017
2016
2015
$
165.3 $
-
-
HEI CONSOLIDATED NET INCOME
GAAP (as reported)
Excluding special items (after-tax):
(Income) expenses related to the terminated merger with NextEra Energy
and cancelled spin-off of ASB Hawaii
Costs related to the terminated LNG contract2
Bonus related to enactment of federal tax reform3
Federal tax reform impacts4
Non-GAAP (core) net income
HEI CONSOLIDATED DILUTED EARNINGS PER COMMON SHARE
GAAP (as reported)
Excluding special items (after-tax):
(Income) expenses related to the terminated merger with NextEra Energy
and cancelled spin-off of ASB Hawaii
Costs related to the terminated LNG contract2
Bonus related to enactment of federal tax reform3
Federal tax reform impacts4
Non-GAAP (core) diluted earnings per common share
1.65 $
HEI CONSOLIDATED RETURN ON AVERAGE COMMON EQUITY (ROACE) (simple average)
0.01
0.12
0.7
13.4
1.52 $
179.5 $
-
-
$
$
$
248.3 $
159.9
(60.3)
2.1
-
-
190.1 $
15.8
-
-
-
175.7
2.29 $
1.50
(0.56)
0.02
-
-
1.75 $
0.15
-
-
-
1.65
Based on GAAP
Based on non-GAAP (core)5
Note: Columns may not foot due to rounding
7.9%
8.6%
12.4%
9.5%
8.6%
9.4%
1 Accounting principles generally accepted in the United States of America
2 The LNG contract was terminated as it was conditioned on the merger with NextEra Energy closing
3 Bonus paid by American Savings Bank related to enactment of federal tax reform
4 Reflects the lower rates enacted by federal tax reform, primarily the adjustments to reduce the unregulated net deferred tax asset
balances
5 Calculated as core net income divided by average GAAP common equity
Executive Management (as of March 15, 2018)
Hawaiian Electric Industries (HEI)
Constance H. Lau
President and Chief Executive Officer,
Hawaiian Electric Industries, Inc.
Chair,
Hawaiian Electric Company, Inc.
Chair,
American Savings Bank, F.S.B.
Greg C. Hazelton
Executive Vice President and
Chief Financial Officer
Hawaiian Electric
Alan M. Oshima
President and Chief Executive Officer
Jay M. Ignacio
President, Hawai‘i Electric Light and
Senior Operations Advisor to the
President and CEO of Hawaiian Electric
Sharon M. Suzuki
President,
Maui Electric
Jimmy D. Alberts
Senior Vice President,
Customer Service
Colton K. Ching
Senior Vice President,
Planning and Technology
Ronald R. Cox
Senior Vice President,
Operations
Shelee M. T. Kimura
Senior Vice President,
Business Development and Strategic Planning
Susan A. Li
Senior Vice President,
General Counsel, Chief Compliance and
Administrative Officer, and Corporate Secretary
Tayne S. Y. Sekimura
Senior Vice President and
Chief Financial Officer
Scott W. H. Seu
Senior Vice President,
Public Affairs
American Savings Bank (ASB)
Richard F. Wacker
President and Chief Executive Officer
Danielle K. N. Aiu
Executive Vice President,
Consumer Banking
Alexander S. Kim
Executive Vice President,
Technology
Gabriel S. H. Lee
Executive Vice President,
Commercial Markets
Robert K. W. H. Nobriga
Executive Vice President and
Chief Financial Officer
Craig A. Norris
Executive Vice President and
Chief Credit Officer
Natalie M. H. Taniguchi
Executive Vice President,
Enterprise Risk and Regulatory Relations
Ann C. Teranishi
Executive Vice President,
Operations
K. Elizabeth Whitehead
Executive Vice President,
Chief Administrative Officer and
Assistant Secretary
Board of Directors
Jeffrey N. Watanabe
Chair, HEI
Chair, HEI Executive
Committee
Constance H. Lau
President and Chief Executive
Officer, HEI
Director, HEI
Director, Hawaiian Electric
Chair, Hawaiian Electric
Director, ASB
Retired Founder,
Watanabe Ing LLP
Chair, ASB
Chair, ASB Executive
Committee
Barry K. Taniguchi
Chair, HEI Audit Committee
Director, HEI
Chair, ASB Audit Committee
Director, ASB
Chairman and Chief Executive
Officer, KTA Super Stores
Admiral Thomas B. Fargo,
USN (Retired)
Chair, HEI Compensation
Committee
Director, HEI
Chairman, Huntington Ingalls
Industries, Inc.
Former Commander of the U.S.
Pacific Command
Kelvin H. Taketa
Chair, HEI Nominating &
Corporate Governance
Committee
Director, HEI
Director, Hawaiian Electric
Senior Fellow, Hawai‘i
Community Foundation
Peggy Y. Fowler
Director, HEI
Richard J. Dahl
Director, HEI
Lead Independent Director,
Umpqua Holdings Corp.
Director, Hawaiian
Electric
Retired President and Chief
Executive Officer, Portland
General Electric Company
Non-Executive Chairman,
DineEquity, Inc.
Non-Executive Chairman,
Retired President and Chief
Executive Officer, James
Campbell Company, LLC
Keith P. Russell
Director, HEI
Chair, ASB Risk
Committee
Director, ASB
President, Russell
Financial, Inc.
James K. Scott, Ed.D.
Director, HEI
James A. Ajello
Director, ASB
Director, ASB
President, Punahou School
Retired Executive Vice
President and Chief
Financial Officer, Hawaiian
Electric Industries
Kevin M. Burke
Director, Hawaiian
Electric
Chief Marketing Officer,
Square, Inc.
Shirley J. Daniel, Ph.D.
Director, ASB
Professor of Accountancy,
Shidler College of
Business, University of
Hawai‘i-Manoa
Timothy E. Johns
Chair, Hawaiian Electric
Audit Committee
Micah A. Kane
Director, Hawaiian
Electric
Director, Hawaiian
Electric
President and Chief
Executive Officer, Hawai‘i
Community Foundation
Michael J. Kennedy
Director, ASB
Bert A. Kobayashi, Sr.
Director, ASB
President, North America,
OFX
Chairman and Chief
Executive Officer,
Kobayashi Development
Group LLC
Bert A. Kobayashi, Jr.
Director, Hawaiian
Electric
Managing Partner,
BlackSand Capital, LLC
Alan M. Oshima
President and Chief
Executive Officer,
Hawaiian Electric
Director, Hawaiian
Electric
Richard F. Wacker
President and Chief
Executive Officer, ASB
Director, ASB
HEI
Hawaiian Electric
ASB
Jeffrey N. Watanabe, Chair (1, 3)
Constance H. Lau, Chair
Constance H. Lau, Chair (6, 8)
Barry K. Taniguchi (1, 2)
Timothy E. Johns (5)
Barry K. Taniguchi (6, 7)
Admiral Thomas B. Fargo, USN
(Retired) (3, 4)
Kelvin H. Taketa (4)
Richard J. Dahl (2)
Peggy Y. Fowler (3)
Constance H. Lau (1)
Keith P. Russell (2)
James K. Scott, Ed.D. (4)
Richard J. Dahl (5)
Micah A. Kane (5)
Kevin M. Burke
Keith P. Russell (7, 8)
James A. Ajello (8)
Michael J. Kennedy
Bert A. Kobayashi, Jr.
Shirley J. Daniel, Ph.D. (7)
Alan M. Oshima
Kelvin H. Taketa
Jeffrey N. Watanabe
Bert A. Kobayashi, Sr.
James K. Scott, Ed.D.
Richard F. Wacker
Jeffrey N. Watanabe (6, 8)
HEI Board Committees:
(1) Executive
Hawaiian Electric
Board Committees:
American Savings Bank
Board Committees:
Jeffrey N. Watanabe, Chair
(5) Audit
(6) Executive
(2) Audit
Barry K. Taniguchi, Chair
(3) Compensation
Admiral Thomas B. Fargo,
USN (Retired), Chair
(4) Nominating & Corporate Governance
Kelvin H. Taketa, Chair
Timothy E. Johns, Chair
Constance H. Lau, Chair
(7) Audit
Barry K. Taniguchi, Chair
(8) Risk
Keith P. Russell, Chair
Shareholder Information
Corporate Headquarters
Hawaiian Electric Industries, Inc.
1001 Bishop Street, Suite 2900
Honolulu, Hawai‘i 96813
Telephone: 808-543-5662
Mailing address:
P.O. Box 730
Honolulu, Hawai‘i 96808-0730
New York Stock Exchange
Common stock symbol: HE
Trust preferred securities symbol:
HEPrU (Hawaiian Electric Company, Inc.)
Shareholder Services
P.O. Box 730
Honolulu, Hawai‘i 96808-0730
Telephone: 808-532-5841
Toll Free: 866-672-5841
Facsimile: 808-532-5868
E-mail: invest@hei.com
Office hours: 7:30 a.m. to 3:30 p.m. H.S.T.
Correspondence about common stock and utility preferred
stock ownership, dividend payments, transfer requirements,
changes of address, lost stock certificates, duplicate mailings,
and account status may be directed to Shareholder Services.
A copy of the 2017 Form 10-K Annual Report for Hawaiian
Electric Industries, Inc. and Hawaiian Electric Company, Inc.,
including financial statements and schedules, will be provided
by HEI without charge upon written request directed to Shareholder
Services, at the above address for Shareholder Services or through
HEI’s website.
Website
Internet users can access information about HEI and its subsidiaries
at http://www.hei.com.
Dividends and Distributions
Common stock quarterly dividends are customarily paid on or
about the 10th of March, June, September, and December to
shareholders of record on the dividend record date.
Quarterly distributions on trust preferred securities are paid by
HECO Capital Trust III, an unconsolidated financing subsidiary of
Hawaiian Electric Company, Inc., on or about March 31, June 30,
September 30, and December 31 to holders of record on the business
day before the distribution is paid.
Utility company preferred stock quarterly dividends are paid on the
15th of January, April, July, and October to preferred shareholders of
record on the 5th of these months.
Direct Registration
HEI common stock can be issued in direct registration (book entry)
form. The stock is DRS (Direct Registration System) eligible.
Dividend Reinvestment and Stock Purchase Plan
Any individual of legal age or any entity may buy HEI common stock
at market prices directly from HEI. The minimum initial investment is
$250. Additional optional cash investments may be as small as $25.
The annual maximum investment is $300,000. After your account is
open, you may reinvest all of your dividends to purchase additional
shares or elect to receive some or all of your dividends in cash.
You may instruct HEI to electronically debit a regular amount from
a checking or savings account. HEI can also deposit dividends
automatically to your checking or savings account. A prospectus
describing the plan may be obtained through HEI’s website or by
contacting Shareholder Services.
Annual Meeting
Thursday, May 10, 2018, 10:00 a.m. Please direct inquiries to:
American Savings Bank Tower
1001 Bishop Street
8th Floor, Room 805
Honolulu, Hawai‘i 96813
Kurt K. Murao
Vice President,
Legal and Administration
and Corporate Secretary
Telephone: 808-543-5884
Facsimile: 808-203-1992
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
999 Bishop Street, Suite 2700
Honolulu, Hawai‘i 96813
Telephone: 808-543-0700
Facsimile: 855-214-5030
Institutional Investor and Securities
Analyst Inquiries
Please direct inquiries to:
Julie R. Smolinski
Manager, Investor Relations
Telephone: 808-543-7300
Facsimile: 808-695-3201
E-mail: ir@hei.com
Transfer Agents
Common stock and utility company preferred stock:
Shareholder Services
Common stock only:
Continental Stock Transfer & Trust Company
1 State Street, 30th Floor
New York, New York 10004-1561
Telephone: 212-509-4000
Facsimile: 212-509-5150
Trust preferred securities:
Contact your investment broker for information on
transfer procedures.
To minimize our environmental
impact, this report was printed
on paper containing fibers from
socially and environmentally
responsible forestry products.
To learn more, please visit us at
www.hei.com