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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Hawaiian Electric Co Inc    HAWEL

HAWAIIAN ELECTRIC CO INC (HAWEL)
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HAWAIIAN ELECTRIC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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11/07/2018 | 08:50pm CET
The following discussion updates "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in HEI's and Hawaiian
Electric's 2017 Form 10-K and should be read in conjunction with such discussion
and the 2017 annual consolidated financial statements of HEI and Hawaiian
Electric and notes thereto included in HEI's and Hawaiian Electric's 2017
Form 10-K, as well as the quarterly (as of and for the three and nine months
ended September 30, 2018) condensed consolidated financial statements and notes
thereto included in this Form 10-Q.
HEI consolidated
                             RESULTS OF OPERATIONS

(in thousands, except per Three months ended September 30 % share amounts)

                     2018              2017       change            Primary reason(s)*
Revenues                    $        768,048     $  673,185        14     

Increases for the electric utility

                                                                          and bank segments
Operating income                      98,064        111,473       (12 )   

Decrease for the electric utility

segment, partly offset by increase

for the bank segment and lower

operating losses for the "other"

segment

Net income for common                 65,900         60,073        10     Higher net income at the electric
stock                                                                     

utility and bank segments. See

below for effective tax rate

explanation.

Basic earnings per common   $           0.61     $     0.55        11     Higher net income
share
Weighted-average number              108,879        108,786         -     Issuances of shares under
of common shares                                                          compensation stock plans.
outstanding



(in thousands, except per Nine months ended September 30 % share amounts)

                     2018              2017        change            Primary reason(s)*
Revenues                    $      2,099,199     $ 1,897,028       11      

Increases for the electric utility

                                                                           and bank segments
Operating income                     248,752         259,013       (4 )    

Decrease for the electric utility

segment, partly offset by increase

for the bank segment and lower

operating losses for the "other"

segment

Net income for common                152,201         132,927       14      Higher net income at the electric
stock                                                                      

utility and bank segments, partly

offset by higher net losses at the

"other" segment. See below for

                                                                           effective tax rate explanation.
Basic earnings per common   $           1.40     $      1.22       15      Higher net income
share
Weighted-average number              108,847         108,737        -      Issuances of shares under
of common shares                                                           compensation and director stock
outstanding                                                                

plans.

* Also, see segment discussions which follow.



The Company's effective tax rates (combined federal and state income tax rates)
for the third quarters of 2018 and 2017 were 14% and 36%, respectively. The
Company's effective tax rates for the first nine months of 2018 and 2017 were
19% and 35%, respectively. The effective tax rates were lower for the three and
nine months ended September 30, 2018 compared to the same periods in 2017 due
primarily to the provision in the Tax Act that lowered the federal income tax
rate from 35% to 21% and the related amortization of excess deferred income
taxes. In addition, certain tax return adjustments, most notably an increased
pension deduction made in conjunction with the filing of the Company's 2017 tax
returns, contributed to the lower effective tax rate due to the additional tax
benefits realized that were associated with the rate differential. The lower tax
rate was partially offset by lower excess tax benefits associated with
share-based awards in the first nine months of 2018 as compared to the same
period of 2017 and other Tax Act changes (the non-deductibility of excess
executive compensation and various fringe benefit costs and loss of the domestic
production activities deduction).
HEI's consolidated ROACE was 8.7% for the twelve months ended September 30, 2018
and 8.5% for the twelve months ended September 30, 2017.
Dividends.  The payout ratios for the first nine months of 2018 and full year
2017 were 67% and 82%, respectively. HEI currently expects to maintain its
dividend at its present level; however, the HEI Board of Directors evaluates the
dividend

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quarterly and considers many factors in the evaluation including, but not
limited to, the Company's results of operations, the long-term prospects for the
Company and current and expected future economic conditions.
Economic conditions.
Note: The statistical data in this section is from public third-party sources
that management believes to be reliable (e.g., Department of Business, Economic
Development and Tourism (DBEDT), University of Hawaii Economic Research
Organization, U.S. Bureau of Labor Statistics, Department of Labor and
Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of
REALTORS® and national and local newspapers).
Through the first three quarters of 2018, Hawaii's tourism industry, a
significant driver of Hawaii's economy, continues to grow in both visitor
spending and arrivals. Visitor expenditures increased 9.8% and arrivals
increased 6.5% compared to the same period in 2017. Looking ahead, the Hawaii
Tourism Authority expects scheduled nonstop seats to Hawaii to increase as the
year progresses, driven primarily by an increase in seats from West Coast, East
Coast and Asia.
Hawaii's unemployment rate remained steady at 2.2% for September 2018, which was
comparable to the rate for September 2017 and lower than the national
unemployment rate of 3.7%. It is also the lowest unemployment rate in the
nation.
Hawaii real estate activity, as indicated by the home resale market, experienced
a growth in median sales prices for single family homes and condominiums so far
in 2018. Median sales prices for single family residential homes on Oahu through
September 2018 were higher by 4.2% and for condominiums were higher by 5.5%,
over the same time period in 2017. The number of closed sales for single family
residential homes and condominiums were down by -3.7% and -0.1% respectively
through September of 2018 compared to same time period of 2017.
Hawaii's petroleum product prices reflect supply and demand in the Asia-Pacific
region and the price of crude oil in international markets. Although the price
of crude oil fluctuates month to month, the general trend has been an increasing
one over the last 2.5 years.
At its September 2018 meeting, the Federal Open Market Committee (FOMC) decided
to raise the target range for the federal funds rate from "2% to 2.25%" 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.
The performance of Hawaii's tourism industry remains strong. However, natural
disasters such as the volcanic eruption on the Big Island and flooding from
tropical storms on Kauai and the Big Island have had negative impacts on those
islands, translating to some visitor traffic diversion to Oahu and Maui. Local
economists are agreeing that Hawaii's economic growth continues to be positive
but are signifying that the economic expansion has slowed. Potential risks to
the Hawaii economy include infrastructure constraints, tight labor markets and
high housing costs creating inflationary pressures. International trade tariffs
and natural disasters also remain a source of great uncertainty. Most recently,
a hotel employee strike which started in early October continues to impact
thousands of hotel workers, customers and guests at a handful of properties on
Oahu and Maui which could put a damper on Hawaii's visitor industry.
"Other" segment.
                    Three months ended September 30         Nine months ended September 30
(in thousands)         2018                 2017               2018                 2017                      Primary reason(s)
Revenues         $         143         $         127     $         218         $         299
Operating loss          (3,236 )              (4,000 )         (10,865 )             (12,655 )   Third quarter and first nine months of 2018
                                                                                                 include $0.7 million and $3.0 million,
                                                                                                 respectively, of operating income from
                                                                                                 Pacific Current, LLC1. Third quarter 2018
                                                                                                 corporate expense was slightly lower than
                                                                                                 third quarter of 2017; first nine months of
                                                                                                 2018 corporate expense was slightly higher
                                                                                                 than same period in 2017.
Net loss                (5,033 )              (5,006 )         (16,897 )   
         (11,807 )   Third quarter and first nine months of 2018
                                                                                                 include higher interest expense (due to
                                                                                                 higher interest rates and balances at
                                                                                                 corporate and new debt at Pacific Current,
                                                                                                 LLC related to Hamakua Energy's acquisition
                                                                                                 of a power plant) and lower tax benefits on
                                                                                                 expenses as a result of tax reform in third
                                                                                                 quarter and first nine months of 2018 as
                                                                                                 compared to the same periods in 2017.

1 Hamakua Energy's sales to Hawaii Electric Light (a regulated affiliate) are

eliminated in consolidation, but Hamakua Energy's profit on electricity sales

to Hawaii Electric Light is not required to be eliminated because the PPA was

approved by the PUC and it is probable that, through the ratemaking process,

  future revenue from Hawaii Electric Light's sale of the electricity will
  approximate its purchase price from Hamakua Energy under the PPA.




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The "other" business segment (loss)/income includes results of the stand-alone
corporate operations of HEI and ASB Hawaii, Inc. (ASBH), as well as the results
of Pacific Current, LLC, a direct subsidiary of HEI focused on investing in
clean energy and sustainable infrastructure projects; Pacific Current's indirect
subsidiary, Hamakua Energy, LLC, which owns a 60-MW combined cycle power plant,
formerly owned by Hamakua Energy Partners, L.P.; Pacific Current's indirect
subsidiary, Mauo, LLC (Mauo), which is currently constructing a
solar-plus-storage project; HEI Properties, Inc., a company which held passive,
venture capital investments (all of which have been sold or abandoned prior to
its dissolution in December 2015 and final winding up in June 2017); and The Old
Oahu Tug Service, Inc., a maritime freight transportation company that ceased
operations in 1999, but has remaining employee benefit payments obligations; as
well as eliminations of intercompany transactions.
Acquisition of a Solar + Storage Power Purchase Agreement. On February 2, 2018,
Mauo executed definitive agreements to acquire a solar-plus-storage PPA for a
multi-site, commercial-scale project that will provide 8.6 MW of solar capacity
and 42.3 MWH of storage capacity on the islands of Maui and Oahu. The PPA has a
15-year term with an option for the customer to extend for an additional five
years. The system is being constructed by a third-party contractor under an
Engineering, Procurement and Construction (EPC) contract that was
contemporaneously negotiated and executed by Mauo. The EPC contract provides a
fixed price for the construction of the system, a project completion schedule
and performance obligations designed to match the requirements of the PPA. Mauo
plans to fund the construction of the project with a construction loan facility
that will be repaid at the commercial operation date (ultimately with cash from
investment tax credits, state renewable tax credits and non-recourse project
debt). Most of the separate sites that comprise the project are expected to be
substantially complete and operational in 2019.
                              FINANCIAL CONDITION
Liquidity and capital resources.  As a result of the Tax Cut and Jobs Act,
utility property is no longer eligible for bonus depreciation, but further
guidance is required in order to finally determine the application of the new
law. However, note that recent clarification in the tax law indicates that
certain assets with longer construction periods that were placed in service
after the effective date may be grandfathered and qualify for the old 50% bonus
depreciation if subject to binding contracts entered into before such effective
date. Consequently, additional bonus depreciation was taken for the fourth
quarter of 2017 in the Company's income tax return, resulting in an additional
deferral of income taxes. The Utilities are currently evaluating its larger
projects placed into service in 2018 for applicability. Nevertheless, the
initial cash requirement for future utility capital projects will generally
increase because of the loss of the immediate tax benefit from bonus
depreciation. The Company believes that its ability to generate cash, both
internally from electric utility and banking operations and externally from
issuances of equity and debt securities, commercial paper and bank borrowings,
is adequate to maintain sufficient liquidity to fund its contractual obligations
and commercial commitments, its forecasted capital expenditures and investments,
its expected retirement benefit plan contributions and other cash requirements
for the foreseeable future.
The consolidated capital structure of HEI (excluding deposit liabilities and
other bank borrowings) was as follows:
(dollars in millions)                        September 30, 2018               December 31, 2017
Short-term borrowings-other than bank    $        203            5 %   $       118                 3 %
Long-term debt, net-other than bank             1,782           43           1,684                43
Preferred stock of subsidiaries                    34            1              34                 1
Common stock equity                             2,132           51           2,097                53
                                         $      4,151          100 %   $     3,933               100 %


HEI's commercial paper borrowings and line of credit facility were as follows:
                                               Average balance                        Balance
                                              Nine months ended
(in millions)                                September 30, 2018     September 30, 2018       December 31, 2017
Commercial paper                             $              49     $                68     $                63
Line of credit draws                                         -                       -                       -
Undrawn capacity under HEI's line of
credit facility                                                                    150                     150



Note: This table does not include Hawaiian Electric's separate commercial paper
issuances and line of credit facilities and draws, which are disclosed below
under "Electric utility-Financial Condition-Liquidity and capital resources."
The maximum amount of HEI's external short-term borrowings during the first nine
months of 2018 was $68 million.
HEI has a $150 million line of credit facility with no amounts outstanding at
September 30, 2018. See Note 5 of the Condensed Consolidated Financial
Statements.

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The Company has the ability to satisfy the share purchase requirements for the
HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP and ASB
401(k) Plan either through the issuance of new shares, which provides new
capital, or through open market purchases of its common stock. From December 7,
2016 to date, HEI satisfied the share purchase requirements for these plans
through open market purchases of its common stock rather than through new
issuances.
On October 4, 2018, HEI closed on a private placement transaction to issue $150
million senior unsecured notes in two tranches ($50 million HEI Series 2018A and
$100 million HEI Series 2018B). Proceeds from the $50 million HEI Series 2018A
tranche drawn in October 2018 were used to repay HEI's $50 million short-term
borrowing with The Bank of Tokyo-Mitsubishi UFJ, Ltd. Proceeds from the HEI
Series 2018B tranche to be drawn in December 2018 will be used for general
corporate purposes, including contributions to Hawaiian Electric to maintain a
targeted equity capitalization structure.
For the first nine months of 2018, net cash provided by operating activities of
HEI consolidated was $258 million. Net cash used by investing activities for the
same period was $542 million, primarily due to Hawaiian Electric's consolidated
capital expenditures and ASB's net increase in loans held for investment and
purchases of investment securities, partly offset by ASB's receipt of repayments
from investment securities and Hawaiian Electric's receipt of contributions in
aid of construction. Net cash provided by financing activities during this
period was $194 million as a result of several factors, including increases in
short-term borrowings and ASB's deposit liabilities, proceeds from other bank
borrowings and long-term debt and net increases in ASB's retail purchase
agreements, partly offset by the payment of common stock dividends and
repayments of other bank borrowings. Other than capital contributions from their
parent company, intercompany services (and related intercompany payables and
receivables), Hawaiian Electric's periodic short-term borrowings from HEI (and
related interest) and the payment of dividends to HEI, the electric utility and
bank segments are largely autonomous in their operating, investing and financing
activities. (See the electric utility and bank segments' discussions of their
cash flows in their respective "Financial condition-Liquidity and capital
resources" sections below.) During the first nine months of 2018, Hawaiian
Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $77
million and $36 million, respectively.
     CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's results of operations and financial condition can be affected by
numerous factors, many of which are beyond the Company's control and could cause
future results of operations to differ materially from historical results. For
information about certain of these factors, see pages 49, 63 to 65, and 75 to 77
of HEI's MD&A included in Part II, Item 7 of HEI's 2017 Form 10-K.
Additional factors that may affect future results and financial condition are
described on pages iv and v under "Cautionary Note Regarding Forward-Looking
Statements."
              MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ significantly from those
estimates.
In accordance with SEC Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," management has identified the
accounting policies it believes to be the most critical to the Company's
financial statements-that is, management believes that these policies are both
the most important to the portrayal of the Company's results of operations and
financial condition, and currently require management's most difficult,
subjective or complex judgments.
For information about these material estimates and critical accounting policies,
see pages 50 to 51, 65, and 77 to 80 of HEI's MD&A included in Part II, Item 7
of HEI's 2017 Form 10-K.

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Following are discussions of the results of operations, liquidity and capital
resources of the electric utility and bank segments.
Electric utility
                             RESULTS OF OPERATIONS
  Three months ended
     September 30               Increase
   2018         2017           (decrease)        (dollars in millions, except per barrel amounts)
$     687     $   599     $    88                Revenues. Net increase largely due to:
                                      $   57     higher fuel oil prices1
                                          26     higher purchased power energy costs2
                                          11     higher rate relief
                                           8     higher KWH generated
                                           6     higher RAM and MPIR revenues
                                          (7 )   lower KWH purchased
                                         (12 )   Tax reform adjustment
      207         146          61                Fuel oil expense. Increase due to higher fuel oil
                                                 prices and higher KWH generated
      178         160          18                Purchased power expense. Net increase due to:
                                          24     higher purchased power energy price
                                          (6 )   lower KWH purchased
      114          99          15                Operation and maintenance expenses. Net increase
                                                 due to:
                                           6     reset of pension costs

included in rates as part

                                                 of rate case interim decisions
                                           2     25KV underground circuit repair work
                                           2     higher operation and

maintenance expenses for

                                                 generation plants
                                           1     operation expenses for Schofield Generating
                                                 Station placed in service in June
                                           1     higher workers' compensation claims
                                           1     higher medical premium costs
                                           1     higher underground cable maintenance costs
      116         105          11                Other expenses. Increase due to higher revenue
                                                 taxes from higher revenue, coupled with higher
                                                 depreciation expense for plant investments in
                                                 2017
       74          88         (14 )              Operating income.  Decrease due to higher
                                                 operation and maintenance and other expenses,
                                                 offset in part by higher revenue
       50          47           3                Net income for common stock. Increase due to
                                                 higher RAM and MPIR

revenues, rate relief and

                                                 lower income taxes, offset 

in part by higher

                                                 expenses, including 

interest expense. See below

                                                 for discussion on effective tax rate.

    2,329       2,340         (11 )              Kilowatthour sales (millions)3
$   90.93     $ 66.73     $ 24.20                Average fuel oil cost per barrel1




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   Nine months ended
      September 30               Increase
   2018          2017           (decrease)        (dollars in millions, except per barrel amounts)
$   1,866     $  1,674     $   192                Revenues. Net increase largely due to:
                                       $  119     higher fuel oil prices1
                                           50     higher purchased power energy costs2
                                           35     higher RAM and MPIR revenues
                                           28     higher rate relief
                                            5     higher KWH generated
                                          (10 )   lower KWH purchased
                                          (34 )   Tax reform adjustment
      545          432         113                Fuel oil expense.

Increase due to higher fuel oil

                                                  prices and higher KWH generated
      478          441          37                Purchased power expense. Net increase due to:
                                           44     higher purchased power energy price
                                            2     higher AES Hawaii capacity charges
                                           (9 )   lower KWH purchased
      334          302          32                Operation and maintenance expenses. Net increase
                                                  due to:
                                           17     reset of pension costs included in rates as part
                                                  of rate case interim decisions
                                            3     25KV underground circuit repair work
                                            3     higher operation and maintenance expenses for
                                                  generation plants
                                            2     write-off of smart grid costs
                                            2     higher ERP costs related to outside consultants
                                            2     higher medical premium costs
                                            1     operation expenses for Schofield Generating
                                                  Station placed in service in June
                                            1     one-time rent expense adjustment for existing
                                                  substation land
                                            1     higher workers' compensation claims
      328          304          24                Other expenses. Increase due to higher revenue
                                                  taxes from higher revenue, coupled with higher
                                                  depreciation expense for plant investments in
                                                  2017
      181          195         (14 )              Operating income.  Decrease due to higher
                                                  operation and maintenance and other expenses,
                                                  offset in part by higher revenue
      108           95          13                Net income for common stock. Increase due to
                                                  higher RAM and MPIR revenues, rate relief and
                                                  lower taxes, offset in part by higher expenses,
                                                  including interest expense. See below for
                                                  discussion on effective tax rate.

    6,469        6,528         (59 )              Kilowatthour sales (millions)3
$   84.67     $  67.42     $ 17.25                Average fuel oil cost per barrel1
  462,516      461,408       1,108                Customer accounts (end of period)

1 The rate schedules of the electric utilities currently contain energy cost

adjustment clauses (ECACs) through which changes in fuel oil prices and

certain components of purchased energy costs are passed on to customers.

2 The rate schedules of the electric utilities currently contain purchase power

adjustment clauses (PPACs) through which changes in purchase power expenses

(except purchased energy costs) are passed on to customers.

3 KWH sales were lower when compared to the same quarter in the prior year due

largely to continued energy efficiency and conservation efforts by customers

and increasing levels of private customer-sited renewable generation.



The Utilities' effective tax rates for the third quarters of 2018 and 2017 were
12% and 36%, respectively. The Utilities' effective tax rates for the first nine
months of 2018 and 2017 were 19% and 36%, respectively. The effective tax rates
were lower for the three and nine months ended September 30, 2018 compared to
the same periods in 2017 due primarily to the provision in the Tax Act that
lowered the federal income tax rate from 35% to 21% and the related amortization
of excess deferred income taxes.  In addition, certain tax return adjustments,
most notably an increased pension deduction made in conjunction with the filing
of the Company's 2017 tax returns, contributed to the lower effective tax rate
that were associated with the additional tax benefits realized due to the rate
differential. The lower tax rate was partially offset by other Tax Act

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changes (the non-deductibility of excess executive compensation and various
fringe benefit costs and the loss of the domestic production activities
deduction).
Hawaiian Electric's consolidated ROACE was 7.2% for the twelve months ended
September 30, 2018 and September 30, 2017.
The Utilities' consolidated KWH sales have declined each year since 2007. Based
on expectations of additional customer renewable self-generation and
energy-efficiency installations, the Utilities' full year 2018 KWH sales are
expected to be below the 2017 level. However, due to the decoupling model
implemented in 2011, revenues are not tied to KWH sales and include annual rate
adjustments to revenues. See "Decoupling" in the "Regulatory proceedings"
section of Note 3 of the condensed consolidated financial statements for
additional information.
The net book value (cost less accumulated depreciation) of utility property,
plant and equipment (PPE) as of September 30, 2018 amounted to $4 billion, of
which approximately 29% related to generation PPE, 62% related to transmission
and distribution PPE, and 9% related to other PPE. Approximately 10% of the
total net book value relates to generation PPE that has been deactivated or that
the Utilities plan to deactivate or decommission. See "Adequacy of supply"
below.
See "Economic conditions" in the "HEI Consolidated" section above.
Executive overview and strategy.  The Utilities provide electricity on all the
principal islands in the state, other than Kauai, and operate five separate
grids. The Utilities' mission is to provide innovative energy leadership for
Hawaii, to meet the needs and expectations of customers and communities, and to
empower them with affordable, reliable and clean energy. The goal is to create a
modern, flexible and dynamic electric grid that enables an optimal mix of
distributed energy resources (such as private rooftop solar), demand response
and grid-scale resources to achieve the statutory goal of 100% renewable energy
by 2045.
Transition to renewable energy.  The Utilities are committed to partnering with
the State of Hawaii in achieving its Renewable Portfolio Standard goal of 100%
renewable energy by 2045. Hawaii's RPS law requires electric utilities to meet
an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and
2045, respectively. The Utilities have been successful in adding significant
amounts of renewable energy resources to their electric systems and exceeded the
2015 RPS goal. The Utilities' RPS for 2017 was about 27% and is on its way to
achieving the 2020 RPS goal of 30%. (See "Developments in renewable energy
efforts" below).
Power Supply Improvement Plans and Integrated Grid Planning. The December 2016
PSIP Update Report approved by the PUC in July 2017 includes the continued
growth of private rooftop solar and describes 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.
In addition, the plans forecast the addition of 360 MW of grid-scale solar and
157 MW of grid-scale wind, with 8 MW derived from the first phase of the
community-based renewable energy (CBRE) program. The plans also include 115 MW
from Demand Response (DR) programs, which can shift customer use of electricity
to times when more renewable energy is available, potentially making room to add
even more renewable resources. The December 2016 Update Report emphasizes work
that is in progress or planned through 2021 on each of the five islands the
Utilities serve.
Achieving 100% renewable energy will require modernizing the grid through
coordinated energy system planning in partnership with local communities and
stakeholders to affordably move Hawaii towards reliable and resilient clean
energy future with minimal risk. To accomplish this, the Utilities filed its
Integrated Grid Planning (IGP) Report with the PUC on March 1, 2018, which
provides an innovative systems approach to energy planning intended to yield the
most cost-effective renewable energy pathways that are rooted in customer and
stakeholder input. The Utilities' IGP fully integrates resource, transmission,
and distribution planning and incorporates solutions sourcing into the planning
process. This will enable optimization and coordination of the solutions,
thereby resulting in actionable near-term plans that maximize value to
customers.
The PUC opened a docket for the IGP process that the Utilities had proposed. The
Utilities are required to file an IGP work plan by December 14, 2018, describing
the timing and scope of major activities that will occur in the IGP process.
Demand response programs. The PUC provided guidance concerning the objectives
and goals for Demand Response (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 or
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.

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In October 2017, the PUC approved the Utilities request made in December 2015 to
defer and recover certain computer software and software development costs for a
DR Management System in an amount not to exceed $3.9 million, exclusive of
AFUDC, through the Renewable Energy Infrastructure Program Surcharge. The
Utilities completed the first milestone of Blueprinting and realization phase
and have transitioned into the system integration testing phase, which will
continue through the fourth quarter of 2018. The Utilities are still on schedule
for the DR Management System to be in service by first quarter of 2019.
On January 25, 2018, the PUC approved the Utilities' revised DR Portfolio tariff
structure. The PUC supported the approach of working with aggregators to
implement the DR portfolio, and ordered the Utilities to complete contracting by
June 2018 and initiate first implementation by the third quarter of 2018. The
Utilities have selected the aggregators and commenced negotiations in July 2018,
with many technical requirements discussions held. The negotiations with the
aggregators will continue into early fourth quarter of 2018.
Distributed Energy Resources. The PUC has approved rules and tariffs for the
following Distributed Energy Resources (DER) programs:
1)     Net Energy Metering (NEM) provides bill credit for the energy supplied
       from the customer's renewable system at the retail rate of energy
       delivered from the system. The NEM program was capped at 2015 levels and
       has been closed to new participants. Non-export customer systems can be
       added to NEM systems and NEM customers are allowed to add non-export
       energy storage.

2) Customer Grid Supply (CGS) allows customers to receive credit on their

bills for energy delivered to the grid at specified rates for the energy

delivered. Caps on availability of the CGS program on each island system

apply and customers currently under the CGS program are grandfathered

under rates which are fixed until 2022.

3) Controllable Customer Grid Supply (CGS+) 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.

CGS+ customers receive credit on their bills for energy delivered to the

grid at specified rates for the energy delivered. Caps on availability of

       the CGS+ program on each island system apply and rates are fixed until
       2022.


4)     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. Caps on availability of the Smart Export
       program on each island system apply and rates are fixed until 2022.

5) Customer Self Supply program is designed for customers with renewable

systems who are connected and may receive energy from but do not export to

the grid.



PUC orders have also addressed interconnection requirements, authorized advanced
inverter functions in PV and storage systems and specified reporting
requirements regarding hosting capacity analyses.
Grid modernization. After launching a smart grid customer engagement plan during
the second quarter of 2014, Hawaiian Electric replaced approximately 5,200
residential and commercial meters with smart meters, 160 direct load control
switches, fault circuit indicators and remote controlled switches in selected
areas across Oahu as part of the Smart Grid Initial Phase implementation. Also
under the Initial Phase a grid efficiency measure called Volt/Var Optimization
(or Conservation Voltage Reduction) was enabled, customer energy portals were
launched and are available for customer use and a PrePay Application was
launched. The Initial Phase implementation was completed in 2015. The smart grid
provides benefits such as customer tools to manage their electric bills,
potentially shortening outages and enabling the Utilities to integrate more
low-cost renewable energy, like wind and solar, which will reduce Hawaii's
dependence on imported oil.
In March 2016, the Utilities sought PUC approval to commit funds for an
expansion of the smart grid project. The proposed smart grid project was
estimated to cost $340 million and to be implemented over 5 years. On January 4,
2017, the PUC issued an order dismissing the application without prejudice and
directing the Utilities to submit a Grid Modernization Strategy.
The PUC indicated that the overall goal of the Grid Modernization Strategy is to
deploy modern grid investments at an appropriate priority, sequence and pace to
cost-effectively maximize flexibility, minimize the risk of redundancy and
obsolescence, deliver customer benefits and enable greater DER and renewable
energy integration. On June 30, 2017, the Utilities filed an initial draft of
the Grid Modernization Strategy describing how new technology will help triple
private rooftop solar and make use of rapidly evolving products including
storage and advanced inverters. The cost of the first segment of the
modernization is estimated at about $205 million over six years. The Utilities
filed their final Grid Modernization Strategy on August 29, 2017. On February 7,
2018, the PUC issued an order setting forth next steps and directives for the
Utilities to implement the Grid Modernization Strategy. The Utilities have begun
work to implement the Grid Modernization Strategy by issuing solicitations for
advanced meters, a meter data management system, and a communications network.
Also, the Utilities

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have filed their first application with the PUC on June 21, 2018, for the first
implementation phase. Additional applications will be filed later to implement
subsequent phases of the strategy.
Community-Based Renewable Energy. In December 2017, the PUC adopted a CBRE
program framework which allows 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.
The program has two phases.
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. In July 2018, the Utilities' tariffs for each island and phase 1 of
the CBRE program commenced. The Utilities are in the process of verifying the
projects and awarding the capacity to interested subscriber organizations. The
response has been positive; four of the five islands that the Utilities serve
have received applications that equal or exceed what is allowed in phase 1.
The second phase will commence after review of the first full year of the first
phase. The second phase is contemplated to be a larger capacity and include
multiple credit rates (e.g., time of day) and various technologies. The
Utilities will have the opportunity to develop self-build projects; however 50%
of utility capacity will be reserved for low to moderate income customers.
Microgrid services tariff proceeding. On July 10, 2018, the PUC issued an order
instituting a proceeding to investigate establishment of a microgrid services
tariff, pursuant to Act 200 (July 10, 2018 Act). The PUC will issue subsequent
order(s) establishing a statement of issues to be addressed in the order, and
issue a procedural schedule to govern this proceeding, after the deadline for
the filing of motions to intervene or participate.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial
Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as
calculated under the earnings sharing mechanism, which includes only items
considered in establishing rates. At year-end, each utility's rate-making ROACE
is compared against its ROACE allowed by the PUC to determine whether earnings
sharing has been triggered. Annual earnings of a utility over and above the
ROACE allowed by the PUC are shared between the utility and its ratepayers on a
tiered basis. Earnings sharing credits are included in the annual decoupling
filing for the following year. Results for 2017, 2016 and 2015 did not trigger
the earnings sharing mechanism for the Utilities.
Regulated returns. Actual and PUC-allowed (as of September 30, 2018) returns
were as follows:
%                           Rate-making Return on rate base (RORB)*                        ROACE**                                  Rate-making ROACE***
                                           Hawaii                                         Hawaii                                         Hawaii
Twelve months ended        Hawaiian       Electric                        Hawaiian       Electric                        Hawaiian       Electric
September 30, 2018         Electric        Light        Maui Electric     Electric        Light        Maui Electric     Electric        Light        Maui Electric
Utility returns              6.32          7.32                 5.99        6.99          8.34               7.10          7.55          8.83               6.94
PUC-allowed returns          7.57          7.80                 7.43        9.50          9.50               9.50          9.50          9.50               9.50
Difference                  (1.25 )       (0.48 )              (1.44 )     (2.51 )       (1.16 )            (2.40 )       (1.95 )       (0.67 )            (2.56 )


*   Based on recorded operating income and average rate base, both adjusted for
items not included in determining electric rates.
**  Recorded net income divided by average common equity.
*** ROACE adjusted to remove items not included by the PUC in establishing
rates, such as incentive compensation.
The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily
due to: the consistent exclusion of certain expenses from rates (for example,
incentive compensation and charitable contributions), the recognition of annual
RAM revenues on June 1 annually rather than on January 1, the low RBA interest
rate (currently a short-term debt rate rather than the actual cost of capital),
O&M increases and return on capital additions since the last rate case in excess
of indexed escalations, and the portion of the pension regulatory asset not
earning a return due to pension contributions and pension costs in excess of the
pension amount in rates. In 2017, the utility ROACEs actually achieved reflect
negative impacts of the Tax Act on deferred tax assets.
Most recent rate proceedings.  Unless otherwise agreed or ordered, each electric
utility is currently required by PUC order to initiate a rate proceeding every
third year (on a staggered basis) to allow the PUC and the Consumer Advocate to
regularly evaluate decoupling and to allow the utility to request electric rate
increases to cover rising operating costs and the cost of plant and equipment,
including the cost of new capital projects to maintain and improve service
reliability and integrate more renewable energy. The PUC may grant an interim
increase within 10 to 11 months following the filing of an application, but
there is no guarantee of such an interim increase and interim amounts collected
are refundable, with interest, to the extent they exceed the amount approved in
the PUC's final D&O. The timing and amount of any final increase is determined
at the discretion of the PUC. The adoption of revenue, expense, rate base and
cost of capital amounts (including the ROACE and RORB) for purposes of an
interim rate increase does not commit the PUC to accept any such amounts in its
final D&O.

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The effects of the Tax Act on Utilities' regulated operations accrued to the
benefit of customers from the effective date of January 1, 2018. Generally, the
lower corporate income tax rate lowers the Utilities' revenue requirements
through lower income tax expense and through the amortization of a regulatory
liability for excess accumulated deferred income taxes (ADIT) resulting from the
recording of ADIT in prior years at the higher income tax rate. The revenues
collected in the first and a portion of the second quarters reflected income
taxes at the old 35% rate and consequently, the Utilities reduced revenues to
the extent the income taxes collected in 2018 revenue exceeded the taxes accrued
at the new 21% rate. This reduction was recorded to a regulatory liability and
electric rates have been adjusted in the second quarter to initiate the pass
back of the 2018 excess to customers over various amortization periods. In
addition, rates have been adjusted to begin passing back the excess ADIT that
was accumulated as of December 31, 2017. The Tax Act also excludes the
Utilities' asset additions from qualifying for bonus depreciation, which will
partially offset the aforementioned impacts by lowering ADIT and thereby
increasing rate base and the associated revenue requirement for new plant going
forward. However, note that the guidance issued in Treasury regulations proposed
in August 2018 allowed the Utilities to take bonus depreciation on certain
grandfathered utility property.
                                                                                                             Stipulated
                                                                                                             agreement
                            Date                     % over                                       Common    reached with
Test year                 (filed/                   rates in      ROACE     RORB       Rate       equity      Consumer
(dollars in millions)   implemented)    Amount       effect        (%)       (%)        base        %         Advocate
Hawaiian Electric
2017 1
Request                   12/16/16     $ 106.4           6.9     10.60      8.28     $ 2,002      57.36          Yes
Interim increase          2/16/18         36.0           2.3      9.50      7.57       1,980      57.10
Interim increase with
Tax Act                   4/13/18         (0.6 )           -      9.50      7.57       1,993      57.10
Final increase             9/1/18         (0.6 )           -      9.50      7.57       1,993      57.10
Hawaii Electric Light
2016 2
Request                   9/19/16      $  19.3           6.5     10.60      8.44     $   479      57.12          Yes
Interim increase          8/31/17          9.9           3.4      9.50      7.80         482      56.69
Interim increase with
Tax Act                    5/1/18          1.5           0.5      9.50      7.80         481      56.69
Final increase            10/1/18            -             -      9.50      7.80         481      56.69
Maui Electric
2018
Request                   10/12/17     $  30.1           9.3     10.60      8.05     $   473      56.94          Yes
Interim increase          8/23/18         12.5          3.82      9.50      7.43         462      57.02


Note: The "Request" date reflects the application filing date for the rate proceeding. The "Interim increase" and "Final increase" date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase. 1 Final decision and order was issued on June 22, 2018.



2 Final decision and order was issued on June 29, 2018.
See "Most recent rate proceedings" in Note 3 of the Condensed Consolidated
Financial Statements.
Performance-based regulation.  See "Performance incentive mechanisms" and
"Performance-based regulation proceeding" in Note 3 of the Condensed
Consolidated Financial Statements.
Depreciation docket.  In December 2016, the Utilities filed an application with
the PUC for approval of changes in the depreciation and amortization rates and
amortization period for CIAC, based on a 2015 Book Depreciation Study. In July
2018, the PUC approved the stipulated agreement between the Utilities and the
Consumer Advocate, which among other things:
•      Authorized the use of consolidated depreciation and amortization rates
       rather than separate depreciation and amortization rates for the three
       utilities


•      Established revised depreciation and amortization rates for the three
       utilities

• Approved the implementation of the new depreciation and amortization rates

and other changes to coincide with the effective date of the interim or

final base rates approved in the subsequent rate case for each utility,

       beginning with Maui Electric's ongoing 2018 test year rate case.



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Developments in renewable energy efforts.  Developments in the Utilities'
efforts to further their renewable energy strategy include renewable energy
projects discussed in Note 3 of the Condensed Consolidated Financial Statements
and the following:
New renewable PPAs.
•      In July 2015, Maui Electric signed two PPAs, with Kuia Solar and South
       Maui Renewable Resources (which subsequently assigned its PPA to SSA Solar

of HI 2, LLC and SSA Solar of HI 3, LLC, respectively), each for a 2.87-MW

solar facility. In February 2016, the PUC approved both PPAs, subject to

certain conditions and modifications. The guaranteed commercial operations

date for the facilities was December 31, 2016, however both projects

experienced delays. South Maui Renewable Resources reached commercial

operations on May 5, 2018, and Kuia Solar reached commercial operations on

October 4, 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 was expected to be placed into service by August 31, 2019 but delayed

       due to an appeal of the decision in the Habitat Conservation Permit
       contested case.


•      Hawaiian Electric terminated PPAs to purchase solar energy with three

affiliates of SunEdison, which affiliates were acquired by an affiliate of

       NRG Energy, Inc. (NRG) during SunEdison's Chapter 11 bankruptcy
       proceedings. Hawaiian Electric then negotiated with NRG and its newly
       acquired affiliates and entered into amended and restated PPAs for solar

energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for

14.7 MW and Kawailoa Solar, LLC for 49.0 MW. In July 2017, the PUC

approved the three NRG PPAs, subject to modifications and conditions. On

August 31, 2018, NRG sold substantially all of its renewable platform to

       Global Infrastructure Partners (GIP). As a part of that transaction, the
       three projects are now owned by Clearway Energy Group LLC, which is an

investment of GIP. The transaction is not expected to affect the success

       or completion of the projects. The three projects are expected to be in
       service by the end of 2019.

• In July 2018, the PUC approved the Maui Electric's PPA with Molokai New

Energy Partners to purchase solar energy from a PV plus battery storage

       project. The 4.9 MW project will deliver no more than 2.64 MW at any time
       to the Molokai system and is expected to be in service by end of 2019.

Tariffed renewable resources. • As of September 30, 2018, there were approximately 455 MW, 96 MW and 107

MW of installed distributed renewable energy technologies (mainly PV) at

Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively,

for tariff-based private customer generation programs, namely Standard

Interconnection Agreement (SIA), NEM, Customer Grid Supply, Customer Self

Supply, Controllable Customer Grid Supply and Smart Export. As of

September 30, 2018, an estimated 28% of single family homes on the islands

of Oahu, Hawaii and Maui have installed private rooftop solar systems, and

approximately 17% of the Utilities' total customers have solar systems.

• The Utilities began accepting energy from feed-in tariff projects in 2011.

As of September 30, 2018, there were 31 MW, 3 MW and 5 MW of installed

feed-in tariff capacity from renewable energy technologies at Hawaiian

Electric, Hawaii Electric Light and Maui Electric, respectively.

Biofuel sources. • In September 2015, the PUC approved Hawaiian Electric's 2-year biodiesel

supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2

million to 3 million gallons of biodiesel at Campbell Industrial Park

combustion turbine No. 1 (CIP CT-1) and the Honolulu International Airport

Emergency Power Facility (HIA Facility) beginning in November 2015. The

PBT contract is set to expire on November 2, 2018. PBT also has a spot buy

contract with Hawaiian Electric to purchase additional quantities of

biodiesel at or below the price of diesel. Some purchases of "at parity"

biodiesel have been made under the spot purchase contract, which was

recently extended through June 2019. REG Marketing & Logistics Group, LLC

has a contingency supply contract with Hawaiian Electric to also supply

biodiesel to CIP CT-1 in the event PBT is not able to supply necessary

       quantities. This contingency contract has been extended to November 2019,
       and will continue with no volume purchase requirements.

• In July 2018, the PUC approved Hawaiian Electric's 3 year biodiesel supply

contract with PBT to supply 2 million to 4 million gallons of biodiesel at

Hawaiian Electric's Schofield Generating Station and the HIA Facility and

any other generating unit on Oahu, as necessary. The new PBT contract

became effective on November 1, 2018.

Requests for renewable proposals, expressions of interest, and information. • Under a request for proposal process governed by the PUC and monitored by

independent observers, in February 2018, the Utilities issued RFPs for 220

MW of renewable generation on Oahu, 50 MW of renewable generation on

Hawaii Island, and 60 MW of renewable generation on Maui. The Utilities

       selected a final award group for Hawaii



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Island in August 2018 and for Maui and Oahu in September 2018 and are proceeding
to negotiate and file PPAs with the PUC for the selected projects by the end of
2018.
•      In October 2017, the Utilities filed a draft request for proposal with the
       PUC for 40 MW of firm renewable generation on Maui (Maui Firm RFP) to be
       in service by the end of 2022. The Utilities are currently working with
       the independent observer for the Maui Firm RFP to update and revise the
       draft Maui Firm RFP for filing with the PUC for approval.


•      On January 5, 2017, Hawaiian Electric issued requests for Onshore Wind
       Expression of Interest to developers that are capable of developing
       utility scale onshore wind projects that are eligible to capture the
       federal Investment Tax Credit for Large Wind on the island of Oahu.
       Hawaiian Electric entered into non-binding confidential negotiations with
       a developer that responded, and the agreement reached is subject to PUC
       approval.


Adequacy of supply.
Hawaiian Electric. In January 2018, Hawaiian Electric filed its 2018 Adequacy of
Supply (AOS) letter, which indicated that based on its June 2017 sales and peak
forecast for the 2018 - 2023 time period, Hawaiian Electric's generation
capacity will be sufficient to meet reasonably expected demands for service and
provide reasonable reserves for emergencies through 2021, but may have
shortfalls in meeting the Utilities' generating system reliability guideline.
The calculated reliability guideline shortfalls are relatively small and
Hawaiian Electric can implement mitigation measures.
In accordance with its planning criteria, Hawaiian Electric deactivated two
fossil fuel generating units from active service at its Honolulu Power Plant in
January 2014. Hawaiian Electric acquired new firm capacity of 8 MW with the
commissioning of the State of Hawaii Department of Transportation's emergency
power facility in June 2017. Hawaiian Electric is continuing negotiations with
firm capacity IPPs on Oahu. On August 22, 2018, 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, 2019. The PPA with AES
Hawaii is scheduled to expire in 2022. On June 7, 2018, Hawaiian Electric's
Schofield Generating Station was placed into service, providing approximately 50
MW of additional generating capability on Oahu.
Hawaii Electric Light. In January 2018, Hawaii Electric Light filed its 2018 AOS
letter, which indicated that Hawaii Electric Light's generation capacity through
2020 is sufficient to meet reasonably expected demands for service and provide
for reasonable reserves for emergencies. Hawaii Electric Light is anticipating
the addition of the firm dispatchable Honua Ola facility (formerly named Hu
Honua) to be online by the end of 2018. Since May 2018, the Puna Geothermal
Venture facility has been offline due to the lava flow on Hawaii Island. Hawaii
Electric Light expects to have sufficient generation capacity despite the
shutdown of Puna Geothermal Venture.
Maui Electric. In January 2018, Maui Electric filed its 2018 AOS letter, which
indicated that Maui Electric's generation capacity for the islands of Lanai and
Molokai for the next three years is sufficiently large to meet all reasonably
expected demands for service and provide reasonable reserves for emergencies.
The 2018 AOS letter also indicated that without the peak reduction benefits of
demand response but with the equivalent firm capacity value of wind generation,
Maui Electric expects to have a reserve capacity shortfall from 2018 to 2020 on
the island of Maui. Maui Electric is evaluating several measures to mitigate the
anticipated reserve capacity shortfall.  Maui Electric anticipates needing a
significant amount of additional firm capacity on Maui in the 2022 timeframe
after the planned retirement of the Kahului Power Plant.
In May 2016, Maui Electric requested that the PUC open a new docket for Maui
Electric's competitive bidding process for additional firm capacity resources.
In October 2017, Maui Electric filed a draft RFP and supporting documents as
requested by the PUC. In January 2018, the PUC issued an order appointing an
Independent Observer of the RFP process that reports to the PUC for Maui Firm
RFP. However, the PUC stated Maui Electric should focus on its variable RFP and
noted that it would provide further guidance on the Firm RFP. The Utilities are
currently working with the Independent Observer for the Maui Firm RFP to update
and revise the draft Maui Firm RFP for filing with the PUC for approval.
In September 2016, Maui Electric submitted an application to purchase and
install three temporary mobile distributed generation diesel engines to address
increasing reserve capacity shortfalls on the island of Maui; Maui Electric has
since requested the PUC to suspend the proceeding to evaluate contingency
measures and permanent solutions to minimize or eliminate the risk of near-term
capacity shortfalls on the island of Maui.
Legislation and regulation. Congress and the Hawaii legislature periodically
consider legislation that could have positive or negative effects on the
Utilities and their customers. Also see "Environmental regulation" in Note 3 of
the Condensed Consolidated Financial Statements.
Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the
Federal Register the final regulations required by section 316(b) of the CWA
designed to protect aquatic organisms from adverse impacts associated with
existing power plant cooling water intake structures. The regulations were
effective October 14, 2014 and apply to the cooling water

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systems for the steam generating units at three of Hawaiian Electric's power
plants on the island of Oahu. The regulations prescribe a process, including a
number of required site-specific studies, for states to develop
facility-specific entrainment and impingement controls to be incorporated in
each facility's National Pollutant Discharge Elimination System permit. Hawaiian
Electric submitted the final site specific studies to the DOH in December 2016
for the Honolulu and Waiau power plants and in September 2017 for the Kahe power
plant. Hawaiian Electric will work with the DOH to identify the appropriate
compliance methods for the 316(b) rule.
Performance-based ratemaking legislation. See "Performance incentive mechanisms"
and "Performance-based regulation proceeding" in Note 3 of the Condensed
Consolidated Financial Statements.
Impact of lava flows. In May 2018, a lava eruption occurred within the Leilani
Estates subdivision, located along the lower East Rift Zone of Kilauea Volcano
in the Puna district on the island of Hawaii. Over 20 fissures erupted lava and
gas in the area covering approximately 13.7 square miles or 8,700 acres of
land. Approximately 3,000 of the 86,000 Hawaii Electric Light customers reside
in that area and over 1,000 customers had to evacuate their homes, some
permanently. Since early August the lava activity significantly decreased and
there is currently no active flow. The County of Hawaii has rescinded its
mandatory evacuation order for the Leilani Estates subdivision, residents have
returned to their homes, and the United States Geological Survey Hawaii Volcano
Observatory has lowered the volcanic threat levels for Kilauea Volcano. The flow
damaged some of Hawaii Electric Light's property in the affected area and also
resulted in the shutdown of independent power producer PGV's facilities. Hawaii
Electric Light continues to serve the load of Hawaii Island without capacity
from PGV, and the Utilities expect to meet its 2020 RPS goals without the return
of PGV to service. The financial impact to Hawaii Electric Light to date has not
been material.
PUC Commissioner.  Jennifer Potter began her term as PUC Commissioner, effective
July 1, 2018, replacing outgoing commissioner Lorraine Akiba, whose term expired
on June 30, 2018. Ms. Potter was an assistant specialist at Hawaii Natural
Energy Institute, and previously worked at Lawrence Berkley National Lab as a
senior scientific engineering associate, as well as at the Sacramento Municipal
Utility District in various positions.
                              FINANCIAL CONDITION
Liquidity and capital resources.  As a result of the Tax Cut and Jobs Act,
utility property is no longer eligible for bonus depreciation, but further
guidance is required in order to finally determine the application of the new
law. However, note that recent clarification in the tax law indicates that
certain assets with longer construction periods that were placed in service
after the effective date may be grandfathered and qualify for the old 50% bonus
depreciation if subject to binding contracts entered into before such effective
date. Consequently, additional bonus depreciation was taken for the fourth
quarter of 2017 in the Company's income tax return, resulting in an additional
deferral of income taxes. The Utilities are currently evaluating its larger
projects placed into service in 2018 for applicability. Nevertheless, the
initial cash requirement for future capital projects will generally increase
because of the loss of the immediate tax benefit from bonus depreciation.
Management believes that Hawaiian Electric's ability, and that of its
subsidiaries, to generate cash, both internally from operations and externally
from issuances of equity and debt securities and commercial paper and draws on
lines of credit, is adequate to maintain sufficient liquidity to fund their
respective capital expenditures, investments, debt repayments, retirement
benefit plan contributions and other cash requirements in the foreseeable
future.
Hawaiian Electric's consolidated capital structure was as follows:
(dollars in millions)        September 30, 2018            December 31, 2017
Short-term borrowings   $         86             3 %   $         5            - %
Long-term debt, net            1,469            42           1,369           42
Preferred stock                   34             1              34            1
Common stock equity            1,876            54           1,845           57
                        $      3,465           100 %   $     3,253          100 %




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Information about Hawaiian Electric's short-term borrowings (other than from
Hawaii Electric Light and Maui Electric) and Hawaiian Electric's line of credit
facility were as follows:
                                            Average balance                          Balance
                                           Nine months ended
(in millions)                             September 30, 2018      September 30, 2018         December 31, 2017
Short-term borrowings 1
Commercial paper                          $              90     $                  86     $                   5
Line of credit draws                                      -                         -                         -
Borrowings from HEI                                       -                         -                         -
Undrawn capacity under line of credit
facility                                                  -                       200                       200



1  The maximum amount of external short-term borrowings by Hawaiian Electric
during the first nine months of 2018 was $157 million. As of September 30, 2018,
Hawaiian Electric had short-term borrowings from Hawaii Electric Light of nil
and Maui Electric had short-term borrowings from Hawaiian Electric of $2
million.
Hawaiian Electric has a $200 million line of credit facility with no amounts
outstanding at September 30, 2018. See Note 5 of the Condensed Consolidated
Financial Statements.
Upon PUC approval received in April 2018 (April 2018 Approval), on May 30, 2018,
Hawaiian Electric, Hawaii Electric Light and Maui Electric issued through a
private placement, $75 million, $15 million and $10 million, respectively, of
unsecured senior notes bearing taxable interest. The April 2018 Approval also
authorized the use of the expedited approval procedure to request for the
remaining additional taxable debt to be issued during 2019 through 2021, with
certain conditions, for up to $205 million and $15 million for Hawaiian Electric
and Hawaii Electric Light, respectively. Maui Electric does not have
authorization to issue additional taxable debt beyond 2018. See Note 5 of the
Condensed Consolidated Financial Statements.
On July 12, 2018, the Utilities requested PUC approval to issue the remaining
authorized amounts under the April 2018 Approval in 2019 through 2020 (Hawaiian
Electric up to $205 million and Hawaii Electric Light up to $15 million of
taxable debt), as well as a supplemental increase to authorize the issuance of
additional taxable debt to finance capital expenditures, repay long-term and/or
short term debt used to finance or refinance capital expenditures, and/or to
reimburse funds used for payment of capital expenditures, and to refinance the
Utilities' 2004 junior subordinated deferrable interest debentures prior to
maturity. In addition, the Utilities requested approval to extend the period to
issue additional taxable debt from December 31, 2021 to December 31, 2022. The
new total "up to" amounts of taxable debt authorized to be issued through
December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian
Electric, Hawaii Electric Light and Maui Electric, respectively.
On September 6, 2018, Hawaiian Electric and Hawaii Electric Light filed with the
PUC a letter request for the expedited authorization to issue refunding special
purpose revenue bonds (SPRBs) prior to December 31, 2020 to refinance their
outstanding Series 2009 SPRBs in the amount of up to $90 million and $60
million, respectively.
On October 22, 2018, the Utilities received PUC approval for the supplemental
increase to issue and sell additional common stock in the amounts of up to $280
million for Hawaiian Electric and up to $100 million each for Hawaii Electric
Light and Maui Electric, with the new total up to amounts of $430 million for
Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui
Electric, and to extend the period authorized by the PUC to issue and sell
common stock from December 31, 2021 to December 31, 2022.
On October 26, 2018, the Utilities requested PUC approval to issue SPRBs (under
the 2015 Legislative Authorization) in the amounts of up to $70 million, $2.5
million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui
Electric, respectively, prior to June 30, 2020, to finance the Utilities'
capital improvement programs.
Cash flows. The following table reflects the changes in cash flows for the nine
months ended September 30, 2018 compared to the nine months ended September 30,
2017:
                                                        Nine months ended September 30,
(in thousands)                                             2018                 2017             Change
Net cash provided by operating activities           $       193,722       $       258,873     $  (65,151 )
Net cash used in investing activities                      (300,558 )            (258,258 )      (42,300 )
Net cash provided by (used in) financing activities         101,543         

(64,914 ) 166,457



Net cash provided by operating activities. The decrease in net cash provided by
operating activities was primarily driven by lower cash from an increase in
accounts receivable due to timing and increase in customer bills as a result of
higher

                                       77
--------------------------------------------------------------------------------


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

                                       78
--------------------------------------------------------------------------------

Bank
                Three months ended September
                             30                   Increase
(in millions)         2018            2017       (decrease)                     Primary reason(s)
Interest        $            65     $    59     $       6       The increase in interest income was the result of
income                                                          an increase 

in balances and yields on earning

                                                                assets. 

ASB's average investment securities

                                                                portfolio 

balance for the three months ended

                                                                September 

30, 2018 increased by $229 million

                                                                compared to 

the same period in 2017 as ASB used

                                                                excess 

liquidity to purchase investments. The

                                                                yield on 

the investment securities portfolio

                                                                increased 

by 26 basis points as new investment

                                                                purchase 

yields were higher due to the rising

                                                                interest 

rate environment. ASB's average loan

                                                                portfolio 

balance for the three months ended

                                                                September 

30, 2018 increased by $74 million

                                                                compared to 

the same period in 2017 as the

                                                                average 

residential, home equity line of credit

                                                                and 

consumer loan portfolios for the three months

                                                                ended 

September 30, 2018 increased by $48

                                                                million, 

$56 million and $26 million,

respectively, compared to the same period in

                                                                2017. The 

growth in these loan portfolios aligned

                                                                with ASB's 

portfolio mix target and loan growth

                                                                strategy. 

The average commercial and commercial

                                                                real estate 

balances decreased by $38 million and

                                                                $17 

million, respectively. The decrease in these

                                                                loan 

portfolios was due to paydowns in those loan

                                                                portfolios. 

The yield on loans benefited from the

                                                                rising 

interest rate environment, which resulted

                                                                in an 

increase in yield from the total loan

                                                                portfolio of 24 basis points.
Noninterest                  15          15             -       Noninterest income was flat for the three months
income                                                          ended 

September 30, 2018 compared to noninterest

                                                                income for 

the three months ended September 30,

                                                                2017 as 

lower fees from other financial services

                                                                in 2018 as 

a result of debit card interchange

                                                                expenses 

being netted against income beginning in

                                                                2018 were 

offset by higher bank-owned life

                                                                insurance 

income. Prior year's debit card

                                                                interchange 

expenses were recorded in other

                                                                noninterest 

expense. This change was in

                                                                accordance 

with the new revenue recognition

                                                                accounting 

standard. See Note 7 of the Condensed

Consolidated Financial Statements for additional

                                                                information 

on the new revenue recognition

                                                                standard.
Revenues                     80          74             6       The 

increase in revenues for the three months

                                                                ended 

September 30, 2018 compared to the same

                                                                period in 2017 was due to higher interest income.
Interest                      4           3             1       Interest expense increased slightly for the three
expense                                                         months 

ended September 30, 2018 compared to the

                                                                same period 

in 2017. Average deposit balances for

                                                                the three 

months ended September 30, 2018

                                                                increased 

by $383 million compared to the same

                                                                period in 

2017 due to an increase in core

                                                                deposits 

and time certificates of $295 million

                                                                and $88 

million, respectively. Average other

                                                                borrowings 

for the three months ended September

                                                                30, 2018 

decreased by $22 million compared to the

                                                                same period 

in 2017 due to a decrease in the

                                                                average 

FHLB advances and repurchase agreements

                                                                of $19 

million and $3 million, respectively. The

interest-bearing liability rate for the three

                                                                months 

ended September 30, 2018 increased by 8

                                                                basis 

points compared to the same period in 2017

                                                                primarily 

due to an increase in term certificate

                                                                and money market account yields.
Provision for                 6           1             5       The provision for loan losses increased for the
loan losses                                                     three 

months ended September 30, 2018 compared to

                                                                the 

provision for loan losses for the three

                                                                months 

ended September 30, 2017. The provision

                                                                for loan 

losses for 2018 was primarily due to

                                                                increased 

reserves for loan growth and additional

                                                                loan loss 

reserves for the consumer and credit

                                                                scored loan 

portfolios, partly offset by the

                                                                release of 

reserves due to paydowns in the

                                                                commercial 

and commercial real estate loan

                                                                portfolios 

and improved credit quality in the

residential, home equity line of credit,

                                                                commercial 

and commercial real estate loan

                                                                portfolios. 

The provision for loan losses for

                                                                2017 was 

primarily due to increased loan loss

                                                                reserves 

for the consumer loan portfolio offset

                                                                by the 

release of reserves for the commercial

                                                                real estate 

and syndicated national credit loan

                                                                portfolios 

due to loan paydowns and sales as the

                                                                Bank 

strategically worked to improve commercial

                                                                asset 

quality. Delinquency rates have decreased

                                                                from 0.60% 

at September 30, 2017 to 0.52% at

                                                                September 

30, 2018. The annualized net charge-off

                                                                ratio for 

the three months ended September 30,

                                                                2018 was 

0.40% compared to an annualized net

                                                                charge-off 

ratio of 0.32% for the same period in

                                                                2017. The 

increase was due to higher net

                                                                charge-offs 

in the consumer loan portfolio with

                                                                risk-based 

pricing.

Noninterest                  43          44            (1 )     Noninterest expense decreased slightly for the
expense                                                         three 

months ended September 30, 2018 compared to

                                                                the same 

period in 2017. The reclassification of

                                                                debit card 

interchange expenses to noninterest

                                                                income in 

accordance with the new revenue

                                                                recognition 

accounting standard that became

                                                                effective 

on January 1, 2018 was partly offset by

                                                                higher employee benefit expenses.
Expenses                     53          48             5       The 

increase in expenses for the three months

                                                                ended 

September 30, 2018 compared to the same

                                                                period in 

2017 was due to higher provision for

                                                                loan 

losses.

Operating                    27          26             1       Operating income increased slightly for the three
income                                                          months 

ended September 30, 2018 compared to the

                                                                same period 

in 2017 as higher interest income and

                                                                lower 

noninterest expenses were partly offset by

                                                                higher provision for loan losses.
Net income                   21          18             3       The 

increase in net income for the three months

                                                                ended 

September 30, 2018 compared to the same

                                                                period in 

2017 was primarily due to lower income

                                                                tax expense 

as a result of the lower corporate

                                                                rate from the Tax Act.



                                       79
--------------------------------------------------------------------------------


                  Nine months ended
                    September 30          Increase
(in millions)      2018        2017      (decrease)                     Primary reason(s)
Interest        $     190     $ 176     $      14      The increase in interest income was primarily the
income                                                 result of an 

increase in balances and yields on

                                                       earning assets. 

ASB's average investment securities

                                                       portfolio balance for the nine months ended
                                                       September 30, 2018 increased by $257 million
                                                       compared to the same period in 2017 as ASB used
                                                       excess liquidity to

purchase investments. The yield

                                                       on the investment 

securities portfolio increased by

                                                       16 basis points as 

new investment purchase yields

                                                       were higher due to 

the rising interest rate

                                                       environment. ASB's 

average loan portfolio balance

                                                       for the nine months ended September 30, 2018
                                                       increased by $29 million compared to the same
                                                       period in 2017 as increases in the average
                                                       residential, home equity line of credit and
                                                       consumer loan

portfolios for the nine months ended

                                                       September 30, 2018 

of $51 million, $55 million and

                                                       $34 million, 

respectively, were partly offset by

                                                       decreases in the the 

average commercial and

                                                       commercial real 

estate balances of $72 million and

                                                       $37 million, respectively. The growth in
                                                       residential, home equity line of credit and
                                                       consumer loan

portfolios aligned with ASB's

                                                       portfolio mix target 

and loan growth strategy. The

                                                       decrease in 

commercial and commercial real estate

                                                       loan portfolios was 

reflective of ASB's strategic

                                                       decision to reduce 

the balances in certain

                                                       commercial and 

national loan portfolios to improve

                                                       the credit quality 

of those portfolios. The yield

                                                       on loans benefited 

from the rising interest rate

                                                       environment, which 

resulted in an increase in

                                                       yields from the 

total loan portfolio of 20 basis

                                                       points.
Noninterest            43        47            (4 )    Noninterest income decreased for the nine months
income                                                 ended September 30, 2018 compared to noninterest
                                                       income for the nine

months ended September 30, 2017

                                                       primarily due to 

lower fees from other financial

                                                       services in 2018 as a result of debit card
                                                       interchange expenses being netted against income
                                                       beginning in 2018. Prior year's debit card
                                                       interchange expenses were recorded in other
                                                       noninterest expense. This change was in accordance
                                                       with the new revenue recognition accounting
                                                       standard. See Note 7 of the Condensed Consolidated
                                                       Financial Statements for additional information on
                                                       the new revenue recognition standard.
Revenues              233       223            10      The increase in

revenues for the nine months ended

                                                       September 30, 2018 

compared to the same period in

                                                       2017 was due higher 

interest income, partly offset

                                                       by lower noninterest 

income.

Interest               11         9             2      Interest expense increased for the nine months
expense                                                ended September 30, 

2018 compared to the same

                                                       period in 2017 due 

to higher interest expense from

                                                       an increase in time certificate balances and
                                                       increased rates for time certificates and money
                                                       market accounts,

partly offset by lower interest

                                                       expense on other 

borrowings as a result of lower

                                                       FHLB advances. 

Average deposit balances for the

                                                       nine months ended 

September 30, 2018 increased by

                                                       $348 million 

compared to the same period in 2017

                                                       due to an increase in core deposits and time
                                                       certificates of $246 million and $102 million,
                                                       respectively.

Average other borrowings for the nine

                                                       months ended 

September 30, 2018 decreased by $27

                                                       million compared to 

the same period in 2017 due to

                                                       a decrease in FHLB 

advances, partly offset by an

                                                       increase in 

repurchase agreements. The

                                                       interest-bearing 

liability rate for the nine months

                                                       ended September 30, 

2018 increased by 5 basis

                                                       points compared to the same period in 2017.
Provision for          12         7             5      The provision for loan losses increased for the
loan losses                                            nine months ended 

September 30, 2018 compared to

                                                       the provision for 

loan losses for the nine months

                                                       ended September 30, 

2017. The provision for loan

                                                       losses for 2018 was 

due to increased reserves for

                                                       loan growth and 

additional loan loss reserves for

                                                       the consumer loan 

portfolio, partly offset by the

                                                       release of reserves for the commercial loan
                                                       portfolio due to a recovery on a previously
                                                       charged-off

commercial loan and improved credit

                                                       quality, primarily 

in the commercial and commercial

                                                       real estate loan 

portfolios. The provision for loan

                                                       losses for 2017 was 

primarily due to increased

                                                       reserves for loan 

growth and additional loan loss

                                                       reserves for the 

consumer loan portfolio, partly

                                                       offset by the 

release of reserves for the

                                                       commercial real 

estate and national syndicated

                                                       credit loan 

portfolios due to lower outstanding

                                                       balances and 

improved credit quality. Delinquency

                                                       rates have decreased 

from 0.60% at September 30,

                                                       2017 to 0.52% at 

September 30, 2018. The annualized

                                                       net charge-off ratio for the nine months ended
                                                       September 30, 2018 was 0.33% compared to an
                                                       annualized net

charge-off ratio of 0.27% for the

                                                       same period in 2017. 

The increase was due to higher

                                                       net charge-offs in 

the consumer loan portfolio with

                                                       risk-based pricing.
Noninterest           131       131             -      Noninterest expense for the nine months ended
expense                                                September 30, 2018 

compared to the same period in

                                                       2017 was flat 

primarily due to higher compensation

                                                       and employee 

benefits expenses as a result of an

                                                       increase in the 

minimum pay rate for employees,

                                                       annual merit increases, and higher service
                                                       expenses, offset by the reclassification of debit
                                                       card interchange

expenses in accordance with the

                                                       new revenue recognition accounting standard.
Expenses              154       147             7      The increase in 

expenses for the nine months ended

                                                       September 30, 2018 

compared to the same period in

                                                       2017 was due to 

higher interest expense and higher

                                                       provision for loan 

losses.

Operating              79        76             3      The increase in operating income for the nine
income                                                 months ended 

September 30, 2018 compared to the

                                                       same period in 2017 

was primarily due to higher

                                                       interest income, 

partly offset by higher provision

                                                       for loan losses, 

higher interest expense, and lower

                                                       noninterest income.
Net income             61        50            11      The increase in net income for the nine months
                                                       ended September 30, 2018 compared to the same
                                                       period in 2017 was primarily due to higher
                                                       operating income and lower income tax expense as a
                                                       result of the lower corporate rate from the Tax
                                                       Act.




                                       80
--------------------------------------------------------------------------------

See Note 4 of the Condensed Consolidated Financial Statements and "Economic conditions" in the "HEI Consolidated" section above.

            ASB continues to maintain its low-risk profile, strong balance 

sheet

and straightforward community banking business model.

            ASB's return on average assets, return on average equity and 

net

interest margin were as follows:

                                          Three months ended          Nine months ended
                                             September 30               September 30
(%)                                       2018          2017          2018         2017
Return on average assets                    1.22          1.07         1.18         1.02
Return on average equity                   13.80         11.64        13.32        11.24
Net interest margin                         3.81          3.69         3.78         3.68


                                                                     Three months ended September 30
                                                            2018                                          2017
                                                           Interest1                                     Interest1
                                            Average         income/         Yield/        Average         income/        Yield/
(dollars in thousands)                      balance         expense        rate (%)       balance         expense       rate (%)
Assets:
Interest-earning deposits                $    66,866     $        339         1.98     $    54,598     $       172         1.23
FHLB stock                                    10,087              120         4.73          10,401              45         1.70
Investment securities
Taxable                                    1,518,743            8,691         2.29       1,291,604           6,521         2.02
Non-taxable                                   16,988              190         4.38          15,427             171         4.33
Total investment securities                1,535,731            8,881         2.31       1,307,031           6,692         2.05
Loans
Residential 1-4 family                     2,114,398           21,776         4.12       2,066,648          21,383         4.14
Commercial real estate                       863,468           10,140         4.61         880,304           9,542         4.26
Home equity line of credit                   951,384            8,936         3.73         895,224           7,714         3.42
Residential land                              14,236              192         5.39          16,340             296         7.26
Commercial                                   581,202            6,759         4.59         618,708           6,863         4.39
Consumer                                     240,067            8,082        13.36         213,619           6,412        11.91
Total loans 2,3                            4,764,755           55,885      

4.66 4,690,843 52,210 4.42 Total interest-earning assets 2

            6,377,439           65,225         4.06       6,062,873          59,119         3.88
Allowance for loan losses                    (52,781 )                                     (55,881 )
Non-interest-earning assets                  622,721                                       558,736
Total assets                             $ 6,947,379                                   $ 6,565,728
Liabilities and shareholder's equity:
Savings                                  $ 2,352,553     $        415         0.07     $ 2,292,341     $       400         0.07
Interest-bearing checking                  1,016,490              194         0.08         901,645              61         0.03
Money market                                 161,363              244         0.60         138,151              41         0.12
Time certificates                            773,921            2,782         1.43         686,638           1,942         1.12
Total interest-bearing deposits            4,304,327            3,635         0.34       4,018,775           2,444         0.24
Advances from Federal Home Loan Bank          48,207              241         1.99          66,848             436         2.59
Securities sold under agreements to
repurchase                                    86,547              163         0.75          90,011              34         0.15
Total interest-bearing liabilities         4,439,081            4,039         0.36       4,175,634           2,914         0.28
Non-interest bearing liabilities:
Deposits                                   1,778,751                                     1,681,774
Other                                        114,343                                       103,695
Shareholder's equity                         615,204                                       604,625
Total liabilities and shareholder's
equity                                   $ 6,947,379                                   $ 6,565,728
Net interest income                                      $     61,186                                  $    56,205
Net interest margin (%) 4                                                     3.81                                         3.69




                                       81
--------------------------------------------------------------------------------

                                                                     Nine months ended September 30
                                                            2018                                         2017
                                                           Interest1                                    Interest1
                                            Average         income/         Yield/        Average         income/       Yield/
(dollars in thousands)                      balance         expense        rate (%)       balance        expense       rate (%)
Assets:
Interest-earning deposits                $    59,051     $        795         1.77     $    64,426     $      479         0.98
FHLB stock                                    10,035              274         3.65          11,128            150         1.80
Investment securities
Taxable                                    1,491,378           25,664         2.29       1,235,029         19,651         2.12
Non-taxable                                   15,953              502         4.15          15,427            481         4.11
Total investment securities                1,507,331           26,166         2.31       1,250,456         20,132         2.15
Loans
Residential 1-4 family                     2,121,049           65,204         4.10       2,070,150         65,172         4.20
Commercial real estate                       865,603           29,350      

4.49 902,605 28,676 4.20 Home equity line of credit

                   935,184           25,278         3.61         880,472         22,078         3.35
Residential land                              15,727              638         5.41          16,816            791         6.28
Commercial                                   578,246           19,752         4.55         650,554         21,108         4.32
Consumer                                     235,063           23,096        13.14         201,379         17,444        11.58
Total loans 2,3                            4,750,872          163,318      

4.58 4,721,976 155,269 4.38 Total interest-earning assets 2

            6,327,289          190,553         4.01       6,047,986        176,030         3.88
Allowance for loan losses                    (53,510 )                                     (56,276 )
Non-interest-earning assets                  595,952                                       537,894
Total assets                             $ 6,869,731                                   $ 6,529,604
Liabilities and shareholder's equity:
Savings                                  $ 2,336,007     $      1,227         0.07     $ 2,271,926     $    1,160         0.07
Interest-bearing checking                    993,686              476         0.06         898,794            175         0.03
Money market                                 133,826              343         0.34         146,864            133         0.12
Time certificates                            777,816            7,830      

1.35 676,083 5,390 1.07 Total interest-bearing deposits

            4,241,335            9,876       

0.31 3,993,667 6,858 0.23 Advances from Federal Home Loan Bank 50,487

              740       

1.96 89,273 1,999 2.99 Securities sold under agreements to repurchase

                                   105,410              553         0.70          93,128            111         0.16
Total interest-bearing liabilities         4,397,232           11,169         0.34       4,176,068          8,968         0.29
Non-interest bearing liabilities:
Deposits                                   1,758,824                                     1,658,238
Other                                        105,426                                       100,499
Shareholder's equity                         608,249                                       594,799
Total liabilities and shareholder's
equity                                   $ 6,869,731                                   $ 6,529,604
Net interest income                                      $    179,384                                  $  167,062
Net interest margin (%) 4                                                     3.78                                        3.68

1 Interest income includes taxable equivalent basis adjustments, based upon a

federal statutory tax rate of 21% and 35%, of $0.04 million and $0.06 million

for the three months ended September 30, 2018 and 2017, respectively and $0.1

million and $0.2 million for the nine months ended September 30, 2018 and

2017, respectively.

2 Includes loans held for sale, at lower of cost or fair value. 3 Includes recognition of net deferred loan fees of $0.1 million and $0.3

million for the three months ended September 30, 2018 and 2017 and $0.2

million and $1.4 million for the nine months ended September 30, 2018 and

2017, respectively, together with interest accrued prior to suspension of

interest accrual on nonaccrual loans.

4 Defined as net interest income, on a fully taxable equivalent basis, as a

percentage of average total interest-earning assets.



Earning assets, costing liabilities, contingencies and other factors.  Earnings
of ASB depend primarily on net interest income, which is the difference between
interest earned on earning assets and interest paid on costing liabilities. The
interest rate environment has been impacted by disruptions in the financial
markets over a period of several years. These conditions have begun to moderate
with the interest rate increases in the past year, resulting in an increase in
ASB's net interest income and net interest margin.
            Loan originations and mortgage-related securities are ASB's 

primary

earning assets.

                                       82
--------------------------------------------------------------------------------


            Loan portfolio.  ASB's loan volumes and yields are affected by
market interest rates, competition, demand for financing, availability of funds
and management's responses to these factors. See Note 4 of the Condensed
Consolidated Financial Statements for the composition of ASB's loans.
Home equity - key credit statistics. Attention has been given by regulators and
rating agencies to the potential for increased exposure to credit losses
associated with home equity lines of credit (HELOC) that were originated during
the period of rapid home price appreciation between 2003 and 2007 as they have
reached the end of their 10-year, interest only payment periods. Once the
interest only payment period has ended, payments are reset to include principal
repayments along with interest. ASB does not have a large exposure to HELOCs
originated between 2003 and 2007. Nearly all of ASB's HELOC originations prior
to 2008 consisted of amortizing equity lines that have structured principal
payments during the draw period. These older equity lines represent 1% of the
HELOC portfolio and are included in the amortizing balances identified in the
loan portfolio table below.
                                                           September 30, 2018     December 31, 2017
Outstanding balance of home equity loans (in thousands)   $         949,872      $       913,052
Percent of portfolio in first lien position                            48.3 %               48.0  %
Annualized net charge-off (recovery) ratio                             0.02 %              (0.03 )%
Delinquency ratio                                                      0.53 %               0.28  %


                                                                  End of draw period - interest only           Current
September 30, 2018            Total       Interest only       2018-2019         2020-2022      Thereafter     amortizing
Outstanding balance (in
thousands)                 $ 949,872     $      721,463     $    26,496       $    98,666     $  596,301     $  228,409
% of total                       100 %               76 %             3 %              10 %           63 %           24 %



            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 77% of the
total HELOC portfolio and is the current product offering. Borrowers also have a
"Fixed Rate Loan Option" to convert a part of their available line of credit
into a 5, 7 or 10-year fully amortizing fixed rate loan with level principal and
interest payments. As of September 30, 2018, approximately 22% of the portfolio
balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements.  See Note 4 of the Condensed Consolidated
Financial Statements.
Investment securities.  ASB's investment portfolio was comprised as follows:
                                               September 30, 2018                 December 31, 2017
(dollars in thousands)                       Balance         % of total        Balance         % of total
U.S. Treasury and federal agency
obligations                              $      170,414           12 %     $      184,298           13 %
Mortgage-related securities - FNMA,
FHLMC and GNMA                                1,251,188           84            1,245,988           86
Corporate bonds                                  49,383            3                    -            -
Mortgage revenue bonds                           19,084            1               15,427            1
Total investment securities              $    1,490,069          100 %     

$ 1,445,713 100 %



Principal and interest on mortgage-related securities issued by Federal National
Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
Government National Mortgage Association (GNMA) are guaranteed by the issuer
and, in the case of GNMA, backed by the full faith and credit of the U.S.
government. U.S. Treasury securities are also backed by the full faith of the
U.S. government.
Deposits and other borrowings.  Deposits continue to be the largest source of
funds for ASB and are affected by market interest rates, competition and
management's responses to these factors. Deposit retention and growth will
remain challenging in the current environment due to competition for deposits
and the low level of short-term interest rates. Advances from the FHLB of Des
Moines and securities sold under agreements to repurchase continue to be
additional sources of funds. As of September 30, 2018, ASB's costing liabilities
consisted of 99% deposits and 1% other borrowings compared to 97% deposits and
3% other borrowings as of December 31, 2017. During the first nine months of
2018, ASB developed new deposit products that enabled approximately $102 million
of retail repurchase agreements to be transferred to deposits. The weighted
average cost of deposits for the first nine months of 2018 and 2017 was 0.22%
and 0.16%, respectively.

                                       83
--------------------------------------------------------------------------------


Federal Home Loan Bank of Des Moines. As of September 30, 2018 ASB had no
advances outstanding at the FHLB of Des Moines compared to $50 million advances
outstanding as of December 31, 2017. As of September 30, 2018, the unused
borrowing capacity with the FHLB of Des Moines was $2.1 billion. The FHLB of Des
Moines continues to be an important source of liquidity for ASB.
Contingencies.  ASB is subject in the normal course of business to pending and
threatened legal proceedings. Management does not anticipate that the aggregate
ultimate liability arising out of these pending or threatened legal proceedings
will be material to its financial position. However, ASB cannot rule out the
possibility that such outcomes could have a material adverse effect on the
results of operations or liquidity for a particular reporting period in the
future.
Other factors.  Interest rate risk is a significant risk of ASB's operations and
also represents a market risk factor affecting the fair value of ASB's
investment securities. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in the fair value of the
investment securities, respectively. In addition, changes in credit spreads also
impact the fair values of the investment securities.
As of September 30, 2018, ASB had an unrealized loss, net of taxes, on
available-for-sale investment securities (including securities pledged for
repurchase agreements) in AOCI of $37.7 million compared to an unrealized loss,
net of taxes, of $15.0 million as of December 31, 2017. See "Item 3.
Quantitative and qualitative disclosures about market risk" for a discussion of
ASB's interest rate risk sensitivity.
During the first nine months of 2018, ASB recorded a provision for loan losses
of $12.3 million due to increased reserves for loan growth and additional loan
loss reserves for the consumer loan portfolio, partly offset by the release of
reserves for the commercial loan portfolio due to a recovery on a previously
charged-off commercial loan and improved credit quality, primarily in the
commercial and commercial real estate loan portfolios. During the first nine
months of 2017, ASB recorded a provision for loan losses of $7.2 million
primarily due to increased reserves for loan growth and additional loan loss
reserves for the consumer loan portfolio, partly offset by the release of
reserves for the commercial real estate and national syndicated credit loan
portfolios due to lower outstanding balances and improved credit quality.
Financial stress on ASB's customers may result in higher levels of delinquencies
and losses.
                                                                                               Year ended
                                                        Nine months ended September 30        December 31,
(in thousands)                                             2018                 2017              2017
Allowance for loan losses, January 1                 $       53,637       $       55,533     $     55,533
Provision for loan losses                                    12,337                7,231           10,901
Less: net charge-offs                                        11,847                9,717           12,797
Allowance for loan losses, end of period             $       54,127       $       53,047     $     53,637
Ratio of net charge-offs during the period to
average loans outstanding (annualized)                         0.33 %               0.27 %           0.27 %


ASB maintains a reserve for credit losses that consists of two components, the
allowance for loan losses and a reserve for unfunded loan commitments (unfunded
reserve). The level of the reserve for unfunded loan commitments is adjusted by
recording an expense or recovery in other noninterest expense. As of
September 30, 2018 and December 31, 2017, the reserve for unfunded loan
commitments was $1.7 million.
Legislation and regulation.  ASB is subject to extensive regulation, principally
by the OCC and the FDIC. Depending on ASB's level of regulatory capital and
other considerations, these regulations could restrict the ability of ASB to
compete with other institutions and to pay dividends to its shareholder. See the
discussion below under "Liquidity and capital resources."
Final Capital Rules.  On July 2, 2013, the FRB finalized its rule implementing
the Basel III regulatory capital framework. The final rule would apply to
banking organizations of all sizes and types regulated by the FRB and the OCC,
except bank holding companies subject to the FRB's Small Bank Holding Company
Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially
engaged in insurance underwriting or commercial activities. HEI currently meets
the requirements of the exemption as a top-tier grandfathered unitary SLHC that
derived, as of June 30 of the previous calendar year, either 50% or more of its
total consolidated assets or 50% or more of its total revenues on an
enterprise-wide basis (calculated under GAAP) from activities that are not
financial in nature pursuant to Section 4(k) of the Bank Holding Company Act.
The FRB is temporarily excluding these SLHCs from the final rule while it
considers a proposal relating to capital and other requirements for SLHC
intermediate holding companies (such as ASB Hawaii). The FRB indicated that it
would release a proposal on intermediate holding companies that would specify
the criteria for establishing and transferring activities to intermediate
holding companies and propose to apply the FRB's capital requirements to such
intermediate holding companies. The FRB has not yet issued such a proposal, or a
proposal on how to apply the Basel III capital rules to SLHCs that are
substantially engaged in commercial or insurance underwriting activities, such
as grandfathered unitary SLHCs like HEI.

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Pursuant to the final rule and consistent with the proposals, all banking
organizations, including covered holding companies, would initially be subject
to the following minimum regulatory capital requirements: a common equity Tier 1
capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%
of risk-weighted assets and a tier 1 leverage ratio of 4%, and these
requirements would increase in subsequent years. In order to avoid restrictions
on capital distributions and discretionary bonus payments to executive officers,
the final rule requires a banking organization to hold a buffer of common equity
tier 1 capital above its minimum capital requirements in an amount greater than
2.5% of total risk-weighted assets (capital conservation buffer). In addition, a
countercyclical capital buffer would expand the capital conservation buffer by
up to 2.5% of a banking organization's total risk-weighted assets for advanced
approaches banking organizations. The final rule would establish qualification
criteria for common equity, additional tier 1 and tier 2 capital instruments
that help to ensure their ability to absorb losses. All banking organizations
would be required to calculate risk-weighted assets under the standardized
approach, which harmonizes the banking agencies' calculation of risk-weighted
assets and addresses shortcomings in capital requirements identified by the
agencies. The phased-in effective dates of the capital requirements under the
final rule are:
Minimum Capital Requirements
Effective dates                        1/1/2015    1/1/2016    1/1/2017    1/1/2018    1/1/2019
Capital conservation buffer                          0.625 %      1.25 %     1.875 %      2.50 %
Common equity Tier-1 ratio +
conservation buffer                       4.50 %     5.125 %      5.75 %     6.375 %      7.00 %
Tier-1 capital ratio + conservation
buffer                                    6.00 %     6.625 %      7.25 %     7.875 %      8.50 %
Total capital ratio + conservation
buffer                                    8.00 %     8.625 %      9.25 %     9.875 %     10.50 %
Tier-1 leverage ratio                     4.00 %      4.00 %      4.00 %      4.00 %      4.00 %
Countercyclical capital buffer - not
applicable to ASB                                    0.625 %      1.25 %    

1.875 % 2.50 %



The final rule was effective January 1, 2015 for ASB and as of September 30,
2018, ASB met the new capital requirements (see "Financial Condition" for a
summary of ASB's capital ratios).
Subject to the timing and final outcome of the FRB's SLHC intermediate holding
company proposal, HEI anticipates that the capital requirements in the final
rule will eventually be effective for HEI or ASB Hawaii as well. If the fully
phased-in capital requirements were currently applicable to HEI, management
believes HEI would satisfy the capital requirements, including the fully
phased-in capital conservation buffer. Management cannot predict what final rule
the FRB may adopt concerning intermediate holding companies or their impact on
ASB Hawaii, if any.
Overtime Rules. The Secretary of Labor updated the overtime regulations of the
Fair Labor Standards Act to simplify and modernize them. The Department of Labor
issued final rules that will raise the salary threshold indicating eligibility
from $455/week to $913/week ($47,476 per year), and update automatically the
salary threshold every three years, based on wage growth over time, increasing
predictability. The final rule was to become effective on December 1, 2016. In
late-November 2016 however, the U.S. District Court in the Eastern District of
Texas granted a nationwide preliminary injunction that blocked the final rule,
saying the Department of Labor's rule exceeds the authority the agency was
delegated by Congress. Despite this block, ASB modified its salaries in the
fourth quarter of 2016 such that it is in voluntary compliance with the final
rule. On July 26, 2017, the Department of Labor published a Request for
Information Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees. On August
31, 2017, U.S. District Court in the Eastern District of Texas granted summary
judgment against the Department of Labor in consolidated cases challenging the
final rule published on May 23, 2016. The court held that the final rule's
salary level exceeded the Department of Labor's authority and concluded that the
final rule was invalid. The Department of Labor is undertaking rulemaking to
revise the regulation.
Arbitration Agreements. Pursuant to section 1028(b) of the Dodd-Frank Act, on
July 19, 2017, the Bureau issued a final rule to regulate arbitration agreements
in contracts for specified consumer financial product and services. First, the
final rule prohibits covered providers of certain consumer financial products
and services from using an agreement with a consumer that provides for
arbitration of any future dispute between the parties to bar the consumer from
filing or participating in a class action concerning the covered consumer
financial product or service. Second, the final rule requires covered providers
that are involved in arbitration pursuant to a pre-dispute arbitration agreement
to submit specified arbitral records to the Bureau and also to submit specified
court records. The compliance date for this regulation was March 19, 2018. Under
the Congressional Review Act, the U.S. House of Representatives voted to
overturn the final rule on July 25, 2017, and the U.S. Senate did the same on
October 24, 2017. On November 1, 2017, the President signed the repeal of the
final rule. In light of these developments, ASB did not modify its existing
agreements.
Expedited Funds Availability Act of 1987 (EFA Act) and the Check Clearing for
the 21st Century Act of 2003 (Check 21 Act). The Board of Governors of the
Federal Reserve System amended Regulation CC, Availability of Funds and
Collection of Checks, which implements EFA Act and Check 21 Act effective July
1, 2018. The Board of Governors modified the current check collection and
returns requirement to reflect the virtually all-electronic check collection and
return environment and to

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encourage all depository banks to receive, and paying banks to send, returned
checks electronically. The Board of Governors applied Regulation CC's existing
check warranties to checks that are collected electronically, and adopted new
warranties and indemnities related to checks collected and returned
electronically and to electronically-created items.
                              FINANCIAL CONDITION
Liquidity and capital resources.
(dollars in millions)             September 30, 2018     December 31, 2017     % change
Total assets                     $             6,929    $             6,799         2
Investment securities                          1,490                  1,446         3
Loans held for investment, net                 4,700                  4,617         2
Deposit liabilities                            6,130                  5,891         4
Other bank borrowings                             71                    191       (63 )


As of September 30, 2018, ASB was one of Hawaii's largest financial institutions
based on assets of $6.9 billion and deposits of $6.1 billion.
As of September 30, 2018, ASB's unused FHLB borrowing capacity was approximately
$2.1 billion. As of September 30, 2018, ASB had commitments to borrowers for
loans and unused lines and letters of credit of $1.8 billion, of which
commitments to borrowers whose loan terms have been modified in troubled debt
restructurings were $0.06 million. Management believes ASB's current sources of
funds will enable it to meet these obligations while maintaining liquidity at
satisfactory levels.
For the nine months ended September 30, 2018, net cash provided by ASB's
operating activities was $76 million. Net cash used during the same period by
ASB's investing activities was $230 million, primarily due to purchases of
investment securities of $190 million, a net increase in loans of $96 million,
additions to premises and equipment of $59 million, purchases of
held-to-maturity investment securities of $62 million and contributions to low
income housing investments of $8 million, partly offset by receipt of repayments
from available-for-sale investment securities of $168 million, proceeds from the
sale of commercial loans of $7 million and receipts of repayments from
held-to-maturity investment securities of $4 million. Net cash provided by
financing activities during this period was $79 million, primarily due to
increases in deposit liabilities of $137 million, proceeds from FHLB advances of
$237 million, and a net increase in retail repurchase agreements of $33 million,
partly offset by principal payments on FHLB advances of $287 million and $36
million in common stock dividends to HEI (through ASB Hawaii).
For the nine months ended September 30, 2017, net cash provided by ASB's
operating activities was $80 million. Net cash used during the same period by
ASB's investing activities was $211 million, primarily due to purchases of
investment securities of $369 million, additions to premises and equipment of
$36 million, and contributions to low-income housing investments of $8 million,
partly offset by receipt of repayments from investment securities of $155
million, proceeds from the sale of commercial loans of $31 million, a net
decrease in loans receivable of $13 million, and a decrease in restricted cash
of $2 million. Net cash provided by financing activities during this period was
$131 million, primarily due to increases in deposit liabilities of $203 million,
proceeds from FHLB advances of $60 million, and a net increase in retail
repurchase agreements of $24 million, partly offset by principal payments on
FHLB advances of $110 million, repayments of securities sold under agreements to
repurchase of $14 million, a net decrease in mortgage escrow deposits of $5
million and $28 million in common stock dividends to HEI (through ASB Hawaii).
ASB believes that maintaining a satisfactory regulatory capital position
provides a basis for public confidence, affords protection to depositors, helps
to ensure continued access to capital markets on favorable terms and provides a
foundation for growth. FDIC regulations restrict the ability of financial
institutions that are not well-capitalized to compete on the same terms as
well-capitalized institutions, such as by offering interest rates on deposits
that are significantly higher than the rates offered by competing institutions.
As of September 30, 2018, ASB was well-capitalized (minimum ratio requirements
noted in parentheses) with a Common equity Tier-1 ratio of 12.6% (6.5%), a
Tier-1 capital ratio of 12.6% (8.0%), a Total capital ratio of 13.8% (10.0%) and
a Tier-1 leverage ratio of 8.6% (5.0%). As of December 31, 2017, ASB was
well-capitalized with a common equity Tier-1 ratio of 13.0%, Tier-1 capital
ratio of 13.0%, a Total capital ratio of 14.2% and a Tier-1 leverage ratio of
8.6%. All dividends are subject to review by the OCC and FRB and receipt of a
letter from the FRB communicating the agencies' non-objection to the payment of
any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii).

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Managers
NameTitle
Alan M. Oshima President, Chief Executive Officer & Director
Constance H. Lau Chairman
Tayne S. Y. Sekimura Chief Financial Officer & Senior Vice President
Timothy E. Johns Director
Kelvin H. Taketa Director
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