Hawaiian Electric Industries, Inc.
we see
2014 Annual Report to Shareholders
we see the power of
A more affordable clean energy future for Hawai‘i – that’s what Hawaiian
Electric, which includes Maui Electric and Hawai‘i Electric Light, will
deliver as part of the NextEra Energy family. NextEra Energy’s utility, one
of the largest in the nation, has a disciplined, customer-first approach
which has resulted in residential bills that are approximately 30% lower
than the national average and leading service reliability to customers
of 99.98%. Hawaiian Electric customers will benefit from approximately
$60 million in cumulative savings as well as NextEra Energy’s commitment
to not file for a general base rate increase for at least four years1. Together,
Hawaiian Electric and NextEra Energy will deliver significant value and
savings to customers.
1 Pending regulatory approval and close of the merger transaction.
2014 Annual Report
1
Letter to Shareholders
we see Hawai‘i’s
clean energy future
Dear Fellow Shareholders,
In 2014, Hawaiian Electric Company (Hawaiian
Electric) filed comprehensive clean energy
transformation plans for Hawai‘i, and Hawaiian
Electric Industries (HEI) announced our merger with
NextEra Energy, Inc. Today, Hawaiian Electric stands
at the forefront in addressing a vast array of complex
issues associated with Hawai‘i’s energy challenges,
and our goals – including increasing renewables to
65 percent, tripling distributed solar, and lowering
customer bills 20% by 2030 – are among the most
ambitious in the nation. The renewable energy future
we are looking to create is full of possibilities for our
customers, our local communities, our shareholders
and other stakeholders. The hard work and
dedication of our talented employees across the HEI
family of companies has been instrumental in getting
us here.
With 12 percent of our residential customers with
rooftop solar at the end of 2014, Hawaiian Electric
continues to lead the nation in the integration of
rooftop photovoltaic (PV) systems.
Our unique combination of companies—Hawaiian
Electric and American Savings Bank—has continued
we had strong loan growth and solid credit quality.
Through the end of 2014, our 5-year EPS growth
to deliver value for shareholders. Most notably, we
averaged 12.5% annually.
have paid dividends consistently since 1901, and
in 2014 we generated a consolidated return on
Our success in 2014 is a direct result of the
average common equity (ROE) of 9.6% and a core
long-term strategic plan and investments we
ROE 1 of 9.8%, which is an improvement on 2013’s
implemented several years ago to build two strong
9.7%. Our 2014 fully-diluted earnings per share
operating companies to serve the people of Hawai‘i.
(EPS) was $1.64 with an even stronger $1.68 core
EPS.1 At Hawaiian Electric, we funded over $360
million of capital expenditures to modernize Hawai‘i’s
And through a transformational partnership with
NextEra Energy, we have found the right partner
to help accelerate Hawaiian Electric’s clean energy
electric grid, improve reliability and increase
transformation and unlock the full potential of
renewable generation. At American Savings Bank,
American Savings Bank.
2
Hawaiian Electric Industries, Inc.
1 Non-GAAP measure excluding expenses related to the pending merger and spin-off transactions of $5 million in 2014.
See Exhibit B to this 2014 Annual Report to Shareholders for the reconciliation of GAAP to non-GAAP measures.
“ I am confident the future is bright for our companies with
the wise guidance of our board, the exemplary efforts of
our leadership team and the hard work and commitment
of our 4,000+ employees.”
Constance H. Lau
President and Chief Executive Officer
Hawaiian Electric Industries, Inc.
HAWAIIAN ELECTRIC
goal of 15%. And by the end of last year, 12% of
In August 2014, Hawaiian Electric presented to
our residential customers across Hawai‘i had solar
the Hawai‘i Public Utilities Commission (PUC) a
photovoltaic systems on their rooftops, compared
comprehensive roadmap designed to position Hawai‘i
to the national average of under 1%. We will work
and our utilities at the forefront of the future of clean
hard towards Hawai‘i’s unprecedented RPS goal of
energy and to provide a starting point for community-
100% by 2045, a goal we fully support. We have
wide discussions and consensus. Our vision is for a
also worked collaboratively with the solar industry,
reliable, sustainable and renewable energy ecosystem
inverter manufacturers and the national labs to
for Hawai‘i. We lead the nation with the integration of
pioneer the use of advanced inverters to integrate
unprecedented levels of renewable energy into our
precedent-setting levels of distributed energy onto
grid. In 2014, 21% of our customers’ energy needs
our grids, and we are working with stakeholders to
were met with renewable energy, well in excess of
establish policies that are fair and equitable for all
Hawai‘i’s 2015 Renewable Portfolio Standard (RPS)
our customers.
Hawaiian Electric Companies
Renewable Portfolio Standard Compliance
18.0%
17.8%
18.2%
18.2%
19.1%
21.3%
21.1%
21.3%
25.0%
20.0%
15.0%
2015 RPS statutory goal of 15%
13.9%
12.0%
10.0%
9.5%
9.5%
5.0%
0.0%
Annual
2009
Annual
2010
Annual
2011
Annual
2012
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2013
2014
Biomass (including municipal solid waste)
Geothermal
Utility-scale Photovoltaic and Solar Thermal
Hydro
Wind
Biofuels
Customer-sited, Grid-connected renewables
2014 Annual Report
3
Hawaiian Electric Companies
Cumulative Distributed PV Growth
s
n
o
i
t
a
l
l
a
t
s
n
I
V
P
60,000
50,000
40,000
30,000
20,000
10,000
0
389
301
171
24
2,899
2009
40
5,107
2010
79
10,424
2011
22,550
2012
40,117
2013
50,985
2014
PV Installations
Installed PV, MW
450
375
300
225
150
75
0
W
M
,
V
P
d
e
l
l
a
t
s
n
I
While Hawaiian Electric has made substantial
progress in developing and integrating renewable
energy resources, our pending merger with NextEra
Energy will give us the expanded capabilities to
accelerate our efforts. Joining with NextEra Energy,
the world’s largest generator of renewable energy
from the wind and sun, provides Hawaiian Electric
with the added capacity, resources and access
to deep operational expertise to strengthen and
accelerate Hawai‘i’s clean energy transformation,
while delivering substantial customer benefits,
including lower costs. As part of the NextEra
Energy family, Hawaiian Electric’s plans for
Hawai‘i’s energy transformation will continue, with
distributed solar generation, including rooftop solar,
remaining a critical cornerstone. Given our unique
circumstances, we and NextEra Energy understand
that Hawai‘i’s energy challenges require Hawai‘i-
specific energy solutions. Our local communities
will see unique solutions adapted for our islands,
and Hawaiian Electric and NextEra Energy are
Our Hawai‘i Island crews, with extra crews from
across the state, worked tirelessly to restore service
to thousands of customers in the wake of Tropical
Storm Iselle last August.
4
Hawaiian Electric Industries, Inc.
committed to this perspective and to keeping
Hawai‘i on the forefront of renewable energy
integration.
Chartered in 1891 by King David Kalakaua when
Hawai‘i was a monarchy, Hawaiian Electric has a
long and proud history in Hawai‘i, and that legacy
will live on. It is our responsibility and privilege—our
kuleana—to serve Hawai‘i and its people. Hawaiian
Electric and our subsidiaries, Maui Electric and
Hawai‘i Electric Light, will continue to operate under
their current names; remain headquartered in
Hawai‘i, be locally managed and advised by a local
advisory board. NextEra Energy, which has been
recognized among the top 10 companies worldwide
for community responsibility and innovativeness
in Fortune’s 2015 list of “World’s Most Admired
Companies” and as a 2015 World’s Most Ethical
Company® by the Ethisphere Institute, shares our
values of protecting the environment, giving back to
our communities and respecting our local culture.
American Savings Bank provided over $1.5 billion of
credit to consumers and businesses and originated
over 3,600 mortgages in 2014.
As an independent company, the bank will be
stronger and even more focused on serving its
customers and broader community.
MOVING FORWARD
AMERICAN SAVINGS BANK
I am confident the future is bright for our companies
As a condition of the merger, American Savings
with the wise guidance of our board, the exemplary
Bank will be spun off to become an independent
efforts of our leadership team and the hard work and
public company with a strong market position,
commitment of our 4,000+ employees. On behalf
a talented team and a strong balance sheet.
of everyone at HEI, Hawaiian Electric and American
Shareholders will continue to benefit from
Savings Bank, I offer a sincere mahalo to all of our
the bank’s track record of high performance,
conservative risk management and solid profitability.
shareholders for your continued support as we strive
to create the next generation of clean, renewable
Our customers will experience a seamless transition
energy for Hawai‘i. With your recent vote approving
as the bank spins off, and our communities should
our merger with NextEra Energy, you have all helped
continue to find American Savings Bank a strong
us take a large step towards this future including a
corporate citizen and an integral supporter of our
new future for American Savings Bank.
communities’ values and goals. Being named one of
the best large companies to work for in Hawai‘i for
five consecutive years will continue to be the norm,
through a strong corporate culture of hard work,
creativity and fun.
Constance H. Lau
President and Chief Executive Officer
Hawaiian Electric Industries, Inc.
2014 Annual Report
5
Financial Highlights
Years ended December 31
(dollars in millions, except per share amounts)
2014
2013
2012
Operating income
$
329
$
315
$
284
Net income (loss) for common stock by segment
Electric utility
Bank
Other
Net income for common stock
Core net income for common stock 1
Diluted earnings per common share
Core diluted earnings per common share1
Return on average common equity
Core return on average common equity 1
138
51
(21)
168
173
1.64
1.68
123
58
(19)
162
162
1.62
1.62
99
59
(19)
139
163
1.42
1.68
9.6%
9.8%
9.7%
9.7%
8.9%
10.4%
Dividends per common share
$
1.24
$
1.24
$
1.24
Indicated annual yield 2
Common shares (millions)
December 31
Weighted-average — basic
Weighted-average — diluted
Total Return
(percent)
HEI
34.9
45.9
2014
3-Year
Edison Electric
Institute (EEI)
Companies’
Average
KBW
Regional
Banking Index
S&P 500
Index
13.7
74.6
28.1
55.9
112.4
171.4
2.4
70.3
94.6
20.6
5-Year
105.6
105.1
10-Year
92.6
109.4
3.7%
4.8%
4.9%
102.6
102.0
102.9
101.3
99.0
99.6
97.9
96.9
97.3
Dividend Yield
(percent)
5.4
4.5
4.7
4.0
4.3
4.9
4.8
3.9
3.7
3.2
6
4
2
0
Source: FactSet / HEI NYSE symbol: HE
(cid:81)(cid:3) EEI Companies’ Average (cid:81)(cid:3) (cid:81)(cid:3)(cid:3)HEI
Source: FactSet
1 Non-GAAP measure excluding expenses related to the pending merger and spin-off transactions of $5 million in 2014 and the after-tax writedown of utility assets of $24 million in 2012.
See Exhibit B to this 2014 Annual Report to Shareholders for the reconciliation of GAAP to non-GAAP measures.
10
11
12
13
14
2 At December 31.
6
Hawaiian Electric Industries, Inc.
Hawaiian Electric Industries, Inc.
2014 Annual Report to Shareholders
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number
1-8503
1-4955
Registrant; State of Incorporation;
Address; and Telephone Number
HAWAIIAN ELECTRIC INDUSTRIES, INC., a Hawaii corporation
1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813
Telephone (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation
900 Richards Street, Honolulu, Hawaii 96813
Telephone (808) 543-7771
I.R.S. Employer
Identification No.
99-0208097
99-0040500
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Hawaiian Electric
Industries, Inc.
Hawaiian Electric
Company, Inc.
Title of each class
Common Stock, Without Par Value
Guarantee with respect to 6.50% Cumulative Quarterly
Income Preferred Securities Series 2004 (QUIPSSM)
of HECO Capital Trust III
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Hawaiian Electric Industries, Inc.
Hawaiian Electric Company, Inc.
Name of each exchange
on which registered
New York Stock Exchange
New York Stock Exchange
Title of each class
None
Cumulative Preferred Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Hawaiian Electric Industries Inc. Yes X No
Hawaiian Electric Company, Inc. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Hawaiian Electric Industries Inc. Yes No X
Hawaiian Electric Company, Inc. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Hawaiian Electric Industries Inc. Yes X No
Hawaiian Electric Company, Inc. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Hawaiian Electric Industries Inc. Yes X No
Hawaiian Electric Company, Inc. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Hawaiian Electric Industries Inc. Large accelerated filer X
Hawaiian Electric Company, Inc. Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
company)
Smaller reporting company
Accelerated filer
Non-accelerated filer X
(Do not check if a smaller reporting
company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Hawaiian Electric Industries Inc. Yes No X
Hawaiian Electric Company, Inc. Yes No X
Aggregate market value
of the voting and non-
voting common equity
held by non-affiliates of
the registrants as of
June 30, 2014
Hawaiian Electric Industries, Inc. (HEI)
$2,571,503,656
Hawaiian Electric Company, Inc.
(Hawaiian Electric)
None
Number of shares of common stock
outstanding of the registrants as of
June 30, 2014
February 13, 2015
101,560,176
(Without par value)
102,710,867
(Without par value)
15,429,105
($6 2/3 par value)
15,805,327
($6 2/3 par value)
DOCUMENTS INCORPORATED BY REFERENCE
Hawaiian Electric’s Exhibit 99.1, consisting of:
Hawaiian Electric’s Directors, Executive Officers and Corporate Governance—Part III
Hawaiian Electric’s Executive Compensation—Part III
Hawaiian Electric’s Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—
Part III
Hawaiian Electric’s Certain Relationships and Related Transactions, and Director Independence—Part III
Hawaiian Electric’s Principal Accounting Fees and Services—Part III
This combined Form 10-K represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian
Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each
registrant on its own behalf. Hawaiian Electric makes no representations as to any information not relating
to it or its subsidiaries.
TABLE OF CONTENTS
Glossary of Terms
Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
Exhibits and Financial Statement Schedules
PART IV
i
Page
ii
vi
1
26
35
36
36
36
36
38
40
79
82
175
176
177
177
185
218
220
221
222
227
Defined below are certain terms used in this report:
GLOSSARY OF TERMS
Terms
ABO
AES Hawaii
AFUDC
AOCI
AOS
APBO
ARO
ASB
ASB Hawaii
ASC
ASU
Btu
CAA
CERCLA
Chevron
CIP
CIS
Company
Consolidated Financial
Statements
Definitions
Accumulated benefit obligation
AES Hawaii, Inc.
Allowance for funds used during construction
Accumulated other comprehensive income (loss)
Adequacy of supply
Accumulated postretirement benefit obligation
Asset retirement obligations
American Savings Bank, F.S.B., a wholly-owned subsidiary of American Savings Holdings, Inc.
ASB Hawaii, Inc. (formerly American Savings Holdings, Inc.), a wholly-owned subsidiary of Hawaiian
Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
Accounting Standards Codification
Accounting Standards Update
British thermal unit
Clean Air Act
Comprehensive Environmental Response, Compensation and Liability Act
Chevron Products Company, a fuel oil supplier
Campbell Industrial Park
Customer Information System
When used in Hawaiian Electric Industries, Inc. sections and in the Notes to Consolidated Financial
Statements, “Company” refers to Hawaiian Electric Industries, Inc. and its direct and indirect
subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed
under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; HEI
Properties, Inc.; Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital
Trust III (inactive financing entities); and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug &
Barge Corp.).
When used in Hawaiian Electric Company, Inc. sections, “Company” refers to Hawaiian Electric
Company, Inc. and its direct subsidiaries.
HEI’s and Hawaiian Electric's combined Consolidated Financial Statements, including notes, in Item 8 of
this Form 10-K
Consumer Advocate
Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
CT-1
D&O
DBEDT
DBF
DG
Dodd-Frank Act
DOH
DRIP
DSM
ECAC
EGU
EIP
Energy Agreement
Combustion turbine No. 1
Decision and order
State of Hawaii Department of Business Economic Development and Tourism
State of Hawaii Department of Budget and Finance
Distributed generation
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Department of Health of the State of Hawaii
HEI Dividend Reinvestment and Stock Purchase Plan
Demand-side management
Energy cost adjustment clause
Electrical generating unit
2010 Executive Incentive Plan, as amended
Agreement, dated October 20, 2008, signed by the Governor of the State of Hawaii, the State of Hawaii
Department of Business, Economic Development and Tourism, the Division of Consumer Advocacy of
the Department of Commerce and Consumer Affairs, and Hawaiian Electric, for itself and on behalf of
its electric utility subsidiaries, committing to actions to develop renewable energy and reduce
dependence on fossil fuels in support of the HCEI. In September 2014, the parties to the Energy
Agreement concluded that the agreements and policy directives in the Energy Agreement had been
advanced or superseded by subsequent events, as well as by decisions and orders issued by the PUC,
and accordingly ended the Energy Agreement as of September 14, 2014.
EOTP
EPA
EPS
East Oahu Transmission Project
Environmental Protection Agency - federal
Earnings per share
ii
Terms
Definitions
GLOSSARY OF TERMS (continued)
ERISA
ERL
Exchange Act
FASB
FDIC
FDICIA
federal
FERC
FHLB
FHLMC
FICO
Fitch
FNMA
FRB
GAAP
GHG
GNMA
Gramm Act
HCEI
HC&S
Hawaii Electric Light
Hawaiian Electric
Employee Retirement Income Security Act of 1974, as amended
Environmental Response Law of the State of Hawaii
Securities Exchange Act of 1934
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation Improvement Act of 1991
U.S. Government
Federal Energy Regulatory Commission
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
Financing Corporation
Fitch Ratings, Inc.
Federal National Mortgage Association
Federal Reserve Board
Accounting principles generally accepted in the United States of America
Greenhouse gas
Government National Mortgage Association
Gramm-Leach-Bliley Act of 1999
Hawaii Clean Energy Initiative
Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii, Inc.
Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and
parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO
Capital Trust III (unconsolidated financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama
Biofuels Corp.
Hawaiian Electric’s MD&A
Hawaiian Electric Company, Inc.’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K
HEI
Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB
Hawaii, Inc., HEI Properties, Inc., Hawaiian Electric Industries Capital Trust II, Hawaiian Electric
Industries Capital Trust III and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge
Corp.).
HEI’s MD&A
Hawaiian Electric Industries, Inc.’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K
HEIPI
HEIRSP
HEP
HTB
HPower
IPP
IRP
IRR
Kalaeloa
kV
kW
KWH
LSFO
LTIP
Maui Electric
MBtu
MD&A
Merger
HEI Properties, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc.
Hawaiian Electric Industries Retirement Savings Plan
Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P.
Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets
and the stock of its subsidiary, Young Brothers, Limited, and changed its name to The Old Oahu Tug
Services, Inc.
City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
Independent power producer
Integrated resource plan
Interest rate risk
Kalaeloa Partners, L.P.
Kilovolt
Kilowatt/s (as applicable)
Kilowatthour/s (as applicable)
Low sulfur fuel oil
Long-term incentive plan
Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Million British thermal unit
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As provided in the Merger Agreement, merger of Merger Sub I with and into HEI, with HEI surviving,
and then merger of HEI with and into Merger Sub II, with Merger Sub II surviving as a wholly owned
subsidiary of NEE
iii
Terms
Definitions
GLOSSARY OF TERMS (continued)
Merger Agreement
Merger Sub I
Merger Sub II
Moody’s
MSFO
MOU
MW
NA
NAAQS
NEE
NII
NM
NPBC
NQSO
O&M
OCC
OPEB
OTS
OTTI
PBO
PCB
PGV
PPA
PPAC
PSD
PUC
PURPA
QF
QTL
RAM
RBA
Registrant
REIP
RFP
RHI
ROA
ROACE
RORB
RPS
S&P
SAR
SEC
See
SLHCs
SOIP
Spin-Off
SPRBs
ST
state
TDR
Agreement and Plan of Merger by and among HEI, NEE, Merger Sub II and Merger Sub I, dated
December 3, 2014
NEE Acquisition Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of NEE
NEE Acquisition Sub I, LLC, a Delaware limited liability company and a wholly owned subsidiary of
NEE
Moody’s Investors Service’s
Medium sulfur fuel oil
Memorandum of Understanding
Megawatt/s (as applicable)
Not applicable
National Ambient Air Quality Standard
NextEra Energy, Inc.
Net interest income
Not meaningful
Net periodic benefits costs
Nonqualified stock options
Other operation and maintenance
Office of the Comptroller of the Currency
Postretirement benefits other than pensions
Office of Thrift Supervision, Department of Treasury
Other-than-temporary impairment
Projected benefit obligation
Polychlorinated biphenyls
Puna Geothermal Venture
Power purchase agreement
Purchased power adjustment clause
Prevention of Significant Deterioration
Public Utilities Commission of the State of Hawaii
Public Utility Regulatory Policies Act of 1978
Qualifying Facility under the Public Utility Regulatory Policies Act of 1978
Qualified Thrift Lender
Rate adjustment mechanism
Revenue balancing account
Each of Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc.
Renewable Energy Infrastructure Program
Request for proposals
Renewable Hawaii, Inc., a wholly-owned nonregulated subsidiary of Hawaiian Electric Company, Inc.
Return on assets
Return on average common equity
Return on rate base
Renewable portfolio standards
Standard & Poor’s
Stock appreciation right
Securities and Exchange Commission
Means the referenced material is incorporated by reference (or means refer to the referenced section in
this document or the referenced exhibit or other document)
Savings & Loan Holding Companies
1987 Stock Option and Incentive Plan, as amended
The distribution to HEI shareholders of all of the common stock of ASB Hawaii immediately prior to the
Merger
Special Purpose Revenue Bonds
Steam turbine
State of Hawaii
Troubled debt restructuring
iv
Terms
Tesoro
TOOTS
Trust III
UBC
Utilities
VIE
GLOSSARY OF TERMS (continued)
Definitions
Tesoro Hawaii Corporation dba BHP Petroleum Americas Refining Inc., a fuel oil supplier
The Old Oahu Tug Service, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc.
HECO Capital Trust III
Uluwehiokama Biofuels Corp., a wholly-owned nonregulated subsidiary of Hawaiian Electric
Company, Inc.
Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company,
Limited
Variable interest entity
v
Forward-Looking Statements
This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian
Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or
refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,”
“estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or
prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries
(collectively, the Company), the performance of the industries in which they do business and economic and market factors, among other
things. These forward-looking statements are not guarantees of future performance.
Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-
looking statements and from historical results include, but are not limited to, the following:
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•
the successful and timely completion of the proposed Merger with NextEra Energy, Inc. (NEE), which could be materially and
adversely affected by, among other things, resolving the litigation brought in connection with the proposed Merger, the timing and
terms and conditions of required governmental and regulatory approvals, the ability to obtain the required shareholder approval and
the ability to maintain relationships with employees, customers or suppliers, as well as the ability to integrate the businesses;
the ability of ASB to operate successfully after the Spin-Off of its parent ASB Hawaii;
international, national and local economic conditions, including the state of the Hawaii tourism, defense and construction industries,
the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual
performance of collateral underlying loans held by American Savings Bank, F.S.B. (ASB), which could result in higher loan loss
provisions and write-offs), decisions concerning the extent of the presence of the federal government and military in Hawaii, the
implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international
responses to those conditions, and the potential impacts of global developments (including global economic conditions and
uncertainties, unrest, ongoing conflicts in North Africa and the Middle East, terrorist acts, potential conflict or crisis with North
Korea or Iran, developments in the Ukraine and potential pandemics);
the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling
and monetary policy;
• weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of
climate change, such as more severe storms and rising sea levels), including their impact on the Company's and Utilities' operations
and the economy;
the timing and extent of changes in interest rates and the shape of the yield curve;
the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other
short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile
and challenging market conditions, and the cost of such financings, if available;
the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available
for sale;
changes in laws, regulations, market conditions and other factors that result in changes in assumptions used to calculate retirement
benefits costs and funding requirements;
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and
regulations that the Dodd-Frank Act requires to be promulgated;
increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to
alternative investments, which may have an adverse impact on ASB’s cost of funds);
the PUC’s potential delay in considering (and potential disapproval of actual or proposed) Hawaii Clean Energy Initiative (HCEI)-
related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers;
potential changes in political support for the HCEI; and uncertainties surrounding wind power, proposed undersea cables, biofuels,
environmental assessments and the impacts of implementation of the HCEI on future costs of electricity);
the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans and business
model changes that are being developed in response to the four orders that the Public Utilities Commission of the State of Hawaii
(PUC) issued in April 2014, in which the PUC: directed the Utilities to develop, among other things, Power Supply Improvement
Plans, a Demand Response Portfolio Plan and a Distributed Generation Interconnection Plan; described the PUC’s inclinations on
the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the
Utilities’ business model with customer interests and the state’s public policy goals; and emphasized the need to “leap ahead” of
other states in creating a 21st century generation system and modern transmission and distribution grids;
capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as
demand-side management (DSM), distributed generation, combined heat and power or other firm capacity supply-side resources
fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;
fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy
cost adjustment clauses (ECACs);
the continued availability to the electric utilities of other cost recovery mechanisms, including the purchased power adjustment
clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB)
tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;
the impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;
•
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•
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•
•
•
•
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•
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vi
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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•
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•
•
the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for
renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;
the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional
resources will be constrained as more generating resources are added to the Utilities' electric systems and as customers reduce their
energy usage;
the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);
the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and
collective bargaining agreements;
new technological developments that could affect the operations and prospects of HEI and ASB or their competitors;
new technological developments, such as the commercial development of energy storage and microgrids, that could affect the
operations of the Utilities;
cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASB and the Utilities (including at
ASB branches and electric utility plants) and incidents at data processing centers they use, to the extent not prevented by intrusion
detection and prevention systems, anti-virus software, firewalls and other general information technology controls;
federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and
regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory
policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or
liabilities), the regulation of greenhouse gas (GHG) emissions, governmental fees and assessments (such as Federal Deposit
Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce
electricity and accelerate the move to renewable generation);
developments in laws, regulations, and policies governing protections for historic, archaeological, and cultural sites, and plant and
animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations, and policies;
discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and
remediation, and any associated enforcement, litigation, or regulatory oversight;
decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes
in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or
otherwise);
decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required
corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or renewable portfolio
standards (RPS));
potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the
Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective
actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new
banking and consumer protection laws and regulations or with respect to capital adequacy);
the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;
the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single
product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines
with certain customers);
changes in accounting principles applicable to HEI, the Utilities and ASB, including the adoption of new U.S. accounting standards,
the potential discontinuance of regulatory accounting and the effects of potentially required consolidation of variable interest
entities (VIEs) or required capital lease accounting for PPAs with IPPs;
changes by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and the results of financing
efforts;
faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and
the impairment of mortgage-servicing assets of ASB;
changes in ASB’s loan portfolio credit profile and asset quality which may increase or decrease the required level of provision for
loan losses, allowance for loan losses and charge-offs;
changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;
the final outcome of tax positions taken by HEI, the Utilities and ASB;
the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution
system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other
exclusions or exceeding policy limits); and
other risks or uncertainties described elsewhere in this report (e.g., Item 1A. Risk Factors) and in other reports previously and
subsequently filed by HEI and/or Hawaiian Electric with the Securities and Exchange Commission (SEC).
Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent
required by the federal securities laws, HEI, Hawaiian Electric, ASB and their subsidiaries undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
vii
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PART I
ITEM 1.
BUSINESS
HEI Consolidated
HEI and subsidiaries and lines of business. HEI was incorporated in 1981 under the laws of the State of Hawaii and is a
holding company with its principal subsidiaries engaged in electric utility and banking businesses operating primarily in the
State of Hawaii. HEI’s predecessor, Hawaiian Electric, was incorporated under the laws of the Kingdom of Hawaii (now the
State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, Hawaiian Electric became an HEI
subsidiary and common shareholders of Hawaiian Electric became common shareholders of HEI.
Hawaiian Electric and its operating utility subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric Light) and
Maui Electric Company, Limited (Maui Electric), are regulated electric public utilities. Hawaiian Electric also owns all the
common securities of HECO Capital Trust III (a Delaware statutory trust), which was formed to effect the issuance of $50
million of cumulative quarterly income preferred securities in 2004, for the benefit of Hawaiian Electric, Hawaii Electric Light
and Maui Electric. In December 2002, Hawaiian Electric formed a subsidiary, Renewable Hawaii, Inc., to invest in renewable
energy projects, but it has made no investments and currently is inactive. In September 2007, Hawaiian Electric formed another
subsidiary, Uluwehiokama Biofuels Corp. (UBC), to invest in a biodiesel refining plant to be built on the island of Maui, which
project has been terminated.
Besides Hawaiian Electric and its subsidiaries, HEI also currently owns directly or indirectly the following
subsidiaries: ASB Hawaii, Inc. (ASB Hawaii) (a holding company, formerly known as American Savings Holdings, Inc.) and
its subsidiary, American Savings Bank, F.S.B. (ASB); HEI Properties, Inc. (HEIPI); Hawaiian Electric Industries Capital Trusts
II and III (both formed in 1997 to be available for trust securities financings); and The Old Oahu Tug Service, Inc. (TOOTS).
ASB, acquired by HEI in 1988, is one of the largest financial institutions in the State of Hawaii with assets of $5.6 billion
as of December 31, 2014.
HEIPI, whose predecessor company was formed in February 1998, holds venture capital investments with a carrying value
of $0.1 million as of December 31, 2014.
TOOTS administers certain employee and retiree-related benefit programs and monitors matters related to its predecessor’s
former maritime freight transportation operations.
The proposed Merger and Merger Agreement. On December 3, 2014, HEI, NextEra Energy, Inc., a Florida corporation
(NEE), NEE Acquisition Sub I, LLC, a Delaware limited liability company and a wholly owned subsidiary of NEE (Merger
Sub II) and NEE Acquisition Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of NEE (Merger Sub I),
entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger Agreement provides for Merger Sub I to
merge with and into HEI, with HEI surviving, and then for HEI to merge with and into Merger Sub II, with Merger Sub II
surviving (the Merger). The Merger Agreement provides that, prior to completion of the Merger, HEI will distribute to its
shareholders, on a pro-rata basis, all of the issued and outstanding shares of ASB Hawaii, Inc., a Hawaii corporation and wholly
owned subsidiary of HEI and direct parent company of ASB (the Spin-Off). The closing of the Merger is subject to various
conditions, including federal and state regulatory approvals and the approval of holders of 75% of the outstanding shares of
HEI common stock. For additional information concerning the proposed Merger, see Note 2 of the Consolidated Financial
Statements.
Additional information. For additional information about the Company required by this item, see HEI’s “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” (HEI’s MD&A), HEI’s “Quantitative and
Qualitative Disclosures about Market Risk” and HEI’s Consolidated Financial Statements.
The Company’s website address is www.hei.com. The information on the Company’s website is not incorporated by
reference in this annual report on Form 10-K unless, and except to the extent, specifically incorporated herein by reference.
HEI and Hawaiian Electric currently make available free of charge through this website their annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports (since 1994) as soon as
reasonably practicable after such material is electronically filed with, or furnished to, the SEC. HEI and Hawaiian Electric
intend to continue to use HEI’s website as a means of disclosing additional information. Such disclosures will be included on
HEI’s website in the Investor Relations section. Accordingly, investors should routinely monitor such portions of HEI’s
website, in addition to following HEI’s, Hawaiian Electric’s and ASB’s press releases, SEC filings and public conference calls
and webcasts. Investors may also wish to refer to the PUC website at dms.puc.hawaii.gov/dms in order to review documents
filed with and issued by the PUC. No information at the PUC website is incorporated herein by reference.
1
Commitments and contingencies. See “HEI Consolidated—Liquidity and capital resources –Selected contractual obligations
and commitments” in HEI’s MD&A, Hawaiian Electric’s “Commitments and contingencies” below and Notes 2 and 5 of the
Consolidated Financial Statements.
Regulation. HEI and Hawaiian Electric are each holding companies within the meaning of the Public Utility Holding
Company Act of 2005 and implementing regulations, which requires holding companies and their subsidiaries to grant the
Federal Energy Regulatory Commission (FERC) access to books and records relating to FERC’s jurisdictional rates. FERC
granted HEI and Hawaiian Electric a waiver from its record retention, accounting and reporting requirements, effective
May 2006.
HEI is subject to an agreement entered into with the PUC (the PUC Agreement) which, among other things, requires PUC
approval of any change in control of HEI, including the proposed Merger. See “PUC application” in Note 2 to the Consolidated
Financial Statements. The PUC Agreement also requires HEI to provide the PUC with periodic financial information and other
reports concerning intercompany transactions and other matters. It also prohibits the electric utilities from loaning funds to HEI
or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval.
Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See
“Restrictions on dividends and other distributions” and “Electric utility—Regulation” below.
HEI and ASB Hawaii are subject to Federal Reserve Board (FRB) registration, supervision and reporting requirements as
savings and loan holding companies. As a result of the enactment of the Dodd-Frank Act, supervision and regulation of HEI
and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally
chartered savings bank, moved to the Office of the Comptroller of the Currency (OCC) in July 2011. In the event the OCC has
reasonable cause to believe that any activity of HEI or ASB Hawaii constitutes a serious risk to the financial safety, soundness
or stability of ASB, the OCC is authorized to impose certain restrictions on HEI, ASB Hawaii and/or any of their subsidiaries.
Possible restrictions include precluding or limiting: (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI
or ASB Hawaii, and their subsidiaries or affiliates; and (iii) any activities of ASB that might expose ASB to the liabilities of
HEI and/or ASB Hawaii and their other affiliates. See “Restrictions on dividends and other distributions” below.
Bank regulations generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in
activities other than those which are specifically enumerated in the regulations. However, the unitary savings and loan holding
company relationship among HEI, ASB Hawaii and ASB is “grandfathered” under the Gramm-Leach-Bliley Act of 1999
(Gramm Act) so that HEI and its subsidiaries are able to continue to engage in their current activities so long as ASB satisfies
the qualified thrift lender (QTL) test discussed under “Bank—Regulation—Qualified thrift lender test.” ASB met the QTL test
at all times during 2014; however, the failure of ASB to satisfy the QTL test in the future could result in a need for HEI to
divest ASB. If the Spin-Off and Merger are completed, these regulatory limitations will be eliminated since ASB Hawaii and
ASB will no longer be affiliated with HEI and will not become affiliates of NextEra.
HEI is also affected by provisions of the Dodd-Frank Act relating to corporate governance and executive compensation,
including provisions requiring shareholder “say on pay” and “say on pay frequency” votes, mandating additional disclosures
concerning executive compensation and compensation consultants and advisors and further restricting proxy voting by brokers
in the absence of instructions. See “Bank—Legislation and regulation” in HEI’s MD&A for a discussion of effects of the Dodd-
Frank Act on HEI and ASB.
Restrictions on dividends and other distributions. HEI is a legal entity separate and distinct from its various subsidiaries.
As a holding company with no significant operations of its own, HEI’s principal sources of funds are dividends or other
distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its creditors
and shareholders, to participate in any distribution of the assets of any of its subsidiaries are subject to the prior claims of the
creditors and preferred shareholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are
recognized as primary.
The abilities of certain of HEI’s subsidiaries to pay dividends or make other distributions to HEI are subject to contractual
and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric
utility subsidiaries falls below 35% of the total capitalization of the electric utilities (including the current maturities of long-
term debt, but excluding short-term borrowings), the electric utility subsidiaries would, absent PUC approval, be restricted in
their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and
preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the
foregoing dividend restriction shall not be construed as relinquishing any right the PUC may have to review the dividend
policies of the electric utility subsidiaries. As of December 31, 2014, the consolidated common stock equity of HEI’s electric
utility subsidiaries was 56% of their total capitalization (as calculated for purposes of the PUC Agreement). As of
December 31, 2014, Hawaiian Electric and its subsidiaries had common stock equity of $1.7 billion of which approximately
$668 million was not available for transfer to HEI without regulatory approval.
2
The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a
limited exception for stock redemptions that do not result in any decrease in ASB’s capital and would improve ASB’s financial
condition, ASB is prohibited from declaring any dividends, making any other capital distributions, or paying a management fee
to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly
undercapitalized or critically undercapitalized. See “Bank—Regulation—Prompt corrective action.” All capital distributions are
subject to prior approval by the OCC and FRB. Also see Note 14 to the Consolidated Financial Statements.
HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that
could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual
restrictions applicable to HEI and/or its subsidiaries will significantly affect the operations of HEI or its ability to pay dividends
on its common stock, including the special dividend expected to be paid to shareholders of HEI if the Merger is consummated.
Environmental regulation. HEI and its subsidiaries are subject to federal and state statutes and governmental regulations
pertaining to water quality, air quality and other environmental factors. See the “Environmental regulation” discussions in the
“Electric utility” and “Bank” sections below.
Securities ratings. See the Fitch Ratings, Inc. (Fitch), Moody’s Investors Service’s (Moody’s) and Standard & Poor’s (S&P)
ratings of HEI’s and Hawaiian Electric’s securities and discussion under “Liquidity and capital resources” (both “HEI
Consolidated” and “Electric utility”) in HEI’s MD&A. These ratings reflect only the view, at the time the ratings are issued, of
the applicable rating agency from whom an explanation of the significance of such ratings may be obtained. There is no
assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered,
suspended or withdrawn entirely by the applicable rating agency if, in such rating agency’s judgment, circumstances so
warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or
marketability of HEI’s and/or Hawaiian Electric’s securities, which could increase the cost of capital of HEI and Hawaiian
Electric, and could affect costs, including interest charges, under HEI's and/or Hawaiian Electric's debt securities and credit
facilities. Neither HEI nor Hawaiian Electric management can predict future rating agency actions or their effects on the future
cost of capital of HEI or Hawaiian Electric.
Revenue bonds have been issued by the Department of Budget and Finance of the State of Hawaii for the benefit of
Hawaiian Electric and its subsidiaries, but the source of their repayment are the unsecured obligations of Hawaiian Electric and
its subsidiaries under loan agreements and notes issued to the Department, including Hawaiian Electric’s guarantees of its
subsidiaries’ obligations. The payment of principal and interest due on revenue bonds currently outstanding and issued prior to
2009 are insured, but the ratings of these insurers have been withdrawn—see “Electric Utility—Liquidity and capital
resources” in HEI’s MD&A.
Employees. The Company had full-time employees as follows:
December 31
HEI
Hawaiian Electric and its subsidiaries
ASB and its subsidiaries
2014
44
2,759
1,162
3,965
2013
43
2,764
1,159
3,966
2012
42
2,658
1,170
3,870
2011
40
2,518
1,096
3,654
2010
34
2,317
1,075
3,426
The employees of HEI and its direct and indirect subsidiaries, other than the electric utilities, are not covered by any
collective bargaining agreement. The International Brotherhood of Electrical Workers Local 1260 represents roughly half of the
Utilities' workforce covered by a collective bargaining agreement that expires on October 31, 2018.
Properties. HEI leases office space from nonaffiliated lessors in downtown Honolulu under leases that expire in March 2016
and December 2017. See the discussions under “Electric Utility” and “Bank” below for a description of properties owned by
HEI subsidiaries.
3
Electric utility
Hawaiian Electric and subsidiaries and service areas. Hawaiian Electric, Hawaii Electric Light and Maui Electric (Utilities)
are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of
electricity on the islands of Oahu; Hawaii; and Maui, Lanai and Molokai, respectively. Hawaiian Electric acquired Maui
Electric in 1968 and Hawaii Electric Light in 1970. In 2014, the electric utilities’ revenues and net income amounted to
approximately 92% and 82%, respectively, of HEI’s consolidated revenues and net income, compared to approximately 92%
and 76% in 2013 and approximately 92% and 72% in 2012, respectively.
The islands of Oahu, Hawaii, Maui, Lanai and Molokai have a combined population estimated at 1.3 million, or
approximately 95% of the total population of the State of Hawaii, and comprise a service area of 5,815 square miles. The
principal communities served include Honolulu (on Oahu), Hilo and Kona (on Hawaii) and Wailuku and Kahului (on Maui).
The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural
operations. The state has granted Hawaiian Electric, Hawaii Electric Light and Maui Electric nonexclusive franchises, which
authorize the Utilities to construct, operate and maintain facilities over and under public streets and sidewalks. Each of these
franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed.
Sales of electricity.
Years ended December 31
2014
2013
2012
(dollars in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
* As of December 31.
Customer
accounts*
Electric sales
revenues
Customer
accounts*
Electric sales
revenues
Customer
accounts*
Electric sales
revenues
301,953
$
2,134,094
299,528
$
2,116,214
297,529
$
2,216,675
83,421
70,042
420,647
420,734
82,637
69,577
430,272
422,205
81,792
68,922
439,249
436,836
455,416
$
2,975,475
451,742
$
2,968,691
448,243
$
3,092,760
Seasonality. Kilowatthour (KWH) sales of the Utilities follow a seasonal pattern, but they do not experience extreme
seasonal variations due to extreme weather variations experienced by some electric utilities on the U.S. mainland. KWH sales
in Hawaii tend to increase in the warmer, more humid months, probably as a result of increased demand for air conditioning.
Significant customers. The Utilities derived approximately 12%, 11%, and 11% of their operating revenues in 2014, 2013
and 2012, respectively, from the sale of electricity to various federal government agencies.
Under the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007 and/or executive orders:
(1) federal agencies must establish energy conservation goals for federally funded programs, (2) goals were set to reduce
federal agencies’ energy consumption by 3% per year up to 30% by fiscal year 2015 relative to fiscal year 2003, and
(3) renewable energy goals were established for electricity consumed by federal agencies. Hawaiian Electric continues to work
with various federal agencies to implement measures that will help them achieve their energy reduction and renewable energy
objectives.
Energy Agreement, State of Hawaii and U.S. Department of Energy MOU, energy efficiency and decoupling. On
October 20, 2008, the Governor, the Hawaii Department of Business Economic Development and Tourism (DBEDT), the
Consumer Advocate and the Utilities entered into an Energy Agreement pursuant to which they agreed to undertake a number
of initiatives to help accomplish the objectives of the Hawaii Clean Energy Initiative (HCEI) established under a memorandum
of understanding between the State of Hawaii and U.S. Department of Energy. The primary objective of the HCEI and Energy
Agreement was to reduce Hawaii’s dependence on imported fuels through substantial increases in the use of renewable energy
and implementation of new programs intended to secure greater energy efficiency and conservation. In September 2014, the
parties to the Energy Agreement now regard the agreements and policy directives within the Energy Agreement to have been
advanced or superseded by subsequent events, as well as by decisions and orders issued by the PUC, and accordingly have
ended the Energy Agreement as of September 14, 2014. On September 15, 2014, the State of Hawaii and the U.S. Department
of Energy executed a Memorandum of Understanding (MOU) recognizing that Hawaii is embarking on the next phase of its
clean energy future. The MOU provides the framework for a comprehensive, sustained effort to better realize its vast renewable
energy potential and allow Hawaii to push forward in three main areas: the power sector, transportation and energy efficiency.
This next phase will focus on stimulating deployment of clean energy infrastructure as a catalyst for economic growth, energy
system innovation and test bed investments.
One of the initiatives under the Energy Agreement was advanced when, in 2009, the state legislature enacted Act 155,
which gave the PUC the authority to establish an Energy Efficiency Portfolio Standard (EEPS) goal of 4,300 GWH of
4
electricity use reductions by 2030. The PUC issued a decision and order (D&O) on January 3, 2012 approving a framework for
EEPS that set 2008 as the initial base year for evaluation and linearly allocated the 2030 goal to interim incremental reduction
goals of 1,375 GWH by 2015 and 975 GWH by each of the years 2020, 2025 and 2030. These goals may be revised through
goal evaluations scheduled every five years or as the result of recommendations by an EEPS technical working group (TWG)
for consideration by the PUC. The interim and final reduction goals will be allocated among contributing entities by the EEPS
TWG. The PUC may establish penalties in the future for failure to meet the goals. Another of the initiatives under the Energy
Agreement was advanced when the PUC approved the implementation of revenue decoupling for the Utilities under which they
are allowed to recover PUC-approved revenue requirements that are not based on the amount of electricity sold. Both the EEPS
and the implementation of revenue decoupling could have an impact on sales.
The statewide Energy Efficiency Potential Study issued in December 2013 indicated that Hawaii is on track to meet the
2015 interim EEPS target, and that available untapped energy efficiency resources in Hawaii exceed the EEPS goal of 4,300
GWH. The PUC convened a meeting of the EEPS Technical Working Group in January 2014 to review the results of the
statewide Energy Efficiency Potential Study. Although the results of the potential study indicate that available untapped energy
efficiency resources in Hawaii exceed the overall goal, no changes were made to the goals or Framework that govern the
achievement of EEPS. Neither HEI nor Hawaiian Electric management can predict with certainty the impact of these or other
governmental mandates, the HCEI or the September 2014 MOU on HEI’s or Hawaiian Electric’s future results of operations,
financial condition or liquidity.
5
Selected consolidated electric utility operating statistics.
Years ended December 31
KWH sales (millions)
Residential
Commercial
Large light and power
Other
KWH net generated and purchased (millions)
Net generated
Purchased
Losses and system uses (%)
Energy supply (December 31)
Net generating capability—MW
Firm purchased capability—MW
Net peak demand—MW1
Btu per net KWH generated
Average fuel oil cost per Mbtu (cents)
Customer accounts (December 31)
Residential
Commercial
Large light and power
Other
Electric revenues (thousands)
Residential
Commercial
Large light and power
Other
Average revenue per KWH sold (cents)
Residential
Commercial
Large light and power
Other
Residential statistics
2014
2013
2012
2011
2010
2,379.7
3,022.0
3,524.5
50.0
8,976.2
5,131.3
4,306.7
9,438.0
4.7
1,787
575
2,362
1,554
10,613
2,087.6
398,256
54,924
596
1,640
2,450.9
3,105.9
3,462.7
50.0
9,069.5
5,352.0
4,195.2
9,547.2
4.8
1,787
567
2,354
1,535
10,570
2,103.2
394,910
54,616
556
1,660
2,582.0
3,074.4
3,499.8
49.8
9,206.0
5,601.7
4,093.2
9,694.9
4.8
1,787
545
2,332
1,535
10,533
2,210.4
392,025
54,005
577
1,636
2,769.7
3,203.8
3,503.4
50.0
9,526.9
6,022.2
4,009.7
10,031.9
4.8
1,787
540
2,327
1,530
10,609
1,986.7
390,133
53,904
567
1,625
2,830.0
3,185.0
3,512.8
50.8
9,578.6
6,053.6
4,062.8
10,116.4
5.1
1,785
540
2,325
1,562
10,617
1,404.8
388,307
54,374
548
1,627
455,416
451,742
448,243
446,229
444,856
$
879,605
$
892,438
$
952,159
$
946,653
$
1,027,588
1,051,119
17,163
1,044,166
1,015,079
17,008
1,060,983
1,062,226
17,392
1,024,725
976,949
16,172
781,467
814,109
752,056
13,004
$
2,975,475
$
2,968,691
$
3,092,760
$
2,964,499
$
2,360,636
33.15
36.93
34.00
29.82
34.36
32.73
36.41
33.62
29.31
34.02
33.60
36.88
34.51
30.35
34.93
31.12
34.18
31.99
27.89
32.37
24.65
27.61
25.56
21.41
25.63
7,317
2,021
Average annual use per customer account (KWH)
6,000
6,220
6,596
7,117
Average annual revenue per customer account
$
2,218
$
2,265
$
2,432
$
2,433
$
Average number of customer accounts
396,640
394,024
391,437
389,160
386,767
1
Sum of the net peak demands on all islands served, noncoincident and nonintegrated.
6
Generation statistics. The following table contains certain generation statistics as of and for the year ended December 31,
2014. The net generating and firm purchased capability available for operation at any given time may be more or less than
shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Island of
Oahu-
Hawaiian
Electric
Island of
Hawaii-
Hawaii
Electric
Light
Island of
Maui-
Maui
Electric
Island of
Lanai-
Maui
Electric
Island of
Molokai-
Maui
Electric
Net generating and firm purchased capability (MW)
as of December 31, 20141
Conventional oil-fired steam units
Diesel
Combustion turbines (peaking units)
Other combustion turbines
Combined-cycle unit
Firm contract power2
Net peak demand (MW)
Reserve margin
Annual load factor
1,106.8
—
214.8
—
—
464.5
1,786.1
63.8
30.8
—
46.3
56.2
94.6
291.7
35.9
96.8
—
—
113.6
16.0
262.3
1,165.0
187.8
190.7
56.1%
69.6%
55.3%
69.3%
37.7%
68.1%
KWH net generated and purchased (millions)
7,101.9
1,139.7
1,137.0
Total
1,206.5
147.3
214.8
48.5
169.8
575.1
—
10.1
—
—
—
—
—
9.6
—
2.2
—
—
10.1
11.8
2,362.0
5.0
102.0%
63.0%
27.6
5.4
1,553.9
3
118.5%
67.3%
54.5%
69.3%
31.8
9,438.0
1
2
3
Hawaiian Electric units at normal ratings; Maui Electric and Hawaii Electric Light units at reserve ratings.
Nonutility generators— Hawaiian Electric: 208 MW (Kalaeloa Partners, L.P., oil-fired), 180 MW (AES Hawaii, Inc., coal-fired), 68.5
MW (HPower, refuse-fired) and 8 MW (Airport Dispatchable Standby Generation, biodiesel); Hawaii Electric Light: 34.6 MW (Puna
Geothermal Venture, geothermal) and 60 MW (Hamakua Energy Partners, L.P., oil-fired); Maui Electric: 16 MW (Hawaiian
Commercial & Sugar Company, primarily bagasse-fired; reduced to 8 MW effective January 1, 2015).
Noncoincident and nonintegrated.
Generating reliability and reserve margin. Hawaiian Electric serves the island of Oahu and Hawaii Electric Light serves the
island of Hawaii. Maui Electric has three separate electrical systems—one each on the islands of Maui, Molokai and Lanai.
Hawaiian Electric, Hawaii Electric Light and Maui Electric have isolated electrical systems that are not currently
interconnected to each other or to any other electrical grid and, thus, each maintains a higher level of reserve generation than is
typically carried by interconnected mainland U.S. utilities, which are able to share reserve capacity. These higher levels of
reserve margins are required to meet peak electric demands, to provide for scheduled maintenance of generating units
(including the units operated by IPPs relied upon for firm capacity) and to allow for the forced outage of the largest generating
unit in the system.
See “Adequacy of supply” in HEI’s MD&A under “Electric utility.”
Nonutility generation. The Company has supported state and federal energy policies which encourage the development of
renewable energy sources that reduce the use of fuel oil as well as the development of qualifying facilities. The Company’s
renewable energy sources and potential sources range from wind, solar, photovoltaic, geothermal, wave and hydroelectric
power to energy produced by the burning of bagasse (sugarcane waste), municipal waste and other biofuels.
The rate schedules of the electric utilities contain ECACs and PPACs that allow them to recover costs of fuel and purchase
power expenses. The PUC approved the PPACs for the first time for Hawaiian Electric, Hawaii Electric Light and Maui
Electric in March 2011, February 2012 and May 2012, respectively.
In addition to the firm capacity PPAs described below, the electric utilities also purchase energy on an as-available basis
directly from nonutility generators and through its Feed-In Tariff programs. The electric utilities also receive renewable energy
from customers under its Net Energy Metering programs.
The PUC has allowed rate recovery for the firm capacity and purchased energy costs for the electric utilities’ approved firm
capacity and as-available energy PPAs.
Hawaiian Electric firm capacity PPAs. Hawaiian Electric currently has three major PPAs that provide a total of 456.5 MW
of firm capacity, representing 26% of Hawaiian Electric’s total net generating and firm purchased capacity on Oahu as of
7
December 31, 2014. In March 1988, Hawaiian Electric entered into a PPA with AES Barbers Point, Inc. (now known as AES
Hawaii, Inc. (AES Hawaii)), a Hawaii-based, indirect subsidiary of The AES Corporation. The agreement with AES Hawaii, as
amended, provides that, for a period of 30 years beginning September 1992, Hawaiian Electric will purchase 180 megawatts
(MW) of firm capacity. The AES Hawaii 180 MW coal-fired cogeneration plant utilizes a “clean coal” technology and is
designed to sell sufficient steam to be a “Qualifying Facility” (QF) under the Public Utility Regulatory Policies Act of 1978
(PURPA). In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s
Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, extend the PPA
term until September 2032, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013,
and Hawaiian Electric has been in negotiations with AES Hawaii.
In October 1988, Hawaiian Electric entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited
partnership, which, through affiliates, contracted to design, build, operate and maintain a QF. The agreement with Kalaeloa, as
amended, provided that Hawaiian Electric would purchase 180 MW of firm capacity for a period of 25 years beginning in
May 1991 and terminating in May 2016. The Kalaeloa facility is a combined-cycle operation, consisting of two oil-fired
combustion turbines burning low sulfur fuel oil (LSFO) and a steam turbine that utilizes waste heat from the combustion
turbines. Following two additional amendments, effective in 2005, Kalaeloa currently supplies Hawaiian Electric with 208 MW
of firm capacity. In January 2011, Hawaiian Electric initiated renegotiation of the agreement with Kalaeloa (exempt from the
PUC’s Competitive Bidding Framework).
Hawaiian Electric also entered into a PPA in March 1986 and a firm capacity amendment in April 1991 with the City and
County of Honolulu with respect to a refuse-fired plant (HPower). Under the amended PPA, the HPower facility supplied
Hawaiian Electric with 46 MW of firm capacity. In May 2012, Hawaiian Electric entered into an amended and restated PPA
with the City and County of Honolulu to purchase additional firm capacity (including the then existing 46 MW) from the
expanded HPower facility for a term of 20 years from the commercial operation date (April 2, 2013). Under the amended and
restated PPA, which the PUC approved, Hawaiian Electric purchases 68.5 MW of firm capacity.
Hawaii Electric Light and Maui Electric firm capacity PPAs. As of December 31, 2014, Hawaii Electric Light has PPAs
for 119.5 MW (of which 94.6 MW are currently available; 3.4 MW are pending and 21.5 MW are expected to be added in
2016) and Maui Electric has a PPA for 16 MW (including 4 MW of system protection) of firm capacity.
Hawaii Electric Light has a 35-year PPA with Puna Geothermal Venture (PGV) for 30 MW of firm capacity from its
geothermal steam facility, which will expire on December 31, 2027. In February 2011, Hawaii Electric Light and PGV
amended the PPA for the pricing on a portion of the energy payments and entered into a new PPA for Hawaii Electric Light to
acquire an additional 8 MW of firm, dispatchable capacity. The PUC approved the amendment and the new PPA in December
2011. PGV’s expansion became commercially operational in March 2012 for a total facility capacity of 34.6 MW.
In October 1997, Hawaii Electric Light entered into an agreement with Encogen, which has been succeeded by Hamakua
Energy Partners, L. P. (HEP). The agreement requires Hawaii Electric Light to purchase up to 60 MW (net) of firm capacity for
a period of 30 years, expiring on December 31, 2030. The dual-train combined-cycle DTCC facility, which primarily burns
naphtha, consists of two oil-fired combustion turbines and a steam turbine that utilizes waste heat from the combustion
turbines.
In March 2012, Hawaii Electric Light entered into an agreement with Hu Honua Bioenergy LLC, which requires Hawaii
Electric Light to purchase up to 21.5 MW (net) of renewable dispatchable firm capacity for a period of 20 years from its
commercial operation date. Hu Honua will restore (i.e., refurbish and modernize) the Hilo Coast Power Company power plant
to operate using biomass fuel from on-island sources. The PUC approved the PPA on December 20, 2013.
Maui Electric had a PPA with Hawaiian Commercial & Sugar Company (HC&S) for 16 MW of firm capacity. In March
2014, HC&S exercised its one-time right to decrease firm capacity to 8 MW effective January 1, 2015. The HC&S generating
units primarily burn bagasse (sugar cane waste) along with secondary fuels of diesel oil or coal. In 2014, Maui Electric filed a
request for an exemption or waiver from the Competitive Bidding Framework for the proposed extension, which the PUC
approved. In February, the parties agreed to extend the PPA and renegotiated terms and conditions, including amending the PPA
from a firm capacity contract to a scheduled energy contract. If the PUC does not approve the amendment to the PPA by
September 30, 2015, the PPA will remain in full force and effect as before the amendment including being subject to
termination by either party with 90 days written notice.
Fuel oil usage and supply. The rate schedules of the Company’s electric utility subsidiaries include ECACs under which
electric rates (and consequently the revenues of the electric utility subsidiaries generally) are adjusted for changes in the
weighted-average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-
generated power and purchased power. See discussion of rates and issues relating to the ECAC below under “Rates,” and
8
“Electric utility—Certain factors that may affect future results and financial condition—Regulation of electric utility rates” and
“Electric utility—Material estimates and critical accounting policies–Revenues” in HEI’s MD&A.
Hawaiian Electric’s steam generating units consume LSFO and Hawaiian Electric’s combustion turbine peaking units
consume diesel fuel (diesel), except for CIP CT-1 which operates exclusively on B99 grade biodiesel. A Hawaiian Electric
steam unit has successfully completed a co-firing project to test burn mixtures of LSFO and biofuel.
Maui Electric’s and Hawaii Electric Light’s steam generating units burn medium sulfur fuel oil (MSFO) and Hawaii
Electric Light’s and Maui Electric’s Maui combustion turbine generating units burn diesel. Hawaii Electric Light’s and Maui
Electric’s Maui, Molokai and Lanai diesel engine generating units burn ultra-low-sulfur diesel and biodiesel. A Maui Electric
diesel generating unit has successfully completed a biodiesel test fire project.
See the fuel oil commitments information set forth in the “Fuel contracts” section in Note 4 of the Consolidated Financial
Statements.
The following table sets forth the average cost of fuel oil used by Hawaiian Electric, Hawaii Electric Light and Maui
Electric to generate electricity in 2014, 2013 and 2012:
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Consolidated
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
$/Barrel
¢/MBtu
2014
2013
2012
130.71
130.85
139.14
2,075.4
2,068.2
2,195.5
121.49
125.81
129.27
2,002.5
2,064.7
2,112.5
130.51
135.57
138.60
2,198.9
2,286.3
2,327.4
129.65
131.10
138.09
2,087.6
2,103.2
2,210.4
The average per-unit cost of fuel oil consumed to generate electricity for Hawaiian Electric, Hawaii Electric Light and
Maui Electric reflects a different volume mix of fuel types and grades as follows:
2014
2013
2012
Hawaiian Electric
Hawaii Electric Light
Maui Electric
LSFO Diesel/Biodiesel
MSFO
97%
98
99
3%
2
1
47%
53
59
Diesel
53%
47
41
MSFO Diesel/Biodiesel
20%
18
22
80%
82
78
In general, MSFO is the least costly fuel, biodiesel and diesel are the most expensive fuels and the price of LSFO falls in-
between on a per-barrel basis. In 2014, prices of all petroleum fuels plateaued during the first three quarters of the year before
falling strongly over the course of 2014’s final quarter. LSFO prices were relatively weaker than other fuel types and ended
2014 about a third lower than at the end of the previous year, MSFO prices and diesel prices also ended the year below where
they began and on average, MSFO and diesel were lower in 2014 by approximately 25% and 12%, respectively. The per-unit
price of biodiesel before the retroactive application of the federal blender’s credit was generally flat over the course of the year.
Similar to 2013, 2014 again saw the $1 per gallon federal blenders credit enacted at the end of the year, requiring retroactive
application against biodiesel purchases earlier in the calendar year.
In December 2000, Hawaii Electric Light and Maui Electric executed contracts of private carriage with Hawaiian
Interisland Towing, Inc. for the employment of a double-hull tank barge for the shipment of MSFO and diesel supplies from
their fuel suppliers’ facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively, commencing
January 1, 2002. The contracts have been extended through December 31, 2016. In July 2011, the carriage contracts were
assigned to Kirby Corporation (Kirby), which provides refined petroleum and other products for marine transportation,
distribution and logistics services in the U.S. domestic marine transportation industry.
Kirby never takes title to the fuel oil or diesel fuel, but does have custody and control while the fuel is in transit from Oahu.
If there were an oil spill in transit, Kirby is generally contractually obligated to indemnify Hawaii Electric Light and/or Maui
Electric for resulting clean-up costs, fines and damages. Kirby maintains liability insurance coverage for an amount in excess of
$1 billion for oil spill related damage. State law provides a cap of $700 million on liability for releases of heavy fuel oil
transported interisland by tank barge. In the event of a release, Hawaii Electric Light and/or Maui Electric may be responsible
for any clean-up, damages, and/or fines that Kirby and its insurance carrier do not cover.
The prices that Hawaiian Electric, Hawaii Electric Light and Maui Electric pay for purchased energy from certain older
nonutility generators are generally linked to the price of oil. The AES Hawaii energy prices vary primarily with an inflation
index. The energy prices for Kalaeloa, which purchases LSFO from Hawaiian Independent Energy (formerly Tesoro Hawaii
Corporation), vary primarily with the price of Asian crude oil. The HC&S and a portion of PGV energy prices are based on the
9
electric utilities’ respective short-run avoided energy cost rates (which vary with their respective composite fuel costs), subject
to minimum floor rates specified in their approved PPAs. HEP energy prices vary primarily with Hawaii Electric Light’s diesel
costs.
The Utilities estimate that 68% of the net energy they generate or purchase will come from fossil fuel oil in 2015 compared
to 69% in 2014. Hawaiian Electric generally maintains an average system fuel inventory level equivalent to 47 days of forward
consumption. Hawaii Electric Light and Maui Electric generally maintain an average system fuel inventory level equivalent to
approximately one month’s supply of both MSFO and diesel. The PPAs with AES Hawaii and HEP require that they maintain
certain minimum fuel inventory levels.
Rates. Hawaiian Electric, Hawaii Electric Light and Maui Electric are subject to the regulatory jurisdiction of the PUC with
respect to rates, issuance of securities, accounting and certain other matters. See “Regulation” below.
Rate schedules of Hawaiian Electric and its subsidiaries contain ECACs and PPACs. Under current law and practices,
specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses
previously approved by the PUC. All other rate increases require the prior approval of the PUC after public and contested case
hearings. PURPA requires the PUC to periodically review the ECACs of electric and gas utilities in the state, and such clauses,
as well as the rates charged by the utilities generally, are subject to change.
See “Electric utility–Most recent rate proceedings, “Electric utility–Certain factors that may affect future results and
financial condition–Regulation of electric utility rates” and “Electric utility–Material estimates and critical accounting policies–
Revenues” in HEI’s MD&A and “Interim increases” and “Utility projects” under “Commitments and contingencies” in Note 4
of the Consolidated Financial Statements.
Public Utilities Commission and Division of Consumer Advocacy of the Department of Commerce and Consumer
Affairs of the State of Hawaii. On January 12, 2015, Hermina M. Morita resigned as Chair of the PUC, a position she held
since 2011. On January 16, 2015, Governor David Ige appointed Randy Iwase to the PUC and designated him as Chair of the
PUC. Mr. Iwase was formerly a state legislator, Honolulu city council member, supervising deputy attorney general, and Chair
of the Hawaii State Tax Review Commission. He earned his bachelor’s degree from the University of Florida and his J.D. from
the University of San Francisco School of Law.
The other commissioners are Michael E. Champley (for a term that will expire in June 2016), who previously was a senior
energy consultant and a senior executive with DTE Energy, and Lorraine H. Akiba (for a term that will expire in June 2018),
who previously was an attorney in private practice who earlier served as the Director of the State Department of Labor and
Industrial Relations.
The Executive Director of the Division of Consumer Advocacy is Jeffrey T. Ono, previously an attorney in private practice.
Competition. See “Electric utility–Certain factors that may affect future results and financial condition–Competition” in HEI’s
MD&A.
Electric and magnetic fields. The generation, transmission and use of electricity produces low-frequency (50Hz-60Hz)
electrical and magnetic fields (EMF). While EMF has been classified as a possible human carcinogen by more than one public
health organization and remains the subject of ongoing studies and evaluations, no definite causal relationship between EMF
and health risks has been clearly demonstrated to date and there are no federal standards in the U.S. limiting occupational or
residential exposure to 50Hz-60Hz EMF. The Utilities are continuing to monitor the ongoing research and continue to
participate in utility industry funded studies on EMF and, where technically feasible and economically reasonable, continue to
pursue a policy of prudent avoidance in the design and installation of new transmission and distribution facilities. Management
cannot predict the impact, if any, the EMF issue may have on the Utilities in the future.
Global climate change and greenhouse gas (GHG) emissions reduction. The Company shares the concerns of many
regarding the potential effects of global climate changes and the human contributions to this phenomenon, including burning of
fossil fuels for electricity production, transportation, manufacturing and agricultural activities, as well as deforestation.
Recognizing that effectively addressing global climate changes requires commitment by the private sector, all levels of
government, and the public, the Company is committed to taking direct action to mitigate GHG emissions from its operations.
See “Environmental regulation–Global climate change and greenhouse gas emissions reduction” under “Commitments and
contingencies” in Note 4 of the Consolidated Financial Statements.
Legislation. See “Electric utility–Legislation and regulation” in HEI’s MD&A.
Commitments and contingencies. See “Selected contractual obligations and commitments” in Hawaiian Electric’s MD&A
and “Electric utility–Certain factors that may affect future results and financial condition–Other regulatory and permitting
10
contingencies” in HEI’s MD&A, Item 1A. Risk Factors, and Note 4 of the Consolidated Financial Statements for a discussion
of important commitments and contingencies.
Regulation. The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of
Hawaiian Electric and its electric utility subsidiaries. See the previous discussion under “Rates” and the discussions under
“Electric utility–Results of operations–Most recent rate proceedings” and “Electric utility–Certain factors that may affect future
results and financial condition–Regulation of electric utility rates” in HEI’s MD&A.
Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a
material adverse effect on consolidated Hawaiian Electric’s and the Company’s results of operations, financial condition or
liquidity.
In January 2015, NEE and Hawaiian Electric filed an application with the PUC requesting approval of the proposed
Merger. See “PUC application” in Note 2 to the Consolidated Financial Statements
On October 20, 2008, Hawaiian Electric signed an Energy Agreement (see “Hawaii Clean Energy Initiative” under
“Commitments and contingencies” in Note 4 of the Consolidated Financial Statements) setting forth goals, objectives and
actions with the purpose of decreasing Hawaii’s dependence on imported fossil fuels through substantial increases in the use of
renewable energy and implementation of new programs intended to secure greater energy efficiency and conservation. As a
result of the Energy Agreement, numerous PUC proceedings have been initiated, many of which have been completed, as
described elsewhere in this report. In September 2014, the parties to the Energy Agreement concluded that the agreements and
policy directives in the Energy Agreement had been advanced or superseded by subsequent events, as well as by decisions and
orders issued by the PUC, and accordingly ended the Energy Agreement as of September 14, 2014. On September 15, 2014, the
State of Hawaii and the U.S. Department of Energy executed a MOU recognizing that Hawaii is embarking on the next phase
of its clean energy future. The MOU provides the framework for a comprehensive, sustained effort to better realize Hawaii's
vast renewable energy potential and allow it to push forward in three main areas: the power sector, transportation and energy
efficiency. This next phase will focus on stimulating deployment of clean energy infrastructure as a catalyst for economic
growth, energy system innovation and test bed investments.
In 2009, the State Legislature amended Hawaii’s RPS law to require electric utilities (either individually or on a
consolidated basis) to meet an RPS of 10%, 15%, 25% and 40% by December 31, 2010, 2015, 2020 and 2030, respectively.
Energy savings resulting from energy efficiency programs do not count toward the RPS after 2014 (only electrical generation
using renewable energy as a source counts).
Certain transactions between HEI’s electric public utility subsidiaries (Hawaiian Electric, Hawaii Electric Light and Maui
Electric) and HEI and affiliated interests (as defined by statute) are subject to regulation by the PUC. All contracts of $300,000
or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar
services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC
to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such “affiliated contracts” for
capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates,
unless the quotations cannot be obtained without substantial expense. Moreover, all transfers of $300,000 or more of real
property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in
the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract is
unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of
payments under the contract for rate-making purposes. In rate-making proceedings, a utility must also prove the reasonableness
of payments made to affiliated interests under any affiliated contract of $300,000 or more by clear and convincing evidence.
In December 1996, the PUC issued an order in a docket that had been opened to review the relationship between HEI and
Hawaiian Electric and the effects of that relationship on the operations of Hawaiian Electric. The order adopted the report of the
consultant the PUC had retained and ordered Hawaiian Electric to continue to provide the PUC with periodic status reports on
its compliance with the PUC Agreement (pursuant to which HEI became the holding company of Hawaiian Electric). Hawaiian
Electric files such status reports annually. In the order, the PUC also required the Utilities to present a comprehensive analysis
of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the
cost of capital to each utility in future rate cases and remove any such effects from the cost of capital. The Utilities have made
presentations in their subsequent rate cases to support their positions that there was no evidence that would modify the PUC’s
finding that Hawaiian Electric’s access to capital did not suffer as a result of HEI’s involvement in nonutility activities and that
HEI’s diversification did not permanently raise or lower the cost of capital incorporated into the rates paid by Hawaiian
Electric’s utility customers.
The Utilities are not subject to regulation by the FERC under the Federal Power Act, except under Sections 210 through
212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the FERC to order electric
11
utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities.
Title I of PURPA, which relates to retail regulatory policies for electric utilities, and Title VII of the Energy Policy Act of 1992,
which addresses transmission access, also apply to the Utilities. The Utilities are also required to file various operational reports
with the FERC.
Because they are located in the State of Hawaii, Hawaiian Electric and its subsidiaries are exempt by statute from
limitations set forth in the Powerplant and Industrial Fuel Use Act of 1978 on the use of petroleum as a primary energy source.
See also “HEI–Regulation” above.
Environmental regulation. Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, are subject to
periodic inspections by federal, state and, in some cases, local environmental regulatory agencies, including agencies
responsible for the regulation of water quality, air quality, hazardous and other waste, and hazardous materials. These
inspections may result in the identification of items needing corrective or other action. Except as otherwise disclosed in this
report (see “Certain factors that may affect future results and financial condition–Environmental matters” for HEI Consolidated,
the Electric utility and the Bank sections in HEI’s MD&A and Note 4 of the Consolidated Financial Statements, which are
incorporated herein by reference), the Company believes that each subsidiary has appropriately responded to environmental
conditions requiring action and that, as a result of such actions, such environmental conditions will not have a material adverse
effect on the Company or Hawaiian Electric.
Water quality controls. The generating stations, substations and other utility facilities operate under federal and state
water quality regulations and permits, including but not limited to the Clean Water Act National Pollution Discharge
Elimination System (governing point source discharges, including wastewater and storm water discharges), Underground
Injection Control (regulating disposal of wastewater into the subsurface), the Spill Prevention, Control and Countermeasure
(SPCC) program, the Oil Pollution Act of 1990 (OPA) (governing actual or threatened oil releases and imposing strict liability
on responsible parties for clean up costs and damages to natural resources and property), and other regulations associated with
discharges of oil and other substances to surface water. The federal Environmental Protection Agency (EPA) regulations under
OPA also require certain facilities that use or store petroleum to prepare and implement SPCC Plans in order to prevent releases
of petroleum to navigable waters of the U.S. The Utilities' facilities that are subject to SPCC Plan requirements, including most
power plants, base yards, and certain substations, have prepared and are implementing SPCC Plans.
In 2014 and 2015 to date, the Utilities did not experience any significant petroleum releases. The Company believes that
each subsidiary’s costs of responding to petroleum releases to date will not have a material adverse effect on the respective
subsidiary or the Company.
Air quality controls. The Clean Air Act (CAA) amendments of 1990, among other things, established a federal
operating permits program (in Hawaii known as the Covered Source Permit program) and greatly expanded the hazardous air
pollutant program. More stringent National Ambient Air Quality Standards (NAAQS) will affect new or modified generating
units requiring a permit to construct under the Prevention of Significant Deterioration (PSD) program and the controls
necessary to meet the NAAQS.
CAA operating permits (Title V permits) have been issued for all affected generating units.
Hazardous waste and toxic substances controls. The operations of the electric utility and former freight transportation
subsidiaries of HEI are subject to EPA regulations that implement provisions of the Resource Conservation and Recovery Act
(RCRA), the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund),
the Superfund Amendments and Reauthorization Act (SARA) and the Toxic Substances Control Act (TSCA).
RCRA underground storage tank (UST) regulations require all facilities that use USTs for storing petroleum products to
comply with established leak detection, spill prevention, standards for tank design and retrofits, financial assurance, and tank
decommissioning and closure. All of the Utilities' USTs currently meet the applicable requirements.
The Emergency Planning and Community Right-to-Know Act under SARA Title III requires the Utilities to report
potentially hazardous chemicals present in their facilities in order to provide the public with information so that emergency
procedures can be established to protect the public in the event of hazardous chemical releases. All of the Utilities' facilities are
in compliance with applicable annual reporting requirements to the State Emergency Planning Commission, the Local
Emergency Planning Committee and local fire departments. Since January 1, 1998, the steam electric industry category has
been subject to Toxics Release Inventory (TRI) reporting requirements. All of the Utilities' facilities are in compliance with TRI
reporting requirements.
The TSCA regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCBs), a compound
found in some transformer and capacitor dielectric fluids. The TSCA regulations also apply to responses to releases of PCBs to
12
the environment. The Utilities have instituted procedures to monitor compliance with these regulations and have implemented a
program to identify and replace PCB transformers and capacitors in their systems. Management believes that all of the Utilities'
facilities are currently in compliance with PCB regulations. In April 2010, the EPA issued an Advance Notice of Proposed
Rule Making announcing its intent to reassess PCB regulations. The EPA projects that it will publish a notice of proposed rule
making in July 2015.
Hawaii’s Environmental Response Law, as amended (ERL), governs releases of hazardous substances, including oil, to the
environment in areas within the state’s jurisdiction. Responsible parties under the ERL are jointly, severally, and strictly liable
for a release of a hazardous substance. Responsible parties include owners or operators of a facility where a hazardous
substance is located and any person who at the time of disposal of the hazardous substance owned or operated any facility at
which such hazardous substance was disposed.
The Utilities periodically identify leaking petroleum-containing equipment such as USTs, piping, and transformers. In a
few instances, small amounts of PCBs have been identified in the leaking equipment. Each subsidiary reports releases from
such equipment when and as required by applicable law and addresses in all material respects impacts due to the releases in
compliance with applicable regulatory requirements.
Research and development. The Utilities expensed approximately $2.9 million, $3.4 million, and $4.0 million in 2014, 2013
and 2012, respectively, for research and development (R&D). In 2014, 2013 and 2012, the electric utilities’ contributions to the
Electric Power Research Institute accounted for approximately 76%, 64% and 55% of R&D expenses, respectively. There were
also utility expenditures in 2014, 2013 and 2012 related to new technologies, biofuels, energy storage, demand response,
seawater cooling traveling screens, electric and hybrid plug in vehicles and other renewables (e.g., wind and solar power
integration and solar resource evaluation).
Additional information. For additional information about Hawaiian Electric, see Hawaiian Electric’s MD&A, Hawaiian
Electric’s “Quantitative and Qualitative Disclosures about Market Risk” and Hawaiian Electric’s Consolidated Financial
Statements.
Properties. Hawaiian Electric owns and operates four generating plants on the island of Oahu at Honolulu, Waiau, Kahe and
Campbell Industrial Park (CIP). These plants have an aggregate net generating capability of 1,322 MW as of December 31,
2014. The four plants are situated on Hawaiian Electric-owned land having a combined area of 535 acres and three parcels of
land totaling 5.5 acres under leases expiring between June 30, 2016 and December 31, 2018, with options to extend to June 30,
2026. In addition, Hawaiian Electric owns a total of 132 acres of land on which substations, transformer vaults, distribution
baseyards and the Kalaeloa cogeneration facility are located.
Hawaiian Electric owns buildings and approximately 11.6 acres of land located in Honolulu which house its operating,
engineering and information services departments and a warehousing center. It also leases an office building and certain office
space in Honolulu. The lease for the office building expires in November 2021, with an option to extend through
November 2024. Leases for certain office and warehouse spaces expire on various dates from May 31, 2015 through July 31,
2025, some with options to extend to various dates through December 31, 2034.
Hawaiian Electric's Barbers Point Tank Farm (BPTF) has three storage tanks with an aggregate of 1 million barrels of
storage for LSFO. The BPTF is located in Campbell Industrial Park, on the same property as the CIP Generating Station, and is
the central fuel storage facility where LSFO purchased by Hawaiian Electric is received and stored. From the BPTF, LSFO is
transported via Hawaiian Electric owned underground pipelines to the Kahe and Waiau Power Plants. Hawaiian Electric also
has fuel storage facilities at each of its plant sites with a nominal aggregate capacity of 732,000 barrels for LSFO storage,
44,000 barrels for diesel storage, and 88,000 barrels for biodiesel storage. Hawaiian Electric also owns a fuel storage facility at
Iwilei that was used to provide fuel to the Honolulu Power Plant. As the Honolulu Power Plant was deactivated on January 31,
2014 and any future fuel supplies to the plant will be delivered by truck, the Iwilei fuel storage facility may no longer be
needed.
Hawaii Electric Light owns and operates four generating plants on the island of Hawaii in Hilo, Waimea, Keahole and
Puna, along with distributed generators at substation sites. These plants have an aggregate net generating capability of
197.1 MW as of December 31, 2014 (excluding several small run-of-river hydro units). Hawaii Electric Light's Shipman plant
in Hilo was deactivated in 2014. The plants are situated on Hawaii Electric Light-owned land having a combined area of
approximately 44 acres. The distributed generators are located within Hawaii Electric Light-owned substation sites having a
combined area of approximately 4 acres. Hawaii Electric Light also owns fuel storage facilities at these sites with a usable
storage capacity of 51,500 barrels of bunker oil and 81,802 barrels of diesel. There are an additional 19,200 barrels of diesel
and 22,770 barrels of bunker oil storage capacity for Hawaii Electric Light-owned fuel off-site at Chevron Products Company
(Chevron)-owned terminalling facilities. Hawaii Electric Light pays a storage fee to Chevron and has no other interest in the
property, tanks or other infrastructure situated on Chevron’s property. Hawaii Electric Light also owns 6 acres of land in Kona,
13
which is used for a baseyard, and one acre of land in Hilo, which houses its accounting, customer services and administrative
offices. Hawaii Electric Light also leases 3.7 acres of land for its baseyard in Hilo under a lease expiring in 2030. In addition,
Hawaii Electric Light owns a total of approximately 100 acres of land, and leases a total of approximately 8.5 acres of land, on
which hydro facilities, substations and switching stations, microwave facilities, and transmission lines are located. The deeds to
the sites located in Hilo contain certain restrictions, but the restrictions do not materially interfere with the use of the sites for
public utility purposes.
Maui Electric owns and operates two generating plants on the island of Maui, at Kahului and Maalaea, with an aggregate
net generating capability of 244.3 MW as of December 31, 2014. The plants are situated on Maui Electric-owned land having a
combined area of 28.6 acres. Maui Electric also owns fuel oil storage facilities at these sites with a total maximum usable
capacity of 81,272 barrels of bunker oil, and 94,586 barrels of diesel. There are an additional 56,358 barrels of diesel oil storage
capacity for Maui Electric-owned fuel off-site at Aloha Petroleum, Ltd. (Aloha Petroleum)-owned terminalling facilities and
10,000 barrels of diesel oil storage capacity for Maui Electric-owned fuel off-site at Chevron Products Company (Chevron)-
owned terminalling facilities. Maui Electric pays storage fees to Aloha Petroleum and Chevron. Maui Electric owns two 1 MW
stand-by diesel generators and a 6,000 gallon fuel storage tank located in Hana. Maui Electric owns 65.7 acres of undeveloped
land at Waena. Most of this Waena land is currently used for agricultural purposes by the former landowner.
Maui Electric’s administrative offices and engineering and distribution departments are located on 9.1 acres of Maui
Electric-owned land in Kahului.
Maui Electric also owns and operates smaller distribution systems, generation systems (with an aggregate net capability of
21.9 MW as of December 31, 2014) and fuel storage facilities on the islands of Lanai and Molokai, primarily on land owned by
Maui Electric.
Other properties. The Utilities own overhead transmission and distribution lines, underground cables, poles (some jointly)
and metal high voltage towers. Electric lines are located over or under public and nonpublic properties. Lines are added when
needed to serve increased loads and/or for reliability reasons. In some design districts on Oahu, lines must be placed
underground. Under Hawaii law, the PUC generally must determine whether new 46 kilovolt (kV), 69 kV or 138 kV lines can
be constructed overhead or must be placed underground.
See “Hawaiian Electric and subsidiaries and service areas” above for a discussion of the nonexclusive franchises of
Hawaiian Electric and subsidiaries. Most of the leases, easements and licenses for Hawaiian Electric’s, Hawaii Electric Light’s
and Maui Electric’s lines have been recorded.
See “Generation statistics” above and “Limited insurance” in HEI’s MD&A for a further discussion of some of the electric
utility properties.
Bank
General. ASB was granted a federal savings bank charter in January 1987. Prior to that time, ASB had operated since 1925 as
the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah. As of December 31, 2014, ASB was one
of the largest financial institutions in the State of Hawaii based on total assets of $5.6 billion and deposits of $4.6 billion. In
2014, ASB’s revenues and net income amounted to approximately 8% and 31% of HEI’s consolidated revenues and net income,
respectively, compared to approximately 8% and 36% in 2013 and approximately 8% and 42% in 2012, respectively.
At the time of HEI’s acquisition of ASB in 1988, HEI agreed with the OTS’ predecessor regulatory agency that ASB’s
regulatory capital would be maintained at a level of at least 6% of ASB’s total liabilities, or at such greater amount as may be
required from time to time by regulation. Under the agreement, HEI’s obligation to contribute additional capital to ensure that
ASB would have the capital level required by the OTS was limited to a maximum aggregate amount of approximately
$65.1 million. As of December 31, 2014, as a result of certain HEI contributions of capital to ASB, HEI’s maximum obligation
under the agreement to contribute additional capital has been reduced to approximately $28.3 million. ASB is subject to OCC
regulations on dividends and other distributions and ASB must receive a letter of non-objection from the OCC and FRB before
it can declare and pay a dividend to HEI.
14
The following table sets forth selected data for ASB (average balances calculated using the average daily balances):
Years ended December 31
Common equity to assets ratio
2014
2013
2012
Average common equity divided by average total assets
9.89%
9.90%
10.14%
Return on assets
Net income for common stock divided by average total assets
Return on common equity
Net income for common stock divided by average common equity
0.95
9.62
1.13
1.18
11.38
11.68
Asset/liability management. See HEI’s “Quantitative and Qualitative Disclosures about Market Risk.”
Consolidated average balance sheet and interest income and interest expense. See “Bank—Results of operations—
Average balance sheet and net interest margin” in HEI’s MD&A.
The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average
interest rate multiplied by prior year average balance) and (2) changes in volume (change in average balance multiplied by prior
period weighted-average interest rate). Any remaining change is allocated to the above two categories on a prorata basis.
(in thousands)
Interest income
Other investments
$
Securities purchased under resale agreements
Available-for-sale investment securities
Taxable
Non-taxable
Total available-for-sale investment securities
Loans
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial
Consumer
Total loans
Total increase (decrease) in interest income
Interest expense
Savings
Interest-bearing checking
Money market
Time certificates
Advances from Federal Home Loan Bank
Securities sold under agreements to repurchase
Total (increase) decrease in interest expense
Increase (decrease) in net interest income
2014 vs. 2013
2013 vs. 2012
Rate
Volume
Total
Rate
Volume
Total
70
1
—
60
60
(5,112)
(636)
1,791
111
(2,106)
(113)
(6,065)
(5,934)
—
—
10
(48)
459
107
528
$
1
$
71
$
(24)
(23)
144
(2,125)
(1,981)
2,410
4,993
3,483
(313)
2,212
(348)
12,437
10,433
(82)
(20)
8
147
(1,173)
(139)
(1,259)
144
(2,065)
(1,921)
(2,702)
4,357
5,274
(202)
106
(461)
6,372
4,499
(82)
(20)
18
99
(714)
(32)
(731)
18
22
55
(52)
3
(9,670)
(612)
1,561
64
(2,246)
(1,422)
(12,325)
(12,282)
139
—
57
592
322
(291)
819
$
(48) $
21
(903)
218
(685)
3,907
1,772
2,775
(853)
509
1,127
9,237
8,525
(63)
5
30
571
(578)
431
396
(30)
43
(848)
166
(682)
(5,763)
1,160
4,336
(789)
(1,737)
(295)
(3,088)
(3,757)
76
5
87
1,163
(256)
140
1,215
$
(5,406) $
9,174
$
3,768
$
(11,463) $
8,921
$
(2,542)
See “Bank—Results of operations” in HEI’s MD&A for an explanation of significant changes in earning assets and costing
liabilities.
Noninterest income. In addition to net interest income, ASB has various sources of noninterest income, including fee income
from credit and debit cards, fee income from deposit liabilities, mortgage banking income and other financial products and
services. See “Bank—Results of operations” in HEI’s MD&A for an explanation of significant changes in noninterest income.
15
Lending activities.
General. The following table sets forth the composition of ASB’s loans receivable held for investment:
December 31
2014
2013
2012
2011
2010
(dollars in thousands)
Real estate: 1
Residential 1-4
family
Commercial real
estate
Home equity line of
credit
Residential land
Commercial
construction
Residential
construction
Total real estate
Commercial
Consumer
Total loans
Balance
% of
total
Balance
% of
total
Balance
% of
total
Balance
% of
total
Balance
% of
total
$ 2,044,205
46.0
$
2,006,007
48.2
$
1,866,450
49.2
$
1,926,774
52.2
$
2,087,813
58.9
531,917
12.0
440,443
10.6
375,677
9.9
331,931
9.0
300,689
8.5
818,815
16,240
18.4
0.4
739,331
16,176
17.8
0.4
630,175
25,815
16.6
0.7
535,481
45,392
14.5
1.2
416,453
65,599
11.7
1.8
96,438
2.2
52,112
1.3
43,988
1.2
41,950
1.1
38,079
1.1
18,961
3,526,576
791,757
122,656
0.4
79.4
17.8
2.8
12,774
3,266,843
783,388
108,722
0.3
78.6
18.8
2.6
6,171
2,948,276
721,349
121,231
0.2
77.8
19.0
3.2
3,327
2,884,855
716,427
93,253
0.1
78.1
19.4
2.5
5,602
2,914,235
551,683
80,138
0.2
82.2
15.5
2.3
4,440,989
100.0
4,158,953
100.0
3,790,856
100.0
3,694,535
100.0
3,546,056
100.0
Less: Deferred fees and
discounts
Allowance for
loan losses
(6,338)
(45,618)
(8,724)
(40,116)
(11,638)
(41,985)
(13,811)
(37,906)
(15,530)
(40,646)
Total loans, net
$ 4,389,033
$
4,110,113
$
3,737,233
$
3,642,818
$
3,489,880
1
Includes renegotiated loans.
The increase in the loans receivable balance in 2014 was primarily due to growth in commercial real estate, home equity
lines of credit (HELOC), commercial construction and residential 1-4 family loan portfolios. The growth in the commercial real
estate and commercial construction loan portfolios were driven by demand for these loan types as the Hawaii economy
continues to improve. The growth in the HELOC and residential loan portfolios were consistent with ASB’s mix target and loan
growth strategy. The increase in the loans receivable balance in 2013 was primarily due to growth in the residential, HELOC,
commercial and commercial real estate loan portfolios. The growth in these portfolios was consistent with ASB’s mix target and
loan growth strategy. The increase in the loans receivable balance in 2012 and 2011 was primarily due to growth in commercial,
commercial real estate, consumer and HELOC loans as ASB targeted these portfolios because of their shorter duration and/or
variable rates. Offsetting these 2012 and 2011 loan portfolio increases was a decrease in the residential loan portfolio. Although
ASB produced nearly $1.0 billion of new, long-term residential loans in 2012, nearly double the level for 2011, it sold more
than half those loans to control interest rate risk and repayments were also higher than in 2011.
16
The following table summarizes our loans receivable held for investment based upon contractually scheduled principal
payments allocated to the indicated maturity categories:
December 31
Due
(in millions)
Commercial – Fixed
Commercial – Adjustable
Total commercial
Commercial construction – Fixed
Commercial construction – Adjustable
Total commercial construction
Residential construction – Fixed
Residential construction – Adjustable
Total residential construction
Total loans – Fixed
Total loans – Adjustable
Total loans
2014
In
1 year
or less
After 1 year
through
5 years
After
5 years
Total
$
46
$
217
263
—
63
63
19
—
19
65
280
345
$
$
112
361
473
—
33
33
—
—
—
112
394
506
$
$
21
35
56
—
—
—
—
—
—
21
35
56
$
$
179
613
792
—
96
96
19
—
19
198
709
907
Origination, purchase and sale of loans. Generally, residential and commercial real estate loans originated by ASB are
collateralized by real estate located in Hawaii. For additional information, including information concerning the geographic
distribution of ASB’s mortgage-related securities portfolio and the geographic concentration of credit risk, see Note 15 of the
Consolidated Financial Statements. The demand for loans is primarily dependent on the Hawaii real estate market, business
conditions, interest rates and loan refinancing activity.
Residential mortgage lending. ASB originates fixed rate and adjustable rate loans secured by single family residential
property, including investor-owned properties, with maturities of up to 30 years. ASB’s general policy is to require private
mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase
price at origination. For nonowner-occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of
the appraised value or purchase price at origination.
Construction and development lending. ASB provides both fixed- and adjustable-rate loans for the construction of one-to-
four unit residential and commercial properties. Construction loan projects are typically short term in nature. Construction and
development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real
estate. Accordingly, construction and development loans are generally priced higher than loans collateralized by completed
structures. ASB’s underwriting, monitoring and disbursement practices with respect to construction and development financing
are designed to ensure sufficient funds are available to complete construction projects. See “Loan portfolio risk elements” and
“Multifamily residential and commercial real estate lending” below.
Multifamily residential and commercial real estate lending. ASB provides permanent financing and construction and
development financing collateralized by multifamily residential properties (including apartment buildings) and collateralized by
commercial and industrial properties (including office buildings, shopping centers and warehouses) for its own portfolio as well
as for participation with other lenders. Commercial real estate lending typically involves long lead times to originate and fund.
As a result, production results can vary significantly from period to period.
Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans collateralized by deposits are
limited to 90% of the available account balance. ASB offers home equity lines of credit, clean energy loans, secured and
unsecured VISA cards (through a third party issuer), checking account overdraft protection and other general purpose consumer
loans.
Commercial lending. ASB provides both secured and unsecured commercial loans to business entities. This lending
activity is designed to diversify ASB’s asset structure, shorten maturities, improve rate sensitivity of the loan portfolio and
attract commercial checking deposits. ASB offers commercial loans with terms up to ten years.
Loan origination fee and servicing income. In addition to interest earned on residential mortgage loans, ASB receives
income from servicing loans, for late payments and from other related services. Servicing fees are received on loans originated
and subsequently sold by ASB where ASB acts as collection agent on behalf of third-party purchasers.
17
ASB generally charges the borrower at loan settlement a loan origination fee of 1% of the amount borrowed. See “Loans
receivable” in Note 1 of the Consolidated Financial Statements.
Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the
delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a
collection action, including foreclosure proceedings in the case of real estate secured loans. In a foreclosure action, the property
collateralizing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If
ASB is the successful bidder, the property is classified as real estate owned until it is sold. As of December 31, 2014, 2013 and
2012, ASB had $0.9 million, $1.2 million and $6.1 million, respectively, of real estate acquired in settlement of loans.
In addition to delinquent loans, other significant lending risk elements include: (1) loans which accrue interest and are 90
days or more past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans
on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower
to service the obligation under the original terms of the agreement (troubled debt restructured loans). ASB loans that were 90
days or more past due on which interest was being accrued as of December 31, 2014, 2013, 2012, 2011 and 2010 were
immaterial or nil. The following table sets forth certain information with respect to nonaccrual and troubled debt restructured
loans:
December 31
(dollars in thousands)
Nonaccrual loans—
Real estate
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Residential construction
Total real estate
Commercial
Consumer
Total nonaccrual loans
Troubled debt restructured loans not included above—
Real estate
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Total real estate
Commercial
2014
2013
2012
2011
2010
$
19,253
$
19,679
$
26,721
$
28,298
$
36,420
5,112
1,087
720
—
26,172
10,053
661
4,439
2,060
3,161
—
29,339
18,781
401
6,750
2,349
8,561
—
44,381
20,222
284
3,436
2,258
14,535
—
48,527
17,946
281
—
1,659
15,479
—
53,558
4,956
341
$
36,886
$
48,521
$
64,887
$
66,754
$
58,855
$
13,525
$
9,744
$
6,759
$
5,029
$
—
480
7,130
21,135
2,972
—
171
7,476
17,391
1,649
—
—
11,090
17,849
43
—
—
24,828
29,857
15,386
5,150
1,963
—
27,689
34,802
4,035
Total troubled debt restructured loans
$
24,107
$
19,040
$
17,892
$
45,243
$
38,837
Impact of nonperforming loans on interest income. The following table presents the gross interest income for both
nonaccrual and restructured loans that would have been recognized if such loans had been current in accordance with their
original contractual terms, and had been outstanding throughout the period or since origination if held for only part of the
period. The table also presents the interest income related to these loans that was actually recognized for the period.
(dollars in millions)
Gross amount of interest income that would have been recorded in accordance with original contractual terms, and
had been outstanding throughout the period or since origination, if held for only part of the period 1
Interest income actually recognized
Total interest income foregone
Year ended
December 31, 2014
$
$
3
1
2
1 Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status.
18
In 2014, nonaccrual loans decreased $11.6 million primarily due to the payoff of commercial loans that were on nonaccrual
status and repayments in the residential land portfolio. ASB evaluates a restructured loan transaction to determine if the
borrower is in financial difficulty and if the restructured terms are considered concessions—typically terms that are out of
market, beyond normal or reasonable standards, or otherwise not available to a non-troubled borrower in the normal market
place. A loan classified as TDR must meet both criteria of financial difficulty and concession. TDR loans increased $5.1 million
in 2014 primarily due to increases of $3.8 million and $1.3 million of residential 1-4 and commercial loans, respectively,
classified as TDR. In 2013, nonaccrual loans decreased $16.4 million due to improved credit quality in the residential 1-4
family, commercial real estate and commercial loans, and repayments in the residential land portfolio. The improvement is
attributed to the continued stabilization or increase of property values, more financial flexibility of borrowers, and overall
general economic improvement in the State of Hawaii. TDR loans increased $1.1 million in 2013 primarily due to increases of
$3.0 million and $1.6 million of residential 1-4 and commercial loans, respectively, classified as TDR, partly offset by a $3.6
million decrease in residential land loans classified as TDR. In 2012, nonaccrual loans decreased by $1.9 million due to
improved credit quality in the residential 1-4 family and consumer portfolios (residential 1-4 family lower by $1.6 million and
residential land loans lower by $5.9 million), partially offset by higher nonaccrual commercial real estate and commercial loans
of $5.6 million. The improvement was attributed to stabilized or increasing property values, more financial flexibility of
borrowers, and overall general economic improvement in the State of Hawaii. TDR loans decreased by $27.4 million in 2012
due to decreases of $15.3 million and $13.7 million of commercial loans and residential land loans, respectively, classified as
TDR. In 2011, nonaccrual loans increased by $7.9 million due to certain commercial loans that were current as to principal and
interest payments but were classified and placed on nonaccrual status. The increase in troubled debt restructured loans was due
to two commercial loans that were renegotiated.
Allowance for loan losses. See “Allowance for loan losses” in Note 1 of the Consolidated Financial Statements.
The following table presents the changes in the allowance for loan losses:
(dollars in thousands)
Allowance for loan losses, January 1
Provision for loan losses
Charge-offs
Residential 1-4 family
Home equity line of credit
Residential land
Total real estate
Commercial
Consumer
Total charge-offs
Recoveries
Residential 1-4 family
Home equity line of credit
Residential land
Total real estate
Commercial
Consumer
Total recoveries
2014
2013
$
40,116
$
41,985
$
6,126
1,507
2012
37,906
12,883
$
2011
40,646
15,009
$
2010
41,679
20,894
987
196
81
1,264
1,872
2,414
5,550
1,180
752
469
2,401
1,636
889
4,926
1,162
782
485
2,429
3,056
2,717
8,202
1,881
358
868
3,107
1,089
630
4,826
3,183
716
2,808
6,707
3,606
2,517
12,830
1,328
108
1,443
2,879
649
498
4,026
5,528
1,439
4,071
11,038
5,335
3,117
19,490
110
25
170
305
869
567
1,741
6,142
2,517
6,487
15,146
6,261
3,408
24,815
744
63
63
870
1,537
481
2,888
Allowance for loan losses, December 31
$
45,618
$
40,116
$
41,985
$
37,906
$
40,646
Ratio of allowance for loan losses to loans receivable held
for investment
Ratio of provision for loan losses during the year to
average total loans
Ratio of net charge-offs during the year to average total
loans
0.97%
0.04%
0.09%
1.11%
0.35%
0.24%
1.03%
0.42%
0.49%
1.15%
0.58%
0.61%
1.03%
0.14%
0.01%
19
The following table sets forth the allocation of ASB’s allowance for loan losses and the percentage of loans in each
Allow-
ance
balance
$ 4,662
8,954
6,982
1,875
5,471
28
27,972
14,017
3,629
45,618
—
$ 45,618
$
category to total loans:
December 31
(dollars in thousands)
Real estate
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Unallocated
Total allowance for loan
losses
December 31
(dollars in thousands)
Real estate
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Unallocated
Total allowance for loan losses
$
2014
Allowance
to loan
receivable
%
Loan
receivable
% of
total
Allow-
ance
balance
2013
Allowance
to loan
receivable
%
Loan
receivable
% of
total
Allow-
ance
balance
2012
Allowance
to loan
receivable
%
Loan
receivable
% of
total
0.23
1.68
0.85
11.55
5.67
0.15
0.79
1.77
2.96
1.03
46.0
12.0
18.4
0.4
2.2
0.4
79.4
17.8
2.8
100.0
$ 5,534
5,059
5,229
1,817
2,397
19
20,055
15,803
2,367
38,225
1,891
0.28
1.15
0.71
11.23
4.60
0.15
0.61
2.02
2.18
0.92
48.2
10.6
17.8
0.4
1.3
0.3
78.6
18.8
2.6
100.0
$ 6,068
2,965
4,493
4,275
2,023
9
19,833
15,931
4,019
39,783
2,202
$ 40,116
$ 41,985
0.33
0.79
0.71
16.56
4.60
0.15
0.67
2.21
3.32
1.05
49.2
9.9
16.6
0.7
1.2
0.2
77.8
19.0
3.2
100.0
2011
Allowance
to loan
receivable
%
Allowance
balance
Loan
receivable
% of
total
Allowance
balance
2010
Allowance
to loan
receivable
%
Loan
receivable
% of
total
6,500
1,688
4,354
3,795
1,888
4
18,229
14,867
3,806
36,902
1,004
37,906
0.34
0.51
0.81
8.36
4.50
0.12
0.63
2.08
4.08
1.00
52.2
$
9.0
14.5
1.2
1.1
0.1
78.1
19.4
2.5
100.0
6,497
1,474
4,269
6,411
1,714
7
20,372
16,015
3,325
39,712
934
$
40,646
0.31
0.49
1.03
9.77
4.50
0.12
0.70
2.90
4.15
1.12
58.9
8.5
11.7
1.8
1.1
0.2
82.2
15.5
2.3
100.0
In 2014, ASB’s allowance for loan losses increased by $5.5 million primarily due to growth in the loan portfolio ($282
million or 6.8% growth in outstanding balances) and increases in the loss rates of loan portfolios with higher risk such as
commercial real estate and unsecured personal loans. Overall loan quality continues to improve as total delinquencies of $25.5
million at December 31, 2014 was a decrease of $8.3 million compared to total delinquencies of $33.8 million at December 31,
2013 due to a decrease in delinquent commercial, commercial real estate and residential land loans. The ratio of delinquent
loans to total loans decreased from 0.81% of total loans outstanding at December 31, 2013 to 0.58% of total loans outstanding
at December 31, 2014. Net charge-offs for 2014 were $0.6 million, a decrease of $2.8 million compared to $3.4 million for
2013 primarily due to a decrease in commercial, HELOC and residential land loan charge-offs as a result of the strong
economic growth in Hawaii and partially due to the sale of the credit card portfolio in 2013. ASB’s provision for loan losses
was $6.1 million for 2014, an increase of $4.6 million compared to provision for loan losses of $1.5 million for 2013 primarily
due to growth in the loan portfolio.
In 2013, ASB’s allowance for loan losses decreased by $1.9 million, despite the increase in the loan portfolios (9.7%
growth or $368.1 million increase in outstanding balances) primarily due to the release of reserves as a result of repayments in
the higher risk purchased loan and residential land loans portfolios and the sale of the credit card portfolio. Overall loan quality
20
has improved as delinquencies decreased significantly in 2013, primarily in the residential 1-4 family, residential land and
commercial real estate portfolios. Net loan charge-offs for 2013 were $3.4 million compared to $8.8 million in 2012 as the
Hawaii economy in general and the housing market in particular continued to improve. ASB’s provision for loan losses was
$1.5 million in 2013, compared to $12.9 million in 2012.
In 2012, ASB’s allowance for loan losses increased by $4.1 million due to growth in the loan portfolios (2.6% growth or
$96.3 million increase in outstanding balances) and higher impairment reserves for the commercial and commercial real estate
loan portfolios. Although overall loan quality improved, a number of commercial borrowers experienced financial stress during
the year. A loan is deemed impaired when it is probable (more likely than not) that the bank will be unable to collect all
amounts due according to the loan’s original contractual terms. In 2012, delinquencies significantly improved in the residential
1-4 family and consumer loan portfolios, while total bank net loan charge-offs of $8.8 million were about half the level in 2011,
reflecting the gradual improvement in the local economy including a recovery of the housing market. ASB’s provision for loan
losses was $12.9 million in 2012, compared to $15.0 million in 2011.
In 2011, ASB’s allowance for loan losses decreased by $2.7 million from 2010 due to a lower historical loss ratio for the
commercial markets portfolio and the decline of the residential land portfolio, which was a higher risk and had a higher
historical loss ratio assigned to it. Partly offsetting these decreases was an increase in the allowance for loan losses for the
commercial real estate portfolios due to a higher average loan balance. The levels of delinquencies and losses in 2011 declined
from a year ago. ASB’s 2011 provision for loan losses was $15.0 million, or a decrease of $5.9 million from the prior year’s
provision for loan losses. Although the economy had gradually recovered during the year and businesses stabilized, the housing
market remained stagnant.
Investment activities. Currently, ASB’s investment portfolio consists of mortgage-related securities, stock of the FHLB of
Seattle and U.S. Treasury and federal agency obligations. ASB owns mortgage-related securities issued by the Federal National
Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage
Association (GNMA) and federal agency obligations. The weighted-average yield on investments during 2014, 2013 and 2012
was 1.91%, 2.01% and 1.99%, respectively. ASB did not maintain a portfolio of securities held for trading during 2014, 2013
and 2012.
As of December 31, 2014, 2013 and 2012, ASB’s stock in FHLB of Seattle amounted to $69 million, $93 million and
$96 million, respectively. The amount that ASB is required to invest in FHLB of Seattle stock is determined by FHLB
requirements and ASB’s investment is in excess of that requirement. Since the third quarter of 2012, the FHLB of Seattle was
granted authority to repurchase excess stock from its members. ASB’s pro-rata share of the repurchase amount in 2014, 2013
and 2012 was $23 million, $3 million and $2 million, respectively. See “Stock in FHLB of Seattle ” in HEI’s MD&A. Also, see
“Regulation–Federal Home Loan Bank System” below.
ASB does not have any exposure to securities backed by subprime mortgages. See “Investment securities” in Note 5 of the
Consolidated Financial Statements for a discussion of other-than-temporarily impaired securities.
The following table summarizes the current face amount of ASB’s investment portfolio (excluding stock of the FHLB of
Seattle, which has no contractual maturity), as of December 31, 2014, based upon contractually scheduled principal payments
and expected prepayments allocated to the indicated maturity categories:
(dollars in millions)
U.S. Treasury and federal agency obligations
Mortgage-related securities - FNMA, FHLMC and GNMA
Weighted average yield 2
In 1 year
or less
After 1 year
through 5
years
After 5 years
through 10
years
After
10 years
$
26
87
$ 113
2.09%
$
$
44
205
249
$
$
41
106
147
$
$
8
27
35
$
$
2.15%
2.36%
2.30%
Total
119
425
544
1 As of December 31, 2014, no investment exceeded 10% of stockholder's equity.
2 There are no tax exempt obligations.
Deposits and other sources of funds.
General. Deposits traditionally have been the principal source of ASB’s funds for use in lending, meeting liquidity
requirements and making investments. ASB also derives funds from the receipt of interest and principal on outstanding loans
receivable and mortgage-related securities, borrowings from the FHLB of Seattle, securities sold under agreements to
repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit
flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities. Advances from the
21
FHLB and securities sold under agreements to repurchase continue to be a source of funds, but they are a higher cost source
than deposits.
Deposits. ASB’s deposits are obtained primarily from residents of Hawaii. Net deposit inflow or outflow, measured as the
year-over-year difference in year-end deposits, was an inflow of $251 million in 2014, compared to an inflow of $143 million in
2013 and $160 million in 2012.
The following table presents the average deposits and average rates by type of deposit. Average balances have been
calculated using the average daily balances.
Years ended December 31
(dollars in thousands)
Interest-bearing deposit liabilities
2014
% of
total
deposits
Average
balance
Weighted
average
rate %
Average
balance
2013
% of
total
deposits
Weighted
average
rate %
Average
balance
2012
% of
total
deposits
Weighted
average
rate %
$ 1,879,373
58.3%
0.06% $ 1,805,363
58.1%
0.06% $ 1,727,754
56.5%
0.07%
738,651
171,889
434,934
22.9
5.3
13.5
0.02
0.12
0.83
665,941
182,343
454,021
21.4
5.9
14.6
0.02
0.13
0.82
612,629
202,539
517,752
20.0
6.6
16.9
0.02
0.16
0.94
$ 3,224,847
100.0%
0.16% $ 3,107,668
100.0%
0.16% $ 3,060,674
100.0%
0.21%
Savings
Checking
Money market
Certificate
Total interest-bearing
deposit liabilities
Total noninterest-bearing
demand deposit liabilities
Total deposit liabilities
$ 4,510,811
1,285,964
1,179,559
$ 4,287,227
1,060,121
$ 4,120,795
The following table presents the amount of time certificates of deposit of $100,000 or more, segregated by time remaining
until maturity:
(in thousands)
Three months or less
Greater than three months through six months
Greater than six months through twelve months
Greater than twelve months
$
Amount
18,819
12,996
26,045
62,027
$
119,887
Deposit-insurance premiums and regulatory developments. For a discussion of changes to the deposit insurance
system, premiums and Financing Corporation (FICO) assessments, see “Regulation–Deposit insurance coverage” below.
Other borrowings. See “Other borrowings” in Note 5 of the Consolidated Financial Statements. ASB may obtain advances
from the FHLB of Seattle provided that certain standards related to creditworthiness have been met. Advances are collateralized
by a blanket pledge of certain notes held by ASB and the mortgages securing them. To the extent that advances exceed the
amount of mortgage loan collateral pledged to the FHLB of Seattle, the excess must be covered by qualified marketable
securities held under the control of and at the FHLB of Seattle or at an approved third-party custodian. FHLB advances
generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort
to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from
time to time by the FHLB of Seattle.
The increase in other borrowings in 2014 compared to 2013 was due to an increase in repurchase agreements with the State
of Hawaii. The increase in other borrowings in 2013 compared to 2012 was due to $50 million of additional FHLB advances
taken out in 2013. The decrease in other borrowings in 2012 compared to 2011 was due to a decrease in retail repurchase
agreements.
Competition. See “Bank—Executive overview and strategy” and “Bank—Certain factors that may affect future results and
financial condition—Competition” in HEI’s MD&A.
The banking industry in Hawaii is highly competitive. At December 31, 2014, there were 9 financial institutions insured by
the FDIC headquartered in the State of Hawaii. While ASB is one of the largest financial institutions in Hawaii, based on total
assets, ASB faces vigorous competition for deposits and loans from two larger banking institutions based in Hawaii and from
smaller institutions that heavily promote their services in niche areas, such as providing financial services to small and medium-
sized businesses, as well as national financial services organizations. Competition for loans and deposits comes primarily from
other savings institutions, commercial banks, credit unions, securities brokerage firms, money market and mutual funds and
22
other investment alternatives. ASB faces additional competition in seeking deposit funds from various types of corporate and
government borrowers, including insurance companies. Competition for origination of mortgage loans comes primarily from
mortgage banking and brokerage firms, commercial banks, other savings institutions, insurance companies and real estate
investment trusts.
To remain competitive and continue building core franchise value, ASB continues to develop and introduce new products
and services to meet the needs of its consumer and commercial customers. Additionally, the banking industry is constantly
changing and ASB is making the investment in its people and technology necessary to adapt and remain competitive. ASB
competes for deposits primarily on the basis of the variety of types of savings and checking accounts it offers at competitive
rates, the quality of the services it provides, the convenience of its branch locations and business hours, and convenient
automated teller machines. The primary factors in ASB’s competition for mortgage and other loans are the competitive interest
rates and loan origination fees it charges, the wide variety of loan programs it offers and the quality and efficiency of the
services it provides to borrowers and the business community.
Regulation. ASB, a federally chartered savings bank, and its holding companies are subject to the regulatory supervision of the
OCC and FRB, respectively, and in certain respects, the FDIC. See “HEI–Regulation” above and “Bank–Certain factors that
may affect future results and financial condition–Regulation” in HEI’s MD&A. In addition, ASB must comply with FRB
reserve requirements.
Deposit insurance coverage. The Federal Deposit Insurance Act, as amended, and regulations promulgated by the FDIC,
govern insurance coverage of deposit accounts. In July 2010, the Dodd-Frank Act permanently raised the current standard
maximum deposit insurance amount to $250,000. Generally, the amount of all deposits held by a depositor in the same capacity
(even if held in separate accounts) is aggregated for purposes of applying the insurance limit.
See “Federal Deposit Insurance Corporation assessment” in Note 5 of the Consolidated Financial Statements for a
discussion of FDIC deposit insurance assessment rates, the prepayment of estimated assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012 and changes to the assessment rates and base. FICO will continue to impose an assessment
on average total assets minus average tangible equity to service the interest on FICO bond obligations. As of December 31,
2014, ASB’s annual FICO assessment was 0.62 cents per $100 of average total assets minus average tangible equity.
Federal thrift charter. See “Bank–Certain factors that may affect future results and financial condition—Regulation—
Unitary savings and loan holding company” in HEI’s MD&A, including the discussion of previously proposed legislation that
would abolish the charter.
Recent legislation and issuances. See “Bank–Legislation and regulation” in HEI’s MD&A.
Capital requirements. The OCC has set three capital standards for financial institutions. As of December 31, 2014, ASB
was in compliance with all of the minimum standards with a core capital ratio of 8.9% (compared to a 4.0% requirement), a
tangible capital ratio of 8.9% (compared to a 1.5% requirement) and total risk-based capital ratio of 12.3% (based on risk-based
capital of $539.6 million, $190.0 million in excess of the 8.0% requirement).
The OCC requires that financial institutions with a composite rating of “1” under the Uniform Financial Institution Rating
System (i.e., CAMELS rating system) must maintain core capital in an amount equal to at least 3% of adjusted total assets. All
other institutions must maintain a minimum core capital of 4% of adjusted total assets, and higher capital ratios may be required
if warranted by particular circumstances. As of December 31, 2014, ASB met the applicable minimum core capital requirement.
See “Bank-Legislation and regulation” in HEI’s MD&A for the final capital rules under the Basel III regulatory capital
framework.
Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI
and its direct and indirect subsidiaries. For example, ASB is prohibited from making any loan or other extension of credit to an
entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the FRB has determined to be
permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between
ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any
investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB.
Financial Derivatives and Interest Rate Risk. ASB is subject to OCC rules relating to derivatives activities, such as interest
rate swaps, interest rate lock commitments and forward commitments. See “Derivative financial instruments” in Note 5 of the
Consolidated Financial Statements for a description of interest rate lock commitments and forward commitments used by ASB.
Currently ASB does not use interest rate swaps to manage interest rate risk (IRR), but may do so in the future. Generally
speaking, the OCC rules permit financial institutions to engage in transactions involving financial derivatives to the extent these
23
transactions are otherwise authorized under applicable law and are safe and sound. The rules require ASB to have certain
internal procedures for handling financial derivative transactions, including involvement of the ASB Board of Directors.
With the transfer of the regulatory jurisdiction from the OTS to the OCC, ASB has adopted terminology and IRR
assessment, measurement and management practices consistent with OCC guidelines. Management believes ASB’s IRR
processes are aligned with the Interagency Advisory on Interest Rate Risk Management and appropriate with earnings and
capital levels, balance sheet complexity, business model and risk tolerance.
Liquidity. OCC regulations require ASB to maintain sufficient liquidity to ensure safe and sound operations. ASB’s
principal sources of liquidity are customer deposits, borrowings, the maturity and repayment of portfolio loans and securities
and the sale of loans into secondary market channels. ASB’s principal sources of borrowings are advances from the FHLB of
Seattle and securities sold under agreements to repurchase from broker/dealers. ASB is approved by the FHLB of Seattle to
borrow an amount of up to 35% of assets to the extent it provides qualifying collateral and holds sufficient FHLB of Seattle
stock. As of December 31, 2014, ASB’s unused FHLB of Seattle borrowing capacity was approximately $1.2 billion. ASB
utilizes growth in deposits, advances from the FHLB of Seattle and securities sold under agreements to repurchase to fund
maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and make investments. As of
December 31, 2014, ASB had loan commitments, undisbursed loan funds and unused lines and letters of credit of $1.7 billion.
Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at
satisfactory levels.
Supervision. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), the federal
banking agencies promulgated regulations which apply to the operations of ASB and its holding companies. Such regulations
address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with
affiliates and loans to insiders.
Prompt corrective action. The FDICIA establishes a statutory framework that is triggered by the capital level of a financial
institution and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OCC
rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the
categories of “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically
undercapitalized.”
A financial institution that is “undercapitalized” or “significantly undercapitalized” is subject to additional mandatory
supervisory actions and a number of discretionary actions if the OCC determines that any of the actions is necessary to resolve
the problems of the association at the least possible long-term cost to the Deposit Insurance Fund. A financial institution that is
“critically undercapitalized” must be placed in conservatorship or receivership within 90 days, unless the OCC and the FDIC
concur that other action would be more appropriate. As of December 31, 2014, ASB was “well-capitalized.”
Interest rates. FDIC regulations restrict the ability of financial institutions that are undercapitalized to offer interest rates
on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 2014, ASB was
“well capitalized” and thus not subject to these interest rate restrictions.
Qualified thrift lender test. In order to satisfy the QTL test, ASB must maintain 65% of its assets in “qualified thrift
investments” on a monthly average basis in 9 out of the previous 12 months. Failure to satisfy the QTL test would subject ASB
to various penalties, including limitations on its activities, and would also bring into operation restrictions on the activities that
may be engaged in by HEI, ASB Hawaii and their other subsidiaries, which could effectively result in the required divestiture
of ASB. At all times during 2014, ASB was in compliance with the QTL test. See “HEI Consolidated–Regulation.”
Federal Home Loan Bank System. ASB is a member of the FHLB System, which consists of 12 regional FHLBs, and
ASB’s regional bank is the FHLB of Seattle. The FHLB System provides a central credit facility for member institutions.
Historically, the FHLBs have served as the central liquidity facilities for savings associations and sources of long-term funds for
financing housing. At such time as an advance is made to ASB or renewed, it must be collateralized by collateral from one of
the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing
a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof;
(3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a
security interest can be perfected. The aggregate amount of outstanding advances collateralized by such other real estate-related
collateral may not exceed 30% of ASB’s capital.
As mandated by the Gramm Act, the Federal Housing Finance Board (Board) regulations require each FHLB to maintain a
minimum total capital leverage ratio of 5% of total assets and include risk-based capital standards requiring each FHLB to
maintain permanent capital in an amount sufficient to meet credit risk and market risk. In June 2001, the FHLB of Seattle
formulated a capital plan to meet these new minimum capital standards, which plan was approved by the Board. The capital
plan requires ASB to own capital stock in the FHLB of Seattle in an amount equal to the total of 4% of the FHLB of Seattle’s
24
advances to ASB plus the greater of (i) 5% of the outstanding balance of loans sold to the FHLB of Seattle by ASB or (ii) 0.5%
of ASB’s mortgage loans and pass through securities. As of December 31, 2014, ASB was required under the capital plan to
own capital stock in the FHLB of Seattle in the amount of $14 million and owned capital stock in the amount of $69 million, or
$55 million in excess of the requirement. Under the capital plan, stock in the FHLB of Seattle can be required to be redeemed at
the option of ASB, but the FHLB of Seattle may require up to a 5-year notice of redemption. This 5-year notice period has an
adverse but immaterial effect on ASB’s liquidity. See “Stock in FHLB of Seattle” in HEI’s MD&A section for recent
developments regarding the FHLB of Seattle.
Community Reinvestment. The Community Reinvestment Act (CRA) requires financial institutions to help meet the credit
needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The
OCC will consider ASB’s CRA record in evaluating an application for a new deposit facility, including the establishment of a
branch, the relocation of a branch or office, or the acquisition of an interest in another bank. ASB currently holds an
“outstanding” CRA rating.
Other laws. ASB is subject to federal and state consumer protection laws which affect deposit and lending activities, such
as the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures
Act, the Home Mortgage Disclosure Act and several federal and state financial privacy acts intended to protect consumers’
personal information and prevent identity theft, such as the Gramm Act and the Fair and Accurate Transactions Act. ASB is also
subject to federal laws regulating certain of its lending practices, such as the Flood Disaster Protection Act, and laws requiring
reports to regulators of certain customer transactions, such as the Currency and Foreign Transactions Reporting Act and the
International Money Laundering Abatement and Anti-Terrorist Financing Act. ASB’s relationship with LPL Financial LLP is
also governed by regulations adopted by the FRB under the Gramm Act, which regulate “networking” relationships under
which a financial institution refers customers to a broker-dealer for securities services and employees of the financial institution
are permitted to receive a nominal fee for the referrals. These laws may provide for substantial penalties in the event of
noncompliance. ASB believes that it currently is in compliance with these laws and regulations in all material respects.
Proposed legislation. See the discussion of proposed legislation in “Bank–Legislation and regulation” in HEI’s MD&A.
Environmental regulation. ASB may be subject to the provisions of Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), Hawaii Environmental Response Law (ERL) and regulations promulgated
thereunder, which impose liability for environmental cleanup costs on certain categories of responsible parties. CERCLA and
ERL exempt persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not
participate in the management of the facility. Although there may be some risk of liability for ASB for environmental cleanup
costs in the event ASB forecloses on, and becomes the owner of, property with environmental problems, the Company believes
the risk is not as great for ASB as it may be for other depository institutions that have a larger portfolio of commercial loans.
Additional information. For additional information about ASB, see the sections under “Bank” in HEI’s MD&A, HEI’s
“Quantitative and Qualitative Disclosures about Market Risk” and Note 5 of the Consolidated Financial Statements.
Properties. ASB owns or leases several office buildings in downtown Honolulu and owns land and an operations center in the
Mililani Technology Park on the island of Oahu.
The following table sets forth the number of bank branches owned and leased by ASB by island:
December 31, 2014
Oahu
Maui
Hawaii
Kauai
Molokai
Number of branches
Leased
Owned
Total
7
3
3
2
—
15
32
4
2
2
1
41
39
7
5
4
1
56
As of December 31, 2014, the net book value (NBV) of branches and office facilities was $71 million ($64 million NBV of
the land and improvements for the branches and office facilities owned by ASB and $7 million represents the NBV of ASB’s
leasehold improvements) compared to the NBV of branches and office facilities of $52 million ($45 million NBV of the land
and improvements for the branches and office facilities owned by ASB and $7 million represents the NBV of ASB’s leasehold
improvements) as of December 31, 2013. The increase in the NBV of the land and improvements in 2014 over 2013 was due to
the purchase of real property to develop a new corporate campus and branch renovations. The leases expire on various dates
through February 2033, but many of the leases have extension provisions.
As of December 31, 2014, ASB owned 116 automated teller machines.
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ITEM 1A.
RISK FACTORS
The businesses of HEI and its subsidiaries involve numerous risks which, if realized, could have a material and adverse
effect on the Company’s financial statements. In addition, there are numerous risks relating to the Merger and Spin-Off. For
additional information for certain risk factors enumerated below and other risks of the Company and its operations, see
“Forward-Looking Statements” above and HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk”,
the Notes to the Consolidated Financial Statements, Hawaiian Electric’s MD&A, Hawaiian Electric’s “Quantitative and
Qualitative Disclosures About Market Risk.”
Risk Factors Relating to the Merger.
Failure to complete the Merger could negatively impact the stock price and the future business and financial results of
HEI. If the Merger is not completed, the ongoing business of HEI may be adversely affected and HEI will be subject to several
risks, including the following:
•
•
•
having to pay certain costs relating to the proposed Merger and the Spin-Off, such as legal, accounting, financial
advisor, filing, printing and mailing fees;
focusing HEI’s management on the Merger, which could lead to the disruption of HEI’s ongoing business or
inconsistencies in its services, standards, controls, procedures and policies, any of which could adversely affect the
ability of HEI to maintain relationships with customers, regulators, vendors and employees, or could otherwise
adversely affect the business and financial results of HEI, without realizing any of the benefits of having the Merger
completed; and
focusing HEI’s management on the Merger instead of on pursuing other opportunities that could be beneficial to HEI,
without realizing any of the benefits of having the Merger completed.
In addition to the above risks, HEI may be required, under certain circumstances, to pay to NEE a termination fee of $90
million, plus NEE’s expenses up to $5 million.
If the Merger is not completed, HEI cannot assure its shareholders that these risks will not materialize and will not
materially affect its business, financial results and stock price.
The pendency of the Merger could adversely affect the business and operations of HEI. In connection with the pending
Merger, some customers or vendors of HEI’s utilities may delay or defer decisions, which could negatively impact the
revenues, earnings, cash flows and expenses of HEI, regardless of whether the Merger is completed. Similarly, current and
prospective employees of HEI and its utilities may experience uncertainty about their future roles following the Merger, which
may materially adversely affect the ability of HEI and its utilities to attract and retain key personnel during the pendency of the
Merger. In addition, due to operating covenants in the Merger Agreement, HEI and its utilities may be unable, during the
pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant
financing or other specified transactions or pursue actions that are not in the ordinary course of business, even if such actions
would prove beneficial.
If the Merger is completed, NEE may be unable to successfully integrate HEI’s business. NEE and HEI currently operate
as independent public companies. After the Merger, NEE will be required to devote significant management attention and
resources to integrating HEI’s business. Potential difficulties NEE may encounter in the integration process include the
following:
•
•
•
•
•
the complexities associated with integrating HEI and its utility business, while at the same time continuing to provide
consistent, high quality services;
the additional complexities of integrating a company with different core services, markets and customers;
the inability to retain key employees;
unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Merger; and
performance shortfalls as a result of the diversion of management’s attention caused by completing the Merger and
integrating HEI’s utility business.
For these reasons, the integration process following the Merger could result in the distraction of NEE’s management, the
disruption of NEE’s ongoing business or inconsistencies in its services, standards, controls, procedures and policies, any of
which could adversely affect the ability of NEE to maintain relationships with customers, vendors and employees or could
otherwise adversely affect the business and financial results of NEE.
HEI may be materially adversely affected by negative publicity related to the proposed Merger and in connection with
other matters. From time to time, political and public sentiment in connection with the proposed Merger and in connection
with other matters may result in a significant amount of adverse press coverage and other adverse public statements affecting
NEE and HEI. Adverse press coverage and other adverse statements, whether or not driven by political or public sentiment,
26
may also result in investigations by regulators, legislators and law enforcement officials or in legal claims. Responding to these
investigations and lawsuits, regardless of the ultimate outcome of the proceeding, can divert the time and effort of senior
management from the management of HEI’s businesses.
Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time consuming and
expensive and, regardless of the factual basis for the assertions being made, can have a negative impact on HEI’s reputation, on
the morale and performance of its employees and on its relationships with its regulators. It may also have a negative impact on
HEI’s ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative
publicity, and the demands of responding to and addressing it, may have a material adverse effect on HEI’s business, financial
condition, results of operations and prospects.
Pending litigation against HEI and NEE could result in an injunction preventing completion of the merger, the payment of
damages in the event the merger is completed and/or may adversely affect the combined company's business, financial
condition or results of operations following the Merger.
Holding Company and Company-Wide Risks.
HEI is a holding company that derives its income from its operating subsidiaries and depends on the ability of those
subsidiaries to pay dividends or make other distributions to HEI and on its own ability to raise capital. HEI is a legal entity
separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, HEI’s cash
flows and consequent ability to service its obligations and pay dividends on its common stock is dependent upon its receipt of
dividends or other distributions from its operating subsidiaries and its ability to issue common stock or other equity securities
and to incur additional debt. The ability of HEI’s subsidiaries to pay dividends or make other distributions to HEI, in turn, is
subject to the risks associated with their operations and to contractual and regulatory restrictions, including:
•
•
•
•
•
the provisions of an HEI agreement with the PUC, which could limit the ability of HEI’s principal electric public
utility subsidiary, Hawaiian Electric, to pay dividends to HEI in the event that the consolidated common stock equity
of the Utilities falls below 35% of total capitalization of the electric utilities;
the provisions of an HEI agreement entered into with federal bank regulators in connection with its acquisition of its
bank subsidiary, ASB, which require HEI to contribute additional capital to ASB (up to a maximum amount of
additional capital of $28.3 million as of December 31, 2014) upon request of the regulators in order to maintain ASB’s
regulatory capital at the level required by regulation;
the minimum capital and capital distribution regulations of the OCC that are applicable to ASB and capital regulations
that become applicable to HEI and ASB Hawaii;
the receipt of a letter of non-objection or prior approval from the OCC and FRB to the payment of any dividend ASB
proposes to declare and pay to ASB Hawaii and HEI; and
the provisions of preferred stock resolutions and debt instruments of HEI and its subsidiaries.
The Company is subject to risks associated with the Hawaii economy (in the aggregate and on an individual island basis),
volatile U.S. capital markets and changes in the interest rate and credit market environment that have and/or could result in
higher retirement benefit plan funding requirements, declines in electric utility KWH sales, declines in ASB’s interest rate
margins and investment values, higher delinquencies and charge-offs in ASB’s loan portfolio and restrictions on the ability of
HEI or its subsidiaries to borrow money or issue securities. The two largest components of Hawaii’s economy are tourism and
the federal government (including the military). Because the core businesses of HEI’s subsidiaries are providing local public
electric utility services (through Hawaiian Electric and its subsidiaries) and banking services (through ASB) in Hawaii, the
Company’s operating results are significantly influenced by Hawaii’s economy, which in turn is influenced by economic
conditions in the mainland U.S. (particularly California) and Asia (particularly Japan) as a result of the impact of those
conditions on tourism, by the impact of interest rates on the construction and real estate industries and by the impact of world
conditions (e.g., U.S. withdrawal of troops from Afghanistan) on federal government spending in Hawaii. For example, the
turmoil in the financial markets and declines in the national and global economies had a negative effect on the Hawaii economy
in 2009. In 2009, declines in the Hawaii, U.S. and Asian economies in part led to declines in KWH sales, an increase in
uncollected billings of the Utilities, higher delinquencies in ASB’s loan portfolio and other adverse effects on HEI’s businesses.
If Fitch, Moody's or S&P were to downgrade HEI’s or Hawaiian Electric’s long-term debt ratings because of past adverse
effects, or if future events were to adversely affect the availability of capital to the Company, HEI’s and Hawaiian Electric’s
ability to borrow and raise capital could be constrained and their future borrowing costs would likely increase with resulting
reductions in HEI’s consolidated net income in future periods. Further, if HEI’s or Hawaiian Electric’s commercial paper
ratings were to be downgraded, HEI and Hawaiian Electric might not be able to sell commercial paper and might be required to
draw on more expensive bank lines of credit or to defer capital or other expenditures.
Changes in the U.S. capital markets can also have significant effects on the Company. For example, pension funding
requirements are affected by the market performance of the assets in the master pension trust maintained for pension plans, and
27
by the discount rate used to estimate the service and interest cost components of net periodic pension cost and value
obligations. The Utilities’ pension tracking mechanisms help moderate pension expense; however, the significant decline in
2008 in the value of the Company’s defined benefit pension plan assets resulted in a substantial gap between the projected
benefit obligations under the plans and the value of plan assets, resulting in increases in funding requirements. The increases
have moderated in recent years as investment performance has improved.
Because the earnings of ASB depend primarily on net interest income, interest rate risk is a significant risk of ASB’s
operations. HEI and the Utilities are also exposed to interest rate risk primarily due to their periodic borrowing requirements,
the discount rate used to determine pension funding requirements and the possible effect of interest rates on the electric utilities’
rates of return. Interest rates are sensitive to many factors, including general economic conditions and the policies of
government and regulatory authorities. HEI cannot predict future changes in interest rates, nor be certain that interest rate risk
management strategies it or its subsidiaries have implemented will be successful in managing interest rate risk.
Interest rate risk also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and
decreases in prevailing interest rates generally translate into decreases and increases in the fair values of those instruments,
respectively. Disruptions in the credit markets, a liquidity crisis in the banking industry or increased levels of residential
mortgage delinquencies and defaults may result in decreases in the fair value of ASB’s investment securities and an impairment
that is other-than-temporary, requiring ASB to write down its investment securities. As of December 31, 2014, all of ASB’s
investment securities were securities and obligations issued by a federal agency or government sponsored entity that have an
implicit guarantee from the U.S. government.
HEI and Hawaiian Electric and their subsidiaries may incur higher retirement benefits expenses and have and will likely
continue to recognize substantial liabilities for retirement benefits. Retirement benefits expenses and cash funding
requirements could increase in future years depending on numerous factors, including the performance of the U.S. equity
markets, trends in interest rates and health care costs, plan amendments, new laws relating to pension funding and changes in
accounting principles. For the Utilities, however, retirement benefits expenses, as adjusted by the pension and postretirement
benefits other than pensions (OPEB) tracking mechanisms, have been an allowable expense for rate-making purposes.
The Company is subject to the risks associated with the geographic concentration of its businesses and current lack of
interconnections that could result in service interruptions at the Utilities or higher default rates on loans held by ASB. The
business of the Utilities is concentrated on the individual islands they serve in the State of Hawaii. Their operations are more
vulnerable to service interruptions than are many U.S. mainland utilities because none of the systems of the Utilities are
interconnected with the systems on the other islands they serve. Because of this lack of interconnections, it is necessary to
maintain higher generation reserve margins than are typical for U.S. mainland utilities to help ensure reliable service. Service
interruptions, including in particular extended interruptions that could result from a natural disaster or terrorist activity, could
adversely impact the KWH sales of some or all of the Utilities.
Substantially all of ASB’s consumer loan customers are Hawaii residents. A significant portion of the commercial loan
customers are located in Hawaii. While a majority of customers are on Oahu, ASB also has customers on the neighbor islands
(whose economies have been weaker than Oahu during the recent economic downturn). Substantially all of the real estate
underlying ASB’s residential and commercial real estate loans are located in Hawaii. These assets may be subject to a greater
risk of default than other comparable assets held by financial institutions with other geographic concentrations in the event of
adverse economic, political or business developments or natural disasters affecting Hawaii and the ability of ASB’s customers
to make payments of principal and interest on their loans.
Increasing competition and technological advances could cause HEI’s businesses to lose customers or render their
operations obsolete. The banking industry in Hawaii, and certain aspects of the electric utility industry, are competitive. The
success of HEI’s subsidiaries in meeting competition and responding to technological advances will continue to have a direct
impact on HEI’s consolidated financial performance. For example:
• ASB, one of the largest financial institutions in the state, is in direct competition for deposits and loans not only with
two larger institutions that have substantial capital, technology and marketing resources, but also with smaller Hawaii
institutions and other U.S. institutions, including credit unions, mutual funds, mortgage brokers, finance companies
and investment banking firms. Larger financial institutions may have greater access to capital at lower costs, which
could impair ASB’s ability to compete effectively. Significant advances in technology could render the operations of
ASB less competitive or obsolete.
• The Utilities face competition from IPPs; customer self-generation, with or without cogeneration; customer energy
storage; and the potential formation of community-based, cooperative ownership structures for electrical service on
the neighbor islands. With the exception of certain identified projects, the Utilities are required to use competitive
bidding to acquire a future generation resource unless the PUC finds competitive bidding to be unsuitable. The PUC
set policies for distributed generation (DG) interconnection agreements and standby rates, and established conditions
28
under which electric utilities can provide DG services on customer-owned sites as a regulated service. The results of
competitive bidding, competition from IPPs, customer self-generation, and potential cooperative ownership structures
for electric utility service, and the rate at which technological developments facilitating nonutility generation of
electricity and customer energy storage occur may adversely affect the Utilities and the results of their operations.
• New technological developments, such as the commercial development of energy storage and microgrids, may render
the operations of the Utilities less competitive or outdated.
The Company may be subject to information technology system failures, network disruptions and breaches in data security
that could adversely affect its businesses and reputation. The Company is subject to cyber security risks and the potential for
cyber incidents, including potential incidents at ASB branches and at the the Utilities' plants and the related electricity
transmission and distribution infrastructure, and incidents at data processing centers they use, to the extent not prevented by
intrusion detection and prevention systems, anti-virus software, firewalls and other general information technology controls.
ASB and the Utilities are highly dependent on their ability to process, on a daily basis, a large number of transactions. ASB and
the Utilities rely heavily on numerous data processing systems. If any of these systems fails to operate properly or becomes
disabled even for a brief period of time, the Company could suffer financial loss, business disruptions, liability to customers,
regulatory intervention or damage to its reputation. The Utilities and ASB have disaster recovery plans in place to protect their
businesses against natural disasters, security breaches, military or terrorist actions, power or communication failures or similar
events. The disaster recovery plans, however, may not be successful in preventing the loss of customer data, service
interruptions, disruptions to operations or damage to important facilities.
HEI’s businesses could suffer losses that are uninsured due to a lack of affordable insurance coverage, unavailability of
insurance coverage or limitations on the insurance coverage the Company does have. In the ordinary course of business, HEI
and its subsidiaries purchase insurance coverages (e.g., property and liability coverages) to protect against loss of, or damage
to, their properties and against claims made by third parties and employees for property damage or personal injuries. However,
the protection provided by such insurance is limited in significant respects and, in some instances, there is no coverage. Certain
of the insurance has substantial deductibles or has limits on the maximum amounts that may be recovered. For example, the
Utilities’ overhead and underground transmission and distribution systems (with the exception of substation buildings and
contents) have a replacement value roughly estimated at $6 billion and are largely not insured against loss or damage because
the amount of transmission and distribution system insurance available is limited and the premiums are cost prohibitive.
Similarly, the Utilities have no business interruption insurance as the premiums for such insurance would be cost prohibitive,
particularly since the Utilities are not interconnected to other systems. If a hurricane or other uninsured catastrophic natural
disaster were to occur, and if the PUC were not to allow the affected Utilities to recover from ratepayers restoration costs and
revenues lost from business interruption, the lost revenues and repair expenses could result in a significant decrease in HEI’s
consolidated net income or in significant net losses for the affected periods.
ASB generally does not obtain credit enhancements, such as mortgagor bankruptcy insurance, but does require standard
hazard and hurricane insurance and may require flood insurance for certain properties. ASB is subject to the risks of borrower
defaults and bankruptcies, special hazard losses not covered by the required insurance and the insurance company’s inability to
pay claims on existing policies.
Increased federal and state environmental regulation will require an increasing commitment of resources and funds and
could result in construction delays or penalties and fines for non-compliance. HEI and its subsidiaries are subject to federal,
state and local environmental laws and regulations relating to air quality, water quality, hazardous substances, waste
management, natural resources and health and safety, which regulate, among other matters, the operation of existing facilities,
the construction and operation of new facilities and the proper cleanup and disposal of hazardous and toxic wastes and
substances. HEI or its subsidiaries are currently involved in investigatory or remedial actions at current, former or third-party
sites and there is no assurance that the Company will not incur material costs relating to these sites. In addition, compliance
with these legal requirements requires the Utilities to commit significant resources and funds toward, among other things,
environmental monitoring, installation of pollution control equipment and payment of emission fees. These laws and
regulations, among other things, require that certain environmental permits be obtained in order to construct or operate certain
facilities, and obtaining such permits can entail significant expense and cause substantial construction delays. Also, these laws
and regulations may be amended from time to time, including amendments that increase the burden and expense of compliance.
For example, emission and/or discharge limits may be tightened, more extensive permitting requirements may be imposed and
additional substances may become regulated. In addition, significant regulatory uncertainty exists regarding the impact of
federal or state greenhouse gas (GHG) emission limits and reductions.
If HEI or its subsidiaries fail to comply with environmental laws and regulations, even if caused by factors beyond their
control, that failure may result in civil or criminal penalties and fines or the cessation of operations.
29
Adverse tax rulings or developments could result in significant increases in tax payments and/or expense. Governmental
taxing authorities could challenge a tax return position taken by HEI or its subsidiaries and, if the taxing authorities prevail,
HEI’s consolidated tax payments and/or expense, including applicable penalties and interest, could increase significantly.
The Company could be subject to the risk of uninsured losses in excess of its accruals for litigation matters. HEI and its
subsidiaries are involved in routine litigation in the ordinary course of their businesses, most of which is covered by insurance
(subject to policy limits and deductibles). However, other litigation may arise that is not routine (such as the litigation related to
the proposed Merger) or involves claims that may not be covered by insurance. Because of the uncertainties associated with
litigation, there is a risk that litigation against HEI or its subsidiaries, even if vigorously defended, could result in costs of
defense and judgment or settlement amounts not covered by insurance and in excess of reserves established in HEI’s
consolidated financial statements.
Changes in accounting principles and estimates could affect the reported amounts of the Company’s assets and liabilities
or revenues and expenses. HEI’s consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the U.S. Changes in accounting principles (including the possible adoption of International Financial
Reporting Standards or new U.S. accounting standards), or changes in the Company’s application of existing accounting
principles, could materially affect the financial statement presentation of HEI’s or the Utilities’ consolidated results of
operations and/or financial condition. Further, in preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change include the amounts reported for pension and other
postretirement benefit obligations; contingencies and litigation; income taxes; property, plant and equipment; regulatory assets
and liabilities; electric utility revenues; allowance for loan losses; nonperforming loans; troubled debt restructurings; and fair
value.
The Utilities' financial statements reflect assets and costs based on cost-based rate-making regulations. Continued
accounting in this manner requires that certain criteria relating to the recoverability of such costs through rates be met. If events
or circumstances should change so that the criteria are no longer satisfied, the Utilities’ expect that their regulatory assets
(amounting to $905 million as of December 31, 2014), net of regulatory liabilities (amounting to $345 million as of
December 31, 2014), would be charged to the statement of income in the period of discontinuance.
Changes in accounting principles can also impact HEI’s consolidated financial statements. For example, if management
determines that a PPA requires the consolidation of the IPP in the Consolidated Financial Statements, the consolidation could
have a material effect on Hawaiian Electric’s and HEI’s consolidated financial statements, including the recognition of a
significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity,
the potential recognition of such losses. Also, if management determines that a PPA requires the classification of the agreement
as a capital lease, a material effect on HEI’s consolidated balance sheet may result, including the recognition of significant
capital assets and lease obligations.
A proposed standard on accounting for expected credit losses was issued by the FASB which would replace existing
impairment models, including replacing an “incurred loss” model for loans with a “current expected credit loss” model. There
are a number of questions and issues around the expected credit loss model. ASB cannot predict whether or when a final
standard will be issued, when it will be effective or what it its final provisions will be. It is possible that the final standard could
have a material adverse impact on the bank’s results of operations once it is issued and becomes effective.
A standard on accounting for revenues from contracts with customers was issued by the FASB in May 2014. The Company
plans to adopt this standard in the first quarter of 2017, but has not determined the impact of adoption on its financial
statements.
Electric Utility Risks.
Actions of the PUC are outside the control of the Utilities and could result in inadequate or untimely rate increases, in rate
reductions or refunds or in unanticipated delays, expenses or writedowns in connection with the construction of new projects.
The rates the Utilities are allowed to charge for their services and the timeliness of permitted rate increases are among the most
important items influencing the Utilities’ results of operations, financial condition and liquidity. The PUC has broad discretion
over the rates that the Utilities charge their customers. As part of the decoupling mechanism that the Utilities have
implemented, each of the Utilities will file a rate case once every three years. Any adverse decision by the PUC concerning the
level or method of determining electric utility rates, the items and amounts that may be included in rate base, the returns on
equity or rate base found to be reasonable, the potential consequences of exceeding or not meeting such returns, or any
prolonged delay in rendering a decision in a rate or other proceeding could have a material adverse effect on Hawaiian
Electric’s consolidated results of operations, financial condition and liquidity.
30
To improve the timing and certainty of the recovery of their costs, the Utilities have proposed and received approval of
various cost recovery mechanisms including an ECAC and pension and OPEB tracking mechanisms, as well as a decoupling
mechanism, a PPAC, and a renewable energy infrastructure program (REIP) surcharge. A change in, or the elimination of, any
of these cost recovery mechanisms, including in the current proceeding in which the PUC is examining the decoupling
mechanism, could have a material adverse effect on the Utilities.
The Utilities could be required to refund to their customers, with interest, revenues that have been or may be received
under interim rate orders in their rate case proceedings, integrated resource plan cost recovery dockets and other proceedings, if
and to the extent they exceed the amounts allowed in final orders.
Many public utility projects require PUC approval and various permits (e.g., environmental and land use permits) from
other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits, or any
adverse decision or policy made or adopted, or any prolonged delay in rendering a decision, by an agency with respect to such
approvals and permits, can result in significantly increased project costs or even cancellation of projects. In the event a project
does not proceed, or if the PUC disallows cost recovery for all or part of a project, project costs may need to be written off in
amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income. For example, in
January 2013, the Utilities and the Consumer Advocate signed a settlement agreement to write off $40 million of costs in lieu
of conducting PUC-ordered regulatory audits of the CIP CT-1 and the CIS projects.
Energy cost adjustment clauses. The rate schedules of each of the Utilities include ECACs under which electric rates
charged to customers are automatically adjusted for changes in the weighted-average price paid for fuel oil and certain
components of purchased power, and the relative amounts of company-generated power and purchased power.
ECACs are subject to periodic review by the PUC. As part of the review, the Energy Agreement had provided that the PUC
may examine whether there are renewable energy projects from which the Utilities should have, but did not, purchase energy or
whether alternative fuel purchase strategies were appropriately used or not used.
In the most recent rate cases, the PUC allowed the current ECAC to continue. However, in the decoupling reexamination
proceeding, certain parties recommended modifying the ECAC to allow only partial pass-through of fuel costs and eventual
phasing out of the ECAC. The Consumer Advocate stated that there should be no significant change to the existing ECAC
without first undertaking a new regulatory proceeding that would provide time and resources for the careful study of the
potential effects of each ECAC change considered, but that there should be significantly greater ECAC audit and regulatory
review of the Utilities’ incurred fuel costs should be implemented to encourage cost control and to identify and deny recovery
of any imprudently incurred energy costs through the ECAC. The Utilities suggested ways of improving the ECAC but stated
that the partial pass through of fuel costs would not be proper regulatory policy since the Utilities have no control over world
oil markets, that 42 of the 50 states provide dollar-for-dollar pass through of market-driven changes in fuel or purchase power
costs, and that modifying the ECAC to allow only partial pass-through of fuel costs could severely impact the Utilities’ credit
rating. A change in, or the elimination of, the ECAC could have a material adverse effect on the Utilities.
Electric utility operations are significantly influenced by weather conditions. The Utilities’ results of operations can be
affected by the weather. Weather conditions, particularly temperature and humidity, directly influence the demand for
electricity. In addition, severe weather and natural disasters, such as hurricanes, earthquakes, tsunamis and lightning storms,
which may become more severe or frequent as a result of global climate changes, can cause outages and property damage and
require the Utilities to incur significant additional expenses that may not be recoverable.
Electric utility operations depend heavily on third-party suppliers of fuel and purchased power. The Utilities rely on fuel
oil suppliers and shippers and IPPs to deliver fuel oil and power, respectively, in accordance with contractual agreements.
Approximately 69% of the net energy generated or purchased by the Utilities in 2014 was generated from the burning of fossil
fuel oil, and purchases of power by the Utilities provided about 46% of their total net energy generated and purchased for the
same period. Failure or delay by oil suppliers and shippers to provide fuel pursuant to existing contracts, or failure by a major
IPP to deliver the firm capacity anticipated in its PPA, could disrupt the ability of the Utilities to deliver electricity and require
the Utilities to incur additional expenses to meet the needs of their customers that may not be recoverable. In addition, as the
IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units
to ensure the availability of their units. Also, as these contractual agreements end, the Utilities may not be able to purchase fuel
and power on terms equivalent to the current contractual agreements. As the use of biofuels in generating units increases, the
same risks will exist with suppliers of biofuels.
Electric utility generating facilities are subject to operational risks that could result in unscheduled plant outages,
unanticipated and/or increased operation and maintenance expenses and increased power purchase costs. Operation of
electric generating facilities involves certain risks which can adversely affect energy output and efficiency levels. Included
among these risks are facility shutdowns or power interruptions due to insufficient generation or a breakdown or failure of
31
equipment or processes. In January 2015, Hawaiian Electric experienced a generation shortfall event due to unexpected
concurrent outages of a utility generating unit and several IPPs. In addition, operations could be negatively impacted by
interruptions in fuel supply, inability to negotiate satisfactory collective bargaining agreements when existing agreements
expire or other labor disputes, inability to comply with regulatory or permit requirements, disruptions in delivery of electricity,
operator error and catastrophic events such as earthquakes, tsunamis, hurricanes, fires, explosions, floods or other similar
occurrences affecting the Utilities’ generating facilities or transmission and distribution systems.
The Utilities may be adversely affected by new legislation. Congress, the Hawaii legislature and governmental agencies
periodically consider legislation and other initiatives that could have uncertain or negative effects on the Utilities and their
customers. Congress, the Hawaii legislature and governmental agencies have adopted, or are considering adopting, a number of
measures that will significantly affect the Utilities, as described below.
Renewable Portfolio Standards law. In 2009, Hawaii’s RPS law was amended to require electric utilities to meet an
RPS of 10%, 15%, 25% and 40% by December 31, 2010, 2015, 2020 and 2030, respectively. Energy savings resulting from
energy efficiency programs do not count toward the RPS after 2014. The Utilities are committed to achieving these goals and
met the 2010 RPS; however, due to the exclusion of energy savings in calculating RPS after 2014 and risks such as potential
delays in IPPs being able to deliver contracted renewable energy, it is possible the Utilities may not attain the required
renewable percentages in the future, and management cannot predict the future consequences of failure to do so (including
potential penalties to be assessed by the PUC). On December 19, 2008, the PUC approved a penalty of $20 for every MWh that
an electric utility is deficient under Hawaii’s RPS law. The PUC noted, however, that this penalty may be reduced, in the PUC’s
discretion, due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or
circumstance could not be reasonably foreseen and ameliorated, as described in the RPS law and in an RPS framework adopted
by the PUC. In addition, the PUC ordered that the Utilities will be prohibited from recovering any RPS penalty costs through
rates.
Renewable energy. In 2007, a measure was passed by the Hawaii legislature stating that the PUC may consider the
need for increased renewable energy in rendering decisions on utility matters. Due to this measure, it is possible that, if energy
from a renewable source is more expensive than energy from fossil fuel, the PUC may still approve the purchase of energy
from the renewable source, resulting in higher costs.
Global climate change and greenhouse gas emissions reduction. National and international concern about climate
change and the contribution of GHG emissions to climate change have led to action by the state of Hawaii and federal
legislative and regulatory proposals to reduce GHG emissions.
In July 2007, Act 234, which requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the
statewide GHG emission levels in 1990, became law in Hawaii. On June 20, 2014, the Governor signed the final regulations
required to implement Act 234 and the regulations went into effect on June 30, 2014. In general, the regulations require affected
sources that have the potential to emit GHGs in excess of established thresholds to reduce GHG emissions by 16% below 2010
emission levels by 2020. The regulations will also assess affected sources an annual fee based on tons per year of GHG
emissions commencing on the effective date of the regulations, estimated to be approximately $0.5 million annually for the
Utilities. The DOH GHG regulations also track the federal “Prevention of Significant Deterioration and Title V Greenhouse
Gas Tailoring Rule” (GHG Tailoring Rule, see below) and would create new thresholds for GHG emissions from new and
existing stationary source facilities.
Several approaches to GHG emission reduction (including “cap and trade”) have been either introduced or discussed in
Congress; however, no legislation has yet been enacted.
In response to the 2007 U.S. Supreme Court decision in Massachusetts v. Environmental Protection Agency, which ruled
that the EPA has the authority to regulate GHG emissions from motor vehicles under the CAA, the EPA has accelerated
rulemaking addressing GHG emissions from both mobile and stationary sources. On September 22, 2009, the EPA issued the
Final Mandatory Reporting of Greenhouse Gases Rule. The rule, which applies to the Utilities, requires that sources above
certain threshold levels monitor and report GHG emissions.
On June 3, 2010, the EPA’s final GHG Tailoring Rule was published. It created a new emissions threshold for GHG
emissions from new and existing facilities and requires certain facilities to obtain PSD and Title V operating permits. On June
23, 2014, the U.S. Supreme Court issued a decision that invalidated the GHG Tailoring Rule, to the extent it regulated sources
based solely on their GHG emissions. It also invalidated the GHG emissions threshold for regulation. On December 19, 2014,
EPA released two memorandums outlining the Agency’s plan for addressing the U.S. Supreme Court’s decision. Hawaiian
Electric, Hawaii Electric Light and Maui Electric are evaluating the potential impacts of the Agency’s plan on utility operations
and permitting. The current status of the GHG Tailoring Rule, and any further regulatory action the EPA may take in light of
this recent decision, are uncertain.
32
On January 8, 2014, the EPA published in the Federal Register its new proposal for New Source Performance Standards for
GHG from new generating units. The proposed rule on GHG from new EGUs does not apply to oil- fired combustion turbines
or diesel engine generators, and is not otherwise expected to have significant impacts on the Utilities.
On June 18, 2014, the EPA published in the Federal Register its proposed rule for GHG emissions from existing power
plants. The rule sets interim and final state-wide, state-specific emission performance goals, expressed as lb CO2/MWh, that
would apply to the state’s affected sources. The interim goal would apply as an average over the period 2020 through 2029,
with the final goal to be met by 2030. On the same date, the EPA also published a separate rule for modified and reconstructed
power plants. The EPA’s plan is to issue the final rules by mid-summer 2015. Hawaiian Electric is still evaluating the proposed
rules for GHG emissions from existing, modified, and reconstructed sources, and how they might relate to the recently issued
State GHG rules. Hawaiian Electric will participate in the federal GHG rulemaking process, and in the implementation of the
State GHG rules, to try to reconcile federal GHG regulation, state GHG regulation, and any action the EPA may take as a result
of the recent U.S. Supreme Court opinion, to facilitate clear and cost-effective compliance. The Utilities will continue to
evaluate the impact of proposed GHG rules and regulations as they develop. Final regulations may impose significant
compliance costs, and may require reductions in fossil fuel use and the addition of renewable energy resources in excess of the
requirements of the RPS law.
While the timing, extent and ultimate effects of climate change cannot be determined with any certainty, climate change is
predicted to result in sea level rise, which could potentially impact coastal and other low-lying areas (where much of the
Utilities’ electric infrastructure is sited), and could cause erosion of beaches, saltwater intrusion into aquifers and surface
ecosystems, higher water tables and increased flooding and storm damage due to heavy rainfall. The effects of climate change
on the weather (for example, floods or hurricanes), sea levels, and water availability and quality have the potential to materially
adversely affect the results of operations, financial condition and liquidity of the Utilities. For example, severe weather could
cause significant harm to the Utilities’ physical facilities.
The Utilities have taken, and continue to identify opportunities to take, direct action to reduce GHG emissions from their
operations, including, but not limited to, supporting DSM programs that foster energy efficiency, using renewable resources for
energy production and purchasing power from IPPs generated by renewable resources, burning renewable biodiesel in
Hawaiian Electric’s CIP CT-1, using biodiesel for startup and shutdown of selected Maui Electric generating units, and testing
biofuel blends in other Hawaiian Electric and Maui Electric generating units. The Utilities are also working with the State of
Hawaii and other entities to pursue the use of liquefied natural gas as a cleaner and lower cost fuel to replace, at least in part,
the petroleum oil that would otherwise be used. Management is unable to evaluate the ultimate impact on the Utilities of these
various measures to reduce GHG emissions.
The foregoing legislation or legislation that now is, or may in the future be, proposed present risks and uncertainties for the
Utilities.
The Utilities may be subject to increased operational challenges and their results of operations, financial condition and
liquidity may be adversely impacted in meeting the commitments and objectives of clean energy initiatives and Renewable
Portfolio Standards (RPS). The far-reaching nature of the Utilities' renewable energy commitments and the RPS goals present
risks to the Company. Among such risks are: (1) the dependence on third party suppliers of renewable purchased energy, which
if the Utilities are unsuccessful in negotiating purchased power agreements with such IPPs or if a major IPP fails to deliver the
anticipated capacity in its purchased power agreement, could impact the Utilities’ achievement of their commitments to RPS
goals and/or the Utilities’ ability to deliver reliable service; (2) delays in acquiring or unavailability of non-fossil fuel supplies
for renewable generation; (3) the impact of intermittent power to the electrical grid and reliability of service if appropriate
supporting infrastructure is not installed or does not operate effectively; (4) the likelihood that the Utilities may need to make
substantial investments in related infrastructure, which could result in increased borrowings and, therefore, materially impact
the financial condition and liquidity of the Utilities; and (5) the commitment to support a variety of initiatives, which, if
approved by the PUC, may have a material impact on the results of operations and financial condition of the Utilities depending
on their design and implementation.
Bank Risks.
Fluctuations in interest rates could result in lower net interest income, impair ASB’s ability to originate new loans or
impair the ability of ASB’s adjustable-rate borrowers to make increased payments. Interest rate risk is a significant risk of
ASB’s operations. ASB’s net interest income consists primarily of interest income received on fixed-rate and adjustable-rate
loans, mortgage-related securities and investments and interest expense consisting primarily of interest paid on deposits and
other borrowings. Interest rate risk arises when earning assets mature or when their interest rates change in a time frame
different from that of the costing liabilities. Changes in market interest rates, including changes in the relationship between
short-term and long-term market interest rates or between different interest rate indices, can impact ASB’s net interest margin.
33
Although ASB pursues an asset-liability management strategy designed to mitigate its risk from changes in market interest
rates, unfavorable movements in interest rates could result in lower net interest income. Residential 1-4 family fixed-rate
mortgage loans comprised about 43% of ASB’s loan portfolio as of December 31, 2014 and do not re-price with movements in
interest rates. ASB continues to face a challenging interest rate environment. Interest rates declined in 2014 and new loan
production rates remained at historically low levels and below ASB's loan portfolio yields. This placed additional pressure on
ASB's asset yields and net interest margin. The degree to which compression of ASB's margin continues is uncertain if interest
rates rise.
Increases in market interest rates could have an adverse impact on ASB’s cost of funds. Higher market interest rates could
lead to higher interest rates paid on deposits and other borrowings. Significant increases in market interest rates, or the
perception that an increase may occur, could adversely affect ASB’s ability to originate new loans and grow. An increase in
market interest rates, especially a sudden increase, could also adversely affect the ability of ASB’s adjustable-rate borrowers to
meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs.
Conversely, a decrease in interest rates or a mismatching of maturities of interest sensitive financial instruments could result in
an acceleration in the prepayment of loans and mortgage-related securities and impact ASB’s ability to reinvest its liquidity in
similar yielding assets.
ASB’s operations are affected by many disparate factors, some of which are beyond its control, that could result in lower
net interest income or decreased demand for its products and services. ASB’s results of operations depend primarily on the
level of interest income generated by ASB’s earning assets in excess of the interest expense on its costing liabilities and the
supply of and demand for its products and services (i.e., loans and deposits). ASB’s net income may also be adversely affected
by various other factors, such as:
•
•
•
•
•
•
•
•
•
•
local and other economic and political conditions that could result in declines in employment and real estate values,
which in turn could adversely affect the ability of borrowers to make loan payments and the ability of ASB to recover
the full amounts owing to it under defaulted loans;
the ability of borrowers to obtain insurance and the ability of ASB to place insurance where borrowers fail to do so,
particularly in the event of catastrophic damage to collateral securing loans made by ASB;
faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and
investments and the impairment of mortgage servicing assets of ASB;
changes in ASB’s loan portfolio credit profiles and asset quality, which may increase or decrease the required level of
allowance for loan losses;
technological disruptions affecting ASB’s operations or financial or operational difficulties experienced by any outside
vendor on whom ASB relies to provide key components of its business operations, such as business processing,
network access or internet connections;
the impact of legislative and regulatory changes affecting capital requirements and increasing oversight of, and
reporting by, banks;
additional legislative changes regulating the assessment of overdraft, interchange and credit card fees, which will have
a negative impact on noninterest income;
public opinion about ASB and financial institutions in general, which, if negative, could impact the public’s trust and
confidence in ASB and adversely affect ASB’s ability to attract and retain customers and expose ASB to adverse legal
and regulatory consequences;
increases in operating costs (including employee compensation expense and benefits), inflation and other factors, that
exceed increases in ASB’ s net interest, fee and other income; and
the ability of ASB to maintain or increase the level of deposits, ASB’s lowest costing funds.
Banking and related regulations could result in significant restrictions being imposed on ASB’s business or in a
requirement that HEI divest ASB. ASB is subject to examination and comprehensive regulation by the Department of Treasury,
the OCC and the FDIC, and is subject to reserve requirements established by the Board of Governors of the Federal Reserve
System. In addition, the FRB is responsible for regulating ASB’s holding companies, HEI and ASB Hawaii. The regulatory
authorities have extensive discretion in connection with their supervisory and enforcement activities and examination policies
to address not only ASB’s compliance with applicable banking laws and regulations, but also capital adequacy, asset quality,
management ability and performance, earnings, liquidity and various other factors.
Under certain circumstances, including any determination that ASB’s relationship with HEI results in an unsafe and
unsound banking practice, these regulatory authorities have the authority to restrict the ability of ASB to transfer assets and to
make distributions to its shareholders (including payment of dividends to HEI), or they could seek to require HEI to sever its
relationship with or divest its ownership of ASB. Payment by ASB of dividends to HEI may also be restricted by the OCC and
FRB under its prompt corrective action regulations or its capital distribution regulations if ASB’s capital position deteriorates.
In order to maintain its status as a QTL, ASB is required to maintain at least 65% of its assets in “qualified thrift investments.”
Institutions that fail to maintain QTL status are subject to various penalties, including limitations on their activities. In ASB’s
34
case, the activities of HEI and HEI’s other subsidiaries would also be subject to restrictions, and a failure or inability to comply
with those restrictions could effectively result in the required divestiture of ASB. Federal legislation has also been proposed in
the past that could result in a required divestiture of ASB. In the event of a required divestiture, federal law substantially limits
the types of entities that could potentially acquire ASB.
Recent legislative and regulatory initiatives could have an adverse effect on ASB’s business. The Dodd-Frank Act, which
became law in July 2010, has had a substantial impact on the financial services industry. The Dodd-Frank Act establishes a
framework through which regulatory reform will be written and changes to statutes, regulations or regulatory policies could
affect HEI and ASB in substantial and unpredictable ways. A major component of the Dodd-Frank Act is the creation of the
Consumer Financial Protection Bureau that has the responsibility for setting and enforcing clear, consistent rules relating to
consumer financial products and services and has the authority to prohibit practices it finds to be unfair, deceptive or abusive.
Compliance with any such directives could have adverse effects on ASB’s revenues or operating costs. Failure to comply with
laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage,
which could have a material adverse effect on ASB’s business, results of operations, financial condition and liquidity.
A large percentage of ASB’s loans and securities are collateralized by real estate, and adverse changes in the real estate
market and/or general economic or other conditions may result in loan losses and adversely affect the Company’s profitability.
As of December 31, 2014 approximately 79% of ASB’s loan portfolio was comprised of loans primarily collateralized by real
estate, most of which was concentrated in the State of Hawaii. ASB’s HELOC (home equity line of credit) portfolio grew by
11% during 2014 and now comprises 23% of total real estate loans. ASB’s financial results may be adversely affected by
changes in prevailing economic conditions, either nationally or in the state of Hawaii, including decreases in real estate values,
adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant
external events. Adverse changes in the economy may have a negative effect on the ability of borrowers to make timely
repayments of their loans. A deterioration of the economic environment in Hawaii, including a material decline in the real estate
market, further declines in home resales, or a material external shock, or any environmental clean-up obligation, may also
significantly impair the value of ASB’s collateral and ASB’s ability to sell the collateral upon foreclosure. In the event of a
default, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest. In
addition, if poor economic conditions result in decreased demand for real estate loans, ASB’s profits may decrease if its
alternative investments earn less income than real estate loans.
ASB’s strategy to expand its commercial and commercial real estate lending activities may result in higher service costs
and greater credit risk than residential lending activities due to the unique characteristics of these markets. ASB has been
aggressively pursuing a strategy that includes expanding its commercial and commercial real estate lines of business. These
types of loans generally entail higher underwriting and other service costs and present greater credit risks than traditional
residential mortgages.
Generally, both commercial and commercial real estate loans have shorter terms to maturity and earn higher spreads than
residential mortgage loans. Only the assets of the business typically secure commercial loans. In such cases, upon default, any
collateral repossessed may not be sufficient to repay the outstanding loan balance. In addition, loan collections are dependent
on the borrower’s continuing financial stability and, thus, are more likely to be affected by current economic conditions and
adverse business developments.
ASB has grown its national syndicated lending portfolio where ASB is a participant in credit facilities agented by
established and reputable national lenders. Management selectively chooses each deal based on conservative credit criteria to
ensure a high quality, well diversified portfolio.
Commercial real estate properties tend to be unique and are more difficult to value than residential real estate properties.
Commercial real estate loans may not be fully amortizing, meaning that they may have a significant principal balance or
“balloon” payment due at maturity. In addition, commercial real estate properties, particularly industrial and warehouse
properties, are generally subject to relatively greater environmental risks than noncommercial properties and to the
corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be costs and delays
involved in enforcing rights of a property owner against tenants in default under the terms of leases with respect to commercial
properties. For example, a tenant may seek the protection of bankruptcy laws, which could result in termination of the tenant’s
lease.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
HEI: None.
Hawaiian Electric: Not applicable.
35
ITEM 2.
PROPERTIES
HEI and Hawaiian Electric: See the “Properties” sections under “HEI,” “Electric utility” and “Bank” in Item 1. Business
above.
ITEM 3.
LEGAL PROCEEDINGS
HEI and Hawaiian Electric: HEI subsidiaries (including Hawaiian Electric and its subsidiaries and ASB) may be involved in
ordinary routine PUC proceedings, environmental proceedings and/or litigation incidental to their respective businesses. The
Company is involved in PUC proceedings and litigation related to the proposed Merger. See the descriptions of legal
proceedings (including judicial proceedings and proceedings before the PUC and environmental and other administrative
agencies) in “Item 1. Business,” in HEI’s MD&A and in the Notes 2 (which includes a discussion of PUC proceedings and
litigation related to the Merger), 4 and 5 of the Consolidated Financial Statements. The outcomes of litigation and
administrative proceedings are necessarily uncertain and there is a risk that the outcome of such matters could have a material
adverse effect on the financial position, results of operations or liquidity of HEI or one or more of its subsidiaries for a
particular period in the future.
ITEM 4.
MINE SAFETY DISCLOSURES
HEI and Hawaiian Electric: Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
HEI:
Certain of the information required by this item is incorporated herein by reference to Note 14, “Regulatory restrictions on
net assets” and Note 17, “Quarterly information (unaudited)” of the Consolidated Financial Statements and "Item 6. Selected
Financial Data” and “Equity compensation plan information” under "Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" of this Form 10-K. Certain restrictions on dividends and other distributions
of HEI are described in this report under “Item 1. Business—HEI—Regulation—Restrictions on dividends and other
distributions” and that description is incorporated herein by reference. HEI’s common stock is traded on the New York Stock
Exchange and the total number of holders of record of HEI common stock (i.e., registered shareholders) as of February 13,
2015, was 7,796.
Purchases of HEI common shares were made during the fourth quarter to satisfy the requirements of certain plans as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Total Number of
Shares
Purchased **
(b)
Average
Price Paid
per Share **
(c)
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(d)
Maximum Number (or
Approximate Dollar Value) of
Shares that May Yet Be Purchased
Under the Plans or Programs
25,271
16,468
230,009
$
$
$
27.65
27.59
32.19
—
—
—
NA
NA
NA
Period*
October 1 to 31, 2014
November 1 to 30, 2014
December 1 to 31, 2014
NA Not applicable.
* Trades (total number of shares purchased) are reflected in the month in which the order is placed.
** The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares
purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made
under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions
payable to the brokers making the purchases for the DRIP, the HEIRSP and the ASB 401(k) Plan. Of the shares listed in column
(a), all of the 25,271 shares, 13,368 of the 16,468 shares and 219,609 of the 230,009 shares were purchased for the DRIP, none
of the 25,271 shares, none of the 16,468 shares and 8,100 of the 230,009 shares were purchased for the HEIRSP and the
remaining shares were purchased for the ASB 401(k) Plan. The repurchased shares were issued for the accounts of the
participants under registration statements registering the shares issued under these plans.
36
Hawaiian Electric:
Since a corporate restructuring on July 1, 1983, all the common stock of Hawaiian Electric has been held solely by its
parent, HEI, and is not publicly traded. Accordingly, information required with respect to “Market information” and “holders”
is not applicable to Hawaiian Electric.
The dividends declared and paid on Hawaiian Electric’s common stock for the quarters of 2014 and 2013 were as follows:
Quarters ended
March 31
June 30
September 30
December 31
2014
2013
$
22,706,842
$
20,069,526
21,539,126
22,122,984
22,122,984
20,719,142
20,394,334
20,394,334
Also, see “Liquidity and capital resources” in HEI’s MD&A.
See the discussion of regulatory and other restrictions on dividends or other distributions under “Item 1. Business—HEI—
Regulation—Restrictions on dividends and other distributions” and in Note 14 of the Consolidated Financial Statements.
37
ITEM 6.
SELECTED FINANCIAL DATA
HEI:
Selected Financial Data
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(dollars in thousands, except per share amounts)
2014
2013
2012
2011
2010
Results of operations
Revenues
Net income for common stock
Basic earnings per common share
Diluted earnings per common share
Return on average common equity
Financial position *
Total assets
Deposit liabilities
Other bank borrowings
Long-term debt, net
Preferred stock of subsidiaries – not subject to
mandatory redemption
Common stock equity
Common stock
Book value per common share *
Market price per common share
High
Low
December 31
Dividends per common share
Dividend payout ratio
Market price to book value per common share *
Price earnings ratio **
Common shares outstanding (thousands) *
Weighted-average
Shareholders ***
Employees *
$
$
$
$
3,239,542
168,320
1.65
1.64
9.6%
$
$
$
$
3,238,470
161,516
1.63
1.62
9.7%
$
$
$
$
3,374,995
138,658
1.43
1.42
8.9%
$
$
$
$
3,242,335
138,230
1.45
1.44
9.2%
$
$
$
$
2,664,982
113,535
1.22
1.21
7.8%
$ 11,184,161
$ 10,340,044
$ 10,149,132
$
9,594,477
$
9,087,409
4,623,415
290,656
1,506,546
4,372,477
244,514
1,492,945
4,229,916
195,926
1,422,872
4,070,032
233,229
1,340,070
3,975,372
237,319
1,364,942
34,293
34,293
34,293
34,293
34,293
1,791,428
1,727,070
1,593,865
1,528,706
1,480,394
$
17.47
$
17.06
$
16.28
$
15.92
$
15.63
35.00
22.71
33.48
1.24
75%
192%
20.3x
102,565
101,968
29,415
3,965
28.30
23.84
26.06
1.24
76%
153%
16.0x
101,260
98,968
30,653
3,966
29.24
23.65
25.14
1.24
87%
154%
17.6x
97,928
96,908
31,349
3,870
26.79
20.59
26.48
1.24
86%
166%
18.3x
96,038
95,510
32,004
3,654
24.99
18.63
22.79
1.24
102%
146%
18.7x
94,691
93,421
32,624
3,426
* At December 31.
** Calculated using December 31 market price per common share divided by basic earnings per common share. The principal trading
market for HEI’s common stock is the New York Stock Exchange (NYSE).
*** At December 31. Represents registered shareholders plus participants in the HEI Dividend Reinvestment and Stock Purchase Plan
(DRIP) who are not registered shareholders. As of February 13, 2015, HEI had 7,796 registered shareholders (i.e., holders of record of
HEI common stock), 25,627 DRIP participants and total shareholders of 29,144.
See Note 2 and “Commitments and contingencies” in Note 4 of the Consolidated Financial Statements and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for discussions of certain contingencies that could
adversely affect future results of operations and factors that affected reported results of operations.
For 2014, 2013, 2012, 2011 and 2010, under the two-class method of computing basic earnings per share, distributed
earnings were $1.24 per share each year and undistributed earnings (loss) were $0.41, $0.39, $0.19, $0.21 and $(0.02) per
share, respectively, for both unvested restricted stock awards and unrestricted common stock. For 2014, 2013, 2012, 2011 and
2010, under the two-class method of computing diluted earnings per share, distributed earnings were $1.24 per share each year
and undistributed earnings (loss) were $0.40, $0.38, $0.18, $0.20 and $(0.03) per share, respectively, for both unvested
restricted stock awards and unrestricted common stock.
38
Hawaiian Electric:
Selected Financial Data
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Results of operations
Revenues
Net income for common stock
Financial position *
Utility plant
Accumulated depreciation
Net utility plant
Total assets
2014
2013
2012
2011
2010
$ 2,987,323 $ 2,980,172 $ 3,109,439 $ 2,978,690 $ 2,382.366
137,641
122,929
99,276
99,986
76,589
$ 6,220,397 $ 5,896,991 $ 5,567,346 $ 5,242,379 $ 5,049,900
(2,175,510)
(2,111,229)
(2,040,789)
(1,966,894)
(1,941,059)
$ 4,044,887 $ 3,785,762 $ 3,526,557 $ 3,275,485 $ 3,108,841
$ 5,590,457 $ 5,087,129 $ 5,108,793 $ 4,674,007 $ 4,287,745
Current portion of long-term debt
$
— $
11,400 $
— $
57,500 $
—
Long-term debt, net
Common stock equity
Cumulative preferred stock-not
subject to mandatory redemption
Capital structure
Capital structure ratios (%)
Debt (short-term debt, which is nil, and long-term debt, net,
including current portion)
Cumulative preferred stock
Common stock equity
* At December 31.
1,206,546
1,206,545
1,147,872
1,000,570
1,057,942
1,682,144
1,593,564
1,472,136
1,402,841
1,334,155
34,293
34,293
34,293
34,293
34,293
$ 2,922,983 $ 2,845,802 $ 2,654,301 $ 2,495,204 $ 2,426,390
41.3
1.2
57.5
42.8
1.2
56.0
43.2
1.3
55.5
42.4
1.4
56.2
43.6
1.4
55.0
HEI owns all of Hawaiian Electric’s common stock. Therefore, per share data is not meaningful.
See "Forward-Looking Statements" above, the “electric utility” sections and all information related to, or including, Hawaiian Electric and its
subsidiaries in HEI’s MD&A and Note 2 and “Commitments and contingencies” in Note 4 of the Consolidated Financial Statements for
discussions of certain contingencies that could adversely affect future results of operations, financial condition and cash flows.
39
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HEI and Hawaiian Electric (in the case of Hawaiian Electric, only the information related to Hawaiian Electric and its
subsidiaries):
The following discussion should be read in conjunction with the Consolidated Financial Statements. The general
discussion of HEI’s consolidated results should be read in conjunction with the electric utility and bank segment discussions
that follow.
HEI Consolidated
Proposed Merger. On December 3, 2014, HEI, NEE, Merger Sub II and Merger Sub I entered into an Agreement and Plan of
Merger. The Merger Agreement provides for Merger Sub I to merge with and into HEI, with HEI surviving, and then for HEI to
merge with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary of NEE (the Merger). The
Merger Agreement provides that, prior to completion of the Merger, HEI will distribute to its shareholders, on a pro-rata basis,
all of the issued and outstanding shares of ASB Hawaii, parent company of ASB (the Spin-Off). The closing of the Merger is
subject to various conditions, including federal and state regulatory approvals and the approval of holders of 75% of the
outstanding shares of HEI common stock. For additional information concerning the proposed merger, see Note 2 of the
Consolidated Financial Statements.
Executive overview and strategy. HEI is a holding company that operates subsidiaries (collectively, the Company),
principally in Hawaii’s electric utility and banking sectors. HEI’s strategy is to build fundamental earnings and profitability of
its electric utilities and bank in a controlled risk manner to support its current dividend and improve operating and capital
efficiency in order to build shareholder value.
HEI, through its electric utility subsidiaries (Hawaiian Electric and its subsidiaries, Hawaii Electric Light and Maui
Electric), provides the only electric public utility service to approximately 95% of Hawaii’s population. HEI also provides a
wide array of banking and other financial services to consumers and businesses through its bank subsidiary, ASB, one of
Hawaii’s largest financial institutions based on total assets. Together, HEI’s unique combination of electric utilities and a bank
continues to provide the Company with a strong balance sheet and the financial resources to invest in the strategic growth of its
subsidiaries while providing an attractive dividend for investors.
In 2014, net income for HEI common stock was $168 million, up 4% from $162 million in 2013 primarily due to the
Utilities’ 12% higher net income. ASB had 11% lower net income in 2014 compared to 2013 and the “other” segment had a $2
million higher net loss. Basic earnings per share were $1.65 per share in 2014, up 1% from $1.63 per share in 2013.
The Utilities’ strategic focus has been to meet Hawaii’s energy needs by modernizing and adding needed infrastructure
through capital investment, placing emphasis on energy efficiency and conservation, pursuing renewable energy generation and
taking the necessary steps to secure regulatory support for their plans. Electric utility net income for common stock in 2014 of
$138 million increased 12% from the prior year due primarily to the increase in revenues in 2014 for the recovery of costs for
clean energy and reliability investments and reduction of earnings in 2013 due to the Maui Electric refund to customers, offset
in part due to higher O&M expenses, depreciation expense, interest costs, and a favorable deferred tax adjustment in 2013.
ASB continues to develop and introduce new products and services in order to meet the needs of both consumer and
commercial customers. Additionally, ASB is making the investments in people and technology necessary to adapt to a
constantly changing banking industry and remain competitive. ASB’s earnings in 2014 of $51 million decreased $6 million
compared to prior year net income due primarily to lower noninterest income and a higher provision for loan losses. In 2014,
ASB earnings were impacted by lower debit card interchange fees as a result of being non-exempt from the Durbin Amendment
from July 1, 2013, and the settlement of a lawsuit. ASB’s future financial results will continue to be impacted by the interest
rate environment and the quality of ASB’s loan portfolio. If the Spin-Off occurs as contemplated by the Merger Agreement,
ASB expects to be exempt from the Durbin Amendment.
HEI’s “other” segment had a net loss in 2014 of $20.8 million, compared to a net loss of $18.9 million in 2013. In 2014,
HEI incurred $5 million of expenses related to the proposed merger and $3 million lower interest expense (each net of taxes).
Shareholder dividends are declared and paid quarterly by HEI at the discretion of HEI’s Board of Directors. HEI and its
predecessor company, Hawaiian Electric, have paid dividends continuously since 1901. The dividend has been stable at $1.24
per share annually since 1998. The indicated dividend yield as of December 31, 2014 was 3.7%. The dividend payout ratios
based on net income for common stock for 2014, 2013 and 2012 were 75%, 76% and 87%, respectively. The HEI Board of
40
Directors considers many factors in determining the dividend quarterly, including but not limited to the Company’s results of
operations, the long-term prospects for the Company, and current and expected future economic conditions.
HEI’s subsidiaries from time to time consider various strategies designed to enhance their competitive positions and to
maximize shareholder value. Management cannot predict whether any of these strategies or transactions will be carried out or,
if so, whether they will be successfully implemented. See "Proposed merger" above.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g.,
Department of Business, Economic Development and Tourism (DBEDT); University of Hawaii Economic Research
Organization; U.S. Bureau of Labor Statistics; Department of Labor and Industrial Relations (DLIR); Hawaii Tourism
Authority (HTA); Honolulu Board of REALTORS® and national and local newspapers).
Hawaii’s tourism industry, a significant driver of Hawaii’s economy, reached record highs in both visitor spending and
arrivals for the third consecutive year in 2014. Visitor expenditures increased 2.3% and arrivals increased 1.3% compared to
2013. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii for the first quarter of 2015 to
increase by 6.1% over the first quarter of 2014 driven primarily by a 9.2% increase in domestic seats.
Hawaii’s unemployment rate was relatively stable at 4.0% in December 2014, lower than the state’s 4.7% rate in December
2013 and the December 2014 national unemployment rate of 5.6%.
Hawaii real estate activity, as indicated by the home resale market, experienced growth in median sales prices in 2014.
Median sales prices for single family residential homes and condominiums on Oahu increased 3.8% and 5.4%, respectively,
over 2013. However, the number of closed sales was down slightly in 2014. Closed sales for single family residential homes
were down 0.8% and condominiums were down 1.3% compared to 2013.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in
international markets. In 2014, prices of all petroleum fuels plateaued during the first three quarters of the year before falling
strongly over the course of 2014’s final quarter.
At its January 2015 meeting, the Federal Open Market Committee (FOMC) held the federal funds rate target at 0% to
0.25% and this rate is expected to remain at record lows for a considerable time following the end of the asset purchase
program in October 2014.
Overall, Hawaii’s economy is expected to see positive growth in 2015. Tourism had another record year in 2014, but future
gains will be restrained due to limited capacity. Lower energy costs could also provide a boost to the economy if energy costs
remain near the low levels experienced in the latter part of 2014. Risks to local economic growth include planned reductions in
active duty military personnel and weak Japanese visitor arrivals and spending.
Recent tax developments. The Tax Increase Prevention Act of 2014 provided a one year extension of 50% bonus
depreciation, increasing the Company's 2014 federal tax depreciation by an estimated $162 million, primarily attributable to the
Utilities. Previously, the American Taxpayer Relief Act of 2012 provided 50% bonus depreciation through 2013, resulting in an
increase in 2013 federal tax depreciation of $160 million, primarily attributable to the Utilities.
Also, see Note 12 and Hawaiian Electric's consolidated income taxes refunded in Note 13 of the Consolidated Financial
Statements.
41
Results of operations.
(dollars in millions, except per share amounts)
2014 % change
2013 % change
2012
$
3,240
— $
3,238
(4) $
3,375
Revenues
Operating income
Net income for common stock
Net income (loss) by segment:
Electric utility
Bank
Other
Net income for common stock
Basic earnings per share
Diluted earnings per share
Dividends per share
329
168
138
51
(21)
168
1.65
1.64
1.24
$
$
$
$
$
4
4
12
$
(11)
NM
4
1
1
$
$
$
— $
3
315
162
123
58
(19)
162
1.63
1.62
1.24
99.0
11
16
24
$
(2)
NM
16
14
14
$
$
$
— $
2
284
139
99
59
(19)
139
1.43
1.42
1.24
96.9
Weighted-average number of common shares outstanding (millions)
102.0
Dividend payout ratio
NM Not meaningful.
75%
76%
87%
See “Executive overview and strategy” above and the “Other segment,” “Electric utility” and “Bank” sections below for
discussions of results of operations.
Retirement benefits. The Company’s reported costs of providing retirement benefits are dependent upon numerous factors
resulting from actual plan experience and assumptions about future experience. For example, retirement benefits costs are
impacted by actual employee demographics (including age and compensation levels), the level of contributions to the plans,
plus earnings and realized and unrealized gains and losses on plan assets, and changes made to the provisions of the plans. (See
Note 10 of the Consolidated Financial Statements.) Costs may also be significantly affected by changes in key actuarial
assumptions, including the expected return on plan assets, the discount rate and mortality. The Company’s accounting for
retirement benefits under the plans in which the employees of the Utilities participate is also adjusted to account for the impact
of decisions by the Public Utilities Commission of the State of Hawaii (PUC). Changes in obligations associated with the
factors noted above may not be immediately recognized as costs on the income statement, but generally are recognized in
future years over the remaining average service period of plan participants.
The assumptions used by management in making benefit and funding calculations are based on current economic
conditions. Changes in economic conditions will impact the underlying assumptions in determining retirement benefits costs on
a prospective basis.
For 2014, the Company’s retirement benefit plans’ assets generated a gain of 6.8%, net of investment management and
trustee fees, resulting in net earnings and unrealized gains of $90 million, compared to net earnings and unrealized gains of
$223 million for 2013 and $134 million for 2012. The market value of the retirement benefit plans’ assets for December 31,
2014 and 2013 were $1.4 billion and $1.4 billion, respectively.
The Company intends to make contributions to the qualified pension plan for HEI and Hawaiian Electric equal to the
calculated net periodic pension cost for the year. However, if the minimum required contribution determined under the
Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006, for the year is
greater than the net periodic pension cost, then the Company will contribute the minimum required contribution and the
Utilities’ difference between the minimum required contribution and the net periodic pension cost will increase their regulatory
asset. In the next rate case, the regulatory asset will be amortized over five years and used to reduce the cash funding
requirement based on net periodic pension cost. The regulatory asset may not be applied against the ERISA minimum required
contribution.
The net periodic pension cost is expected to be higher than the ERISA minimum required contribution for 2015. Therefore,
to satisfy the requirements of the electric utilities’ pension tracking mechanism, net periodic pension cost will be the basis of
the cash funding for 2015. Based on plan assets as of December 31, 2014 and various assumptions in Note 10 of the
Consolidated Financial Statements, the Company estimates the net periodic pension cost contribution for 2015 will be
$85 million ($2 million for HEI and $83 million for the Utilities).
42
Based on various assumptions in Note 10 of the Consolidated Financial Statements and assuming no further changes in
retirement benefit plan provisions, information regarding consolidated HEI’s and consolidated Hawaiian Electric’s retirement
benefits was, or is estimated to be, as follows, and constitutes “forward-looking statements:”
AOCI debit/(credit), net of
taxes (benefits), related to
retirement benefits liability
Retirement benefits expense,
net of tax benefits
Retirement benefits paid
and plan expenses
December 31
Years ended December 31
Years ended December 31
(in millions)
Consolidated HEI
Consolidated Hawaiian Electric
$
2014
$
28
—
2013
(Estimated)
2015
13
$
(1)
23
19
2014
2013
2012
2014
2013
2012
$ 20
$ 21
$ 22
$
19
18
20
$
71
66
$
70
65
68
63
Based on various assumptions in Note 10 of the Consolidated Financial Statements, sensitivities of the projected benefit
obligation (PBO) and accumulated postretirement benefit obligation (APBO) as of December 31, 2014, associated with a
change in certain actuarial assumptions, were as follows and constitute “forward-looking statements.”
Actuarial assumption
(dollars in millions)
Pension benefits
Discount rate
Other benefits
Discount rate
Health care cost trend rate
Change in assumption
in basis points
Impact on HEI
Consolidated
PBO or APBO
Impact on Consolidated
Hawaiian Electric
PBO or APBO
'+/- 50
$(139)/$157
$(128)/$145
'+/- 50
'+/- 100
(14)/16
4/(5)
(14)/15
4/(4)
See Note 10 of the Consolidated Financial Statements for further retirement benefits information.
Other segment.
(dollars in millions)
Revenues 1
Operating loss
Net loss
2014
% change
2013
% change
2012
$
—
(22)
(21)
NM $
NM
NM
—
(17)
(19)
NM
NM
NM
$ –
(17)
(19)
Including writedowns of and net gains and losses from investments.
1
NM Not meaningful.
The “other” business segment includes results of the stand-alone corporate operations of HEI and ASB Hawaii, both
holding companies; HEI Properties, Inc., a company holding passive, venture capital investments (venture capital investments
with a carrying value of $0.1 million as of December 31, 2014); and The Old Oahu Tug Service, Inc., a maritime freight
transportation company that ceased operations in 1999; as well as eliminations of intercompany transactions.
HEI corporate-level operating, general and administrative expenses were $21 million in 2014 compared to $16 million in
2013 and $16 million in 2012. In 2014, HEI had approximately $5 million of expenses related to the proposed merger. In 2013,
HEI had higher administrative and general expenses, including retirement benefits, partly offset by lower executive
compensation.
The “other” segment’s interest expenses were $12 million in 2014, $16 million in 2013 and $16 million in 2012. In 2014,
HEI had lower average interest rates, partly offset by the impact of higher average borrowings. In 2014, a 6.51% medium-term
note of $100 million was paid off and a $125 million Eurodollar term loan (at rates ranging from 1.12% to 1.14% through
December 31, 2014) was drawn. In 2013, $50 million of long-term debt was refinanced at a lower interest rate. The “other”
segment’s income tax benefits were $13 million in 2014, $14 million in 2013 and $15 million in 2012.
Effects of inflation. U.S. inflation, as measured by the U.S. Consumer Price Index (CPI), averaged 1.6% in 2014, 1.5% in
2013 and 2.1% in 2012. Hawaii inflation, as measured by the Honolulu CPI, was 1.8% in 2013, 2.4% in 2012 and 3.7% in
2011. DBEDT estimates average Honolulu CPI to have been 1.5% in 2014 and forecasts it to be 2.2% for 2015.
43
Inflation continues to have an impact on HEI’s operations. Inflation increases operating costs and the replacement cost of
assets. Subsidiaries with significant physical assets, such as the electric utilities, replace assets at much higher costs and must
request and obtain rate increases to maintain adequate earnings. In the past, the PUC has granted rate increases in part to cover
increases in construction costs and operating expenses due to inflation.
Recent accounting pronouncements. See “Recent accounting pronouncements and interpretations” in Note 1 of the
Consolidated Financial Statements.
Liquidity and capital resources. The Company believes that its ability to generate cash, both internally from electric utility
and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is
adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital
expenditures and investments, its expected retirement benefit plan contributions and other cash requirements in the foreseeable
future.
The Company’s total assets were $11.2 billion as of December 31, 2014 and $10.3 billion as of December 31, 2013.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
December 31
(dollars in millions)
Short-term borrowings—other than bank
Long-term debt, net—other than bank
Preferred stock of subsidiaries
Common stock equity
2014
2013
$
$
119
1,507
34
1,791
3,451
3% $
44
1
52
100% $
105
1,493
34
1,727
3,359
3%
45
1
51
100%
HEI’s short-term borrowings and HEI’s line of credit facility were as follows:
(in millions)
Short-term borrowings 1
Commercial paper
Line of credit draws
Undrawn capacity under HEI’s line of credit facility
Year ended
December 31, 2014
Average
balance
End-of-period
balance
December 31,
2013
$
$
71
—
119
$
—
150
105
—
125
1
This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities, which are disclosed
below under “Electric utility—Financial Condition—Liquidity and capital resources.” At February 13, 2015, HEI’s outstanding
commercial paper balance was $105 million and its line of credit facility was undrawn. The maximum amount of HEI’s short-term
borrowings in 2014 was $119 million.
HEI utilizes short-term debt, typically commercial paper, to support normal operations, to refinance commercial paper, to
retire long-term debt, to pay dividends and for other temporary requirements. HEI also periodically makes short-term loans to
Hawaiian Electric to meet Hawaiian Electric’s cash requirements, including the funding of loans by Hawaiian Electric to
Hawaii Electric Light and Maui Electric, but no such short-term loans to Hawaiian Electric were outstanding as of
December 31, 2014. HEI periodically utilizes long-term debt, historically consisting of medium-term notes and other unsecured
indebtedness, to fund investments in and loans to its subsidiaries to support their capital improvement or other requirements, to
repay long-term and short-term indebtedness and for other corporate purposes.
In March 2013, HEI entered into equity forward transactions in which a forward counterparty borrowed 7 million shares of
HEI’s common stock from third parties and such borrowed shares were sold pursuant to an HEI registered public offering. See
Note 9 of the Consolidated Financial Statements.
On May 2, 2014, HEI closed a two-year term loan from three banks for $125 million. See Note 8 of the Consolidated
Financial Statements for a brief description of the loan agreement and the application of the proceeds of the loan.
In December 2014, HEI filed an omnibus shelf registration statement to register an indeterminate amount of debt and
equity securities.
44
HEI has a line of credit facility, as amended and restated on April 2, 2014, of $150 million. See Note 7 of the Consolidated
Financial Statements.
The rating of HEI’s commercial paper and debt securities could significantly impact the ability of HEI to sell its
commercial paper and issue debt securities and/or the cost of such debt. The rating agencies use a combination of qualitative
measures (i.e., assessment of business risk that incorporates an analysis of the qualitative factors such as management,
competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash flow, debt, interest
coverage and liquidity ratios) in determining the ratings of HEI securities.
Following the announcement that HEI has agreed to merge with NextEra Energy, Inc., on December 4, 2014, Fitch Ratings
(Fitch) placed the ‘BBB’ long-term issuer default rating of HEI on Rating Watch Positive and noted “Fitch will likely resolve
the Rating Watch on the conclusion of the transaction and could upgrade HEI by one notch given its ownership by a higher
rated company. In such a scenario, the ratings of HEI will be equalized with that of its wholly-owned subsidiary, Hawaiian
Electric Company (HECO), given the transaction contemplates the spin-off of the bank.” The key ratings drivers cited were (1)
modest improvement in business risk, (2) structural challenges in Hawaii, (3) regulatory approvals required, and (4) credit
metrics trajectory unchanged. Fitch also noted that “[f]uture developments that may, individually or collectively, lead to
negative rating action include:-- [a]n inability to earn an adequate and timely recovery on invested capital; -- [a]ccelerating
competitive inroads by distributed generation and energy efficiency; and -- [f]ailure to consummate acquisition by Nextera [sic]
and material deterioration in regulatory environment.”
On December 4, 2014, Moody’s affirmed the ratings of HEI (Baa2 stable). Moody’s views “NextEra’s acquisition as
potentially beneficial to HECO which has been experiencing numerous operational challenges due to pressure from regulators
and other stakeholders to reduce costs and expand the use of renewable generation.” Moody’s also noted that the “rating could
be downgraded or placed on negative outlook should the company’s relationship with the regulators deteriorate to a point
where it might affect the company’s credit metrics in a meaningful way, or if HECO’s cash flow to debt metric declined to 13%
or below on a sustained basis.”
On December 4, 2014, S&P placed the ‘BBB-’ issuer credit rating for HEI on CreditWatch with positive implications. S&P
indicated that “[i]n light of the level of NextEra’s investment in HEI, NextEra’s proposed method of funding the acquisition,
opportunities for growth, and stated commitment from management, we assess HEI and HECO as “core” subsidiaries of
NextEra. As a result, upon the close of the transaction, we expect to raise our issuer credit ratings on HEI and HECO to be
aligned with that of the ultimate parent NextEra.” S&P issued a subsequent report on January 26, 2015, stating “[t]he ratings of
HEI and its subsidiaries are on CreditWatch with positive implications because of the proposed merger with higher-rated
NextEra Energy Inc.”
As of February 13, 2015, the Fitch, Moody's and S&P ratings of HEI were as follows:
Long-term issuer default and senior unsecured; senior unsecured; and corporate
credit; respectively
Commercial paper
Outlook
Fitch
BBB
F3
Moody’s
Baa2
P-2
S&P
BBB-
A-3
Watch-Positive
Stable
Watch-Positive
The above ratings reflect only the view, at the time the ratings are issued, of the applicable rating agency, from whom an explanation of
the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may
be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating.
Management believes that, if HEI’s commercial paper ratings were to be downgraded, or if credit markets for commercial
paper with HEI’s ratings or in general were to tighten, it could be more difficult and/or expensive for HEI to sell commercial
paper or HEI might not be able to sell commercial paper in the future. Such limitations could cause HEI to draw on its
syndicated credit facility instead, and the costs of such borrowings could increase under the terms of the credit agreement as a
result of any such ratings downgrades. Similarly, if HEI’s long-term debt ratings were to be downgraded, it could be more
difficult and/or expensive for HEI to issue long-term debt. Such limitations and/or increased costs could materially adversely
affect the results of operations, financial condition and liquidity of HEI and its subsidiaries.
Issuances of common stock through the Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan
(DRIP), Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan provided new capital of
$3 million (approximately 0.1 million shares) in 2014, $48 million (approximately 1.8 million shares) in 2013 and $47 million
(approximately 1.8 million shares) in 2012. From March 6, 2014 to date and from August 18, 2011 to January 8, 2012, HEI
satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its
common stock rather than new issuances.
45
Operating activities provided net cash of $301 million in 2014, $327 million in 2013 and $235 million in 2012. Investing
activities used net cash of $569 million in 2014, $564 million in 2013 and $427 million in 2012. In 2014, net cash used in
investing activities was primarily due to a net increase in loans held for investment, Hawaiian Electric’s consolidated capital
expenditures (net of contributions in aid of construction) and ASB's purchases of investment securities, partly offset by the
repayments of investment securities and the proceeds from sales of investment securities, redemption of stock from Federal
Home Loan Bank of Seattle and real estate acquired in settlement of ASB loans. Financing activities provided net cash of $223
million in 2014, $237 million in 2013 and $142 million in 2012. In 2014, net cash provided by financing activities included net
increases in deposits, other bank borrowings, long-term debt and short-term borrowings and proceeds from the issuance of
common stock, offset by the payment of common and preferred stock dividends. Other than capital contributions from their
parent company, intercompany services (and related intercompany payables and receivables), Hawaiian Electric’s periodic
short-term borrowings from HEI (and related interest) and the payment of dividends to HEI, the electric utility and bank
segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank
segments’ discussions of their cash flows in their respective “Financial condition–Liquidity and capital resources” sections
below.) During 2014, Hawaiian Electric and ASB (via ASB Hawaii) paid cash dividends to HEI of $88 million and $36 million,
respectively.
A portion of the net assets of Hawaiian Electric and ASB is not available for transfer to HEI in the form of dividends, loans
or advances without regulatory approval. One of the conditions to the PUC’s approval of the Merger and corporate
restructuring of Hawaiian Electric and HEI requires that Hawaiian Electric maintain a consolidated common equity to total
capitalization ratio of not less than 35% (actual ratio of 58% at December 31, 2014), and restricts Hawaiian Electric from
making distributions to HEI to the extent it would result in that ratio being less than 35%. In the absence of an unexpected
material adverse change in the financial condition of the electric utilities or ASB, such restrictions are not expected to
significantly affect the operations of HEI, its ability to pay dividends on its common stock or its ability to meet its debt or other
cash obligations. See Note 14 of the Consolidated Financial Statements.
Forecasted HEI consolidated “net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2015
through 2017 consists primarily of the net capital expenditures of the Utilities. In addition to the funds required for the Utilities’
construction programs (see “Electric utility–Liquidity and capital resources”), approximately $200 million will be required
during 2015 through 2017 to repay HEI senior notes of $75 million maturing in March 2016 and and HEI’s $125 million two-
year term loan maturing in May 2016, which are expected to be repaid with the proceeds from the issuance of commercial
paper, bank borrowings, other medium- or long-term debt, common stock and/or dividends from subsidiaries (assuming that the
proposed Merger has not closed by the maturity dates). Additional debt and/or equity financing may be utilized to invest in the
Utilities and bank; to pay down commercial paper or other short-term borrowings; or to fund unanticipated expenditures not
included in the 2015 through 2017 forecast, such as increases in the costs of or an acceleration of the construction of capital
projects of the Utilities, unanticipated utility capital expenditures that may be required by the HCEI or new environmental laws
and regulations, unbudgeted acquisitions or investments in new businesses, significant increases in retirement benefit funding
requirements and higher tax payments that would result if certain tax positions taken by the Company do not prevail or if taxes
are increased by federal or state legislation. In addition, existing debt may be refinanced prior to maturity with additional debt
or equity financing (or both). Further, in anticipation of the possible completion of the Merger, the Company will make
financing arrangements for the funding of the special dividend of $0.50 per share through some combination of the
accumulation of dividends from subsidiaries and/or equity financing and for payment of additional transaction advisory fees
and contingent payments (approximately $30 million) through additional debt and/or equity financing.
As further explained in “Retirement benefits” above and Notes 1 and 10 of the Consolidated Financial Statements, the
Company maintains pension and OPEB plans. The Company’s contributions to the retirement benefit plans totaled $60 million
in 2014 ($59 million by the Utilities, $1 million by HEI and nil by ASB), $83 million in 2013 ($81 million by the Utilities,
$2 million by HEI and nil by ASB) and $78 million in 2012 ($63 million by the Utilities, $2 million by HEI and $13 million by
ASB) and are expected to total $86 million in 2015 ($84 million by the Utilities, $2 million by HEI and nil by ASB). These
contributions satisfied the minimum funding requirements pursuant to ERISA, including changes promulgated by the Pension
Protection Act of 2006, and the requirements of the electric utilities’ pension and OPEB tracking mechanisms. In addition, the
Company paid directly $2 million of benefits in 2014, $2 million in 2013 and $1 million in 2012 and expects to pay $2 million
of benefits in 2015. Depending on the performance of the assets held in the plans’ trusts and numerous other factors, additional
contributions may be required in the future to meet the minimum funding requirements of ERISA or to pay benefits to plan
participants. The Company believes it will have adequate cash flow or access to capital resources to support any necessary
funding requirements.
Selected contractual obligations and commitments. Information about payments under the specified contractual
obligations and commercial commitments of HEI and its subsidiaries was as follows:
46
December 31, 2014
(in millions)
Contractual obligations
Time certificates
Other bank borrowings
Long-term debt
Interest on certificates of deposit, other bank borrowings and long-term debt
Operating leases, service bureau contract and maintenance agreements
Open purchase order obligations1
Fuel oil purchase obligations (estimate based on December 31, 2014 fuel oil
prices)
Power purchase obligations–minimum fixed capacity charges
Total (estimated)
$
Less than
1 year
1-3
years
3-5
years
More than
5 years
Total
$
256
$
$
100
156
200
143
47
26
349
197
72
50
50
131
31
2
—
184
520
$
$
3
—
1,257
760
39
3
—
531
$
2,593
$
431
206
1,507
1,113
146
86
776
1,036
5,301
$ 1,218
$
—
—
79
29
55
427
124
970
1
Includes contractual obligations and commitments for capital expenditures and expense amounts.
The tables above do not include other categories of obligations and commitments, such as deferred taxes, trade payables,
amounts that will become payable in future periods under collective bargaining and other employment agreements and
employee benefit plans, obligations that may arise under indemnities provided to purchasers of discontinued operations,
potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing mechanism) and additional transaction
advisory fees and contingent payments related to the proposed merger (approximately $30 million). As of December 31, 2014,
the fair value of the assets held in trusts to satisfy the obligations of the Company’s retirement benefit plans did not exceed the
retirement benefit plans’ benefit obligation. Minimum funding requirements for retirement benefit plans have not been included
in the tables above; however, see “Retirement benefits” above for estimated minimum required contributions for 2015.
See Note 4 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments. See Note 5
of the Consolidated Financial Statements for a further discussion of ASB's commitments.
Off-balance sheet arrangements. Although the Company has off-balance sheet arrangements, management has determined
that it has no off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the
Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors, including the following types of off-balance sheet arrangements:
1. obligations under guarantee contracts,
2.
retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as
credit, liquidity or market risk support to that entity for such assets,
3. obligations under derivative instruments, and
4. obligations under a material variable interest held by the Company in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research
and development services with the Company.
Certain factors that may affect future results and financial condition. The Company’s results of operations and financial
condition can be affected by numerous factors, many of which are beyond its control and could cause future results of
operations to differ materially from historical results. The following is a discussion of certain of these factors. Also see
“Forward-Looking Statements” and “Risk Factors” above and “Certain factors that may affect future results and financial
condition” in each of the electric utility and bank segment discussions below.
Proposed Merger. On December 3, 2014, HEI, NEE, Merger Sub II and Merger Sub I entered into an Agreement and Plan
of Merger. The Merger Agreement provides that, prior to completion of the Merger, HEI will distribute to its shareholders, on a
pro-rata basis, all of the issued and outstanding shares of ASB Hawaii (parent company of ASB). In addition, the Merger
Agreement contemplates that, immediately prior to the closing of the Merger, HEI will pay its shareholders a special dividend
of $0.50 per share. At the effective time of the Merger, shares of HEI common stock will be converted into shares of NEE
common stock and HEI shareholders will become stockholders of NEE. The closing of the Merger is subject to various
conditions, including federal and state regulatory approvals and the approval of holders of 75% of the outstanding shares of
HEI common stock. See Note 2 of the Consolidated Financial Statements and “Risk Factors Related to the Merger” above.
Economic conditions, U.S. capital markets and credit and interest rate environment. Because the core businesses of HEI’s
subsidiaries are providing local electric public utility services and banking services in Hawaii, the Company’s operating results
47
are significantly influenced by Hawaii’s economy, which in turn is influenced by economic conditions in the mainland U.S.
(particularly California) and Asia (particularly Japan) as a result of the impact of those conditions on tourism, by the impact of
interest rates, particularly on the construction and real estate industries, and by the impact of world conditions on federal
government spending in Hawaii. The two largest components of Hawaii’s economy are tourism and the federal government
(including the military).
If Fitch, Moody's or S&P were to downgrade HEI’s or Hawaiian Electric’s debt ratings, or if future events were to
adversely affect the availability of capital to the Company, HEI’s and Hawaiian Electric’s ability to borrow and raise capital
could be constrained and their future borrowing costs would likely increase.
Changes in the U.S. capital markets can also have significant effects on the Company. For example, pension funding
requirements are affected by the market performance of the assets in the master pension trust, and by the discount rate used to
estimate the service and interest cost components of net periodic pension cost and value obligations. The Utilities’ pension
tracking mechanisms help moderate pension expense; however, a decline in the value of the Company’s defined benefit pension
plan assets may increase the unfunded status of the Company’s pension plans and result in increases in future funding
requirements.
Because the earnings of ASB depend primarily on net interest income, interest rate risk is a significant risk of ASB’s
operations. Changes in interest rates and credit spreads also affect the fair value of ASB’s investment securities. HEI and its
electric utility subsidiaries are also exposed to interest rate risk primarily due to their periodic borrowing requirements, the
discount rate used to determine pension funding requirements and the possible effect of interest rates on the electric utilities’
rates of return and overall economic activity. Interest rates are sensitive to many factors, including general economic conditions
and the policies of government and regulatory authorities. HEI cannot predict future changes in interest rates, nor be certain
that interest rate risk management strategies it or its subsidiaries have implemented will be successful in managing interest rate
risk.
Limited insurance. In the ordinary course of business, the Company purchases insurance coverages (e.g., property and
liability coverages) to protect itself against loss of or damage to its properties and against claims made by third-parties and
employees for property damage or personal injuries. However, the protection provided by such insurance is limited in
significant respects and, in some instances, the Company has no coverage. The Utilities’ transmission and distribution systems
(excluding substation buildings and contents) have a replacement value roughly estimated at $6 billion and are largely
uninsured. Similarly, the Utilities have no business interruption insurance. If a hurricane or other uninsured catastrophic natural
disaster were to occur, and if the PUC were not to allow the Utilities to recover from ratepayers restoration costs and revenues
lost from business interruption, their results of operations, financial condition and liquidity could be materially adversely
impacted. Certain of the Company’s insurance has substantial “deductibles” or has limits on the maximum amounts that may be
recovered. Insurers also have exclusions or limitations of coverage for claims related to certain perils. If a series of losses
occurred, such as from a series of lawsuits in the ordinary course of business each of which were subject to an insurance
deductible amount, or if the maximum limit of the available insurance were substantially exceeded, the Company could incur
uninsured losses in amounts that would have a material adverse effect on the Company’s results of operations, financial
condition and liquidity.
Environmental matters. HEI and its subsidiaries are subject to environmental laws and regulations that regulate the
operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of
hazardous waste and toxic substances. These laws and regulations, among other things, may require that certain environmental
permits be obtained and maintained as a condition to constructing or operating certain facilities. Obtaining such permits can
entail significant expense and cause substantial construction delays. Also, these laws and regulations may be amended from
time to time, including amendments that increase the burden and expense of compliance.
Material estimates and critical accounting policies. In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change include the amounts reported for pension and other
postretirement benefit obligations; contingencies and litigation; income taxes; property, plant and equipment; regulatory assets
and liabilities; electric utility revenues; allowance for loan losses; nonperforming loans; troubled debt restructurings; and fair
value. Management considers an accounting estimate to be material if it requires assumptions to be made that were uncertain at
the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on
the Company’s results of operations or financial condition.
In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting
Policies,” management has identified accounting policies it believes to be the most critical to the Company’s financial
48
statements—that is, management believes that the policies discussed below are both the most important to the portrayal of the
Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or
complex judgments. The policies affecting both of the Company’s two principal segments are discussed below and the policies
affecting just one segment are discussed in the respective segment’s section of “Material estimates and critical accounting
policies.” Management has reviewed the material estimates and critical accounting policies with the HEI Audit Committee and,
as applicable, the Hawaiian Electric Audit Committee.
For additional discussion of the Company’s accounting policies, see Note 1 of the Consolidated Financial Statements and
for additional discussion of material estimates and critical accounting policies, see the electric utility and bank segment
discussions below under the same heading.
Pension and other postretirement benefits obligations. For a discussion of material estimates related to pension and other
postretirement benefits (collectively, retirement benefits), including costs, major assumptions, plan assets, other factors
affecting costs, accumulated other comprehensive income (loss) (AOCI) charges and sensitivity analyses, see “Retirement
benefits” in “Consolidated—Results of operations” above and Notes 1 and 10 of the Consolidated Financial Statements.
Contingencies and litigation. The Company is subject to proceedings (including PUC proceedings), lawsuits and other
claims. Management assesses the likelihood of any adverse judgments in or outcomes of these matters as well as potential
ranges of probable losses, including costs of investigation. A determination of the amount of reserves required, if any, for these
contingencies is based on an analysis of each individual case or proceeding often with the assistance of outside counsel. The
required reserves may change in the future due to new developments in each matter or changes in approach in dealing with
these matters, such as a change in settlement strategy.
In general, environmental contamination treatment costs are charged to expense, unless it is probable that the PUC would
allow such costs to be recovered through future rates, in which case such costs would be capitalized as regulatory assets. Also,
environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of
property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the property
for sale.
See Notes 2, 4 and 5 of the Consolidated Financial Statements.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial
reporting bases and the tax bases of the Company’s assets and liabilities using tax rates expected to be in effect when such
deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible.
Management evaluates its potential exposures from tax positions taken that have or could be challenged by taxing
authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by
management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of
alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other
jurisdictions) and advice from its tax advisors. Management believes that the Company’s provision for tax contingencies is
reasonable. However, the ultimate resolution of tax treatments disputed by governmental authorities may adversely affect the
Company’s current and deferred income tax amounts.
See Note 12 of the Consolidated Financial Statements.
Following are discussions of the electric utility and bank segments. Additional segment information is shown in Note 2 of
the Consolidated Financial Statements. The discussion concerning Hawaiian Electric should be read in conjunction with its
consolidated financial statements and accompanying notes.
49
Electric utility
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state other than Kauai
and operate on five separate grids. The Utilities’ strategic focus is meeting Hawaii’s energy needs in a reliable, economical and
environmentally sound way by modernizing the electric grid, maximizing the use of low-cost, clean energy sources, sustaining
an effective asset management program and promoting smart use of energy by customers through information and choices. The
Utilities are focused on helping Hawaii achieve its statutory goal of 40% of electricity from clean, locally-generated sources by
2030.
Utility strategic progress. The Utilities continue to make significant progress in implementing their renewable energy
strategies to support Hawaii’s efforts to reduce its dependence on oil. The PUC issued several important regulatory decisions
during the last few years, including a number of interim and final rate case decisions (see table in “Most recent rate
proceedings” below).
On August 26, 2014, Hawaiian Electric, Hawaii Electric Light and Maui Electric filed proposed plans for Hawaii’s energy
future with the PUC, as required by PUC orders issued in April 2014. The plans filed were the Hawaiian Electric Power Supply
Improvement Plan, Maui Electric Power Supply Improvement Plan, Hawaii Electric Light Power Supply Improvement Plan,
Hawaiian Electric Companies Distributed Generation Interconnection Plan, and Hawaiian Electric Companies Integrated
Interconnection Queue Plan. Under these plans, the Utilities will support sustainable growth of rooftop solar, expand use of
energy storage systems, empower customers by developing smart grids, offer new products and services to customers (e.g.,
community solar, microgrids and voluntary “demand response” programs), and switch from high-priced oil to lower cost
liquefied natural gas.
Transition to renewable energy. The Utilities are committed to assisting the State of Hawaii in achieving or exceeding its
Renewable Portfolio Standard goal of 40% renewable energy by 2030 (see “Renewable energy strategy” below). In addition,
while it will not take precedence over the Utilities’ work to increase their use of renewable energy, the Utilities are also working
with the State of Hawaii and other entities to examine the possibility of using liquefied natural gas (LNG) as a cleaner and
lower cost fuel to replace, at least in part, the petroleum oil that would otherwise be used for the remaining generation. In
December 2013, the Utilities executed a non-binding memorandum of understanding with The Gas Company, LLC d/b/a
HawaiiGAS, documenting the parties’ desire to work together to (a) develop and/or secure infrastructure for large scale
importation of LNG into Hawaii and (b) establish a consortium to competitively procure the LNG and provide storage and
regasification of it at an LNG terminal site. In March 2014, Hawaiian Electric issued a RFP for the supply of containerized
LNG. Hawaiian Electric received 3 final bid submissions in May 2014 and is in the final stage of selecting an LNG supplier.
Also, see "Liquefied natural gas" in Note 4 of the Consolidated Financial Statements for a description of Hawaiian Electric's
agreement with Fortis BC Energy Inc.
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 in selected areas across Oahu as part of the Smart
Grid Initial Phase. The Initial Phase is expected to run through 2015 and includes the installation of direct load control water
heating switches and the launch of a Pre Pay Application. Also under the Initial Phase, fault circuit indicators and key remote
controlled switches have been installed, a grid efficiency measure called Volt/Var Optimization was turned on and customer
energy portals were launched and are available for customer use. 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. The Utilities are planning to seek approval
from the PUC in 2015 to commit funds for an expansion of the smart grid project, including at Hawaii Electric Light and Maui
Electric.
Decoupling. In 2010, the PUC issued an order approving decoupling, which was implemented by the Utilities in 2011 and
2012. The decoupling model implemented delinks revenues from sales and includes annual rate adjustments for certain O&M
expenses and rate base changes.
completing major capital projects within PUC approved amounts and on schedule;
Under decoupling, the most significant drivers for improving earnings are:
•
• managing O&M expense relative to authorized O&M adjustments; and
•
regulatory outcomes that cover O&M requirements and rate base items not included in the RAMs.
On May 31, 2013, as provided for in its original order issued in 2010 approving decoupling, the PUC opened an
investigative docket to review whether the decoupling mechanisms are functioning as intended, are fair to the Utilities and their
ratepayers, and are in the public interest. On February 7, 2014, in the first part of this bifurcated proceeding, the PUC issued a
D&O on select issues, which made certain modifications to the decoupling mechanism. Among other things, the D&O requires:
50
• An adjustment to the Rate Base RAM Adjustment to include 90% of the amount of the current RAM Period Rate Base
RAM Adjustment that exceeds the Rate Base RAM Adjustment from the prior year, to be effective with the Utilities'
2014 decoupling filing.
• Effective March 1, 2014, the interest rate to be applied on the outstanding RBA balances to be the short term debt rate
used in each Utilities last rate case (ranging from 1.25% to 3.25%), instead of the 6% that was previously approved.
The second part of this proceeding continued with panel hearings held in October 2014. The proceeding is currently
pending a PUC order instructing the parties regarding the issues and scope for limited briefs and reply briefs. See "Decoupling"
in Note 4 of the Consolidated Financial Statements.
Actual and PUC-allowed (as of December 31, 2014) returns were as follows:
%
Return on rate base (RORB)*
Year ended December 31, 2014
Utility returns
PUC-allowed returns
Difference
Hawaiian
Electric
7.76
8.11
Hawaii
Electric
Light
6.28
8.31
(0.35)
(2.03)
Maui
Electric
Hawaiian
Electric
ROACE**
Hawaii
Electric
Light
Rate-making ROACE***
Maui
Electric
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
7.50
7.34
0.16
8.74
10.00
(1.26)
6.71
10.00
(3.29)
8.81
9.00
(0.19)
9.85
10.00
(0.15)
6.65
10.00
(3.35)
9.44
9.00
0.44
* 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 executive incentive compensation and certain advertising.
The approval of decoupling by the PUC has helped the Utilities to gradually improve their ROACEs, which in turn will
facilitate the Utilities’ ability to effectively raise capital for needed infrastructure investments. However, the Utilities continue
to expect an ongoing structural gap between their PUC-allowed ROACEs and the ROACEs actually achieved due to the
following:
•
•
•
•
•
the timing of general rate case decisions,
the effective date of June 1 (rather than January 1) for the RAMs for Hawaii Electric Light and Maui Electric
currently, and for Hawaiian Electric beginning in 2017,
the 5-year historical average for baseline plant additions,
the modifications to the rate base RAM and RBA interest rate per the PUC's February 2014 decision on decoupling (as
discussed in Note 4 of the Consolidated Financial Statements), and
the PUC’s consistent exclusion of certain expenses from rates.
The structural gap in 2015 to 2017 is expected to be 100 to 120 basis points. Factors which impact the range of the
structural gap include the actual sales impacting the size of the RBA regulatory asset, the actual level of baseline additions in
any given year relative to the 5-year historical average, and the timing, nature, and size of any general rate case. Between rate
cases, items not covered by the annual RAMs could also have a negative impact on the actual ROACEs achieved by the
Utilities. Items not covered by the annual RAMS include the changes in rate base for the regulatory asset for pension
contributions in excess of the pension amount in rates, investments in software projects, changes in fuel inventory and O&M in
excess of indexed escalations. The specific magnitude of the impact will depend on various factors, including changes in the
required annual pension contribution, the size of software projects, changes in fuel prices and management’s ability to manage
costs within the current mechanisms.
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.
For 2014 and 2013, the earnings sharing mechanism was triggered for Maui Electric, and Maui Electric will credit $0.5 million
and credited $0.4 million, respectively, to its customers for their portion of the earnings sharing. For 2012, the earnings sharing
mechanism was triggered for Hawaiian Electric, and Hawaiian Electric credited its customers $2.6 million for their portion of
the earnings sharing. Hawaiian Electric’s 2012 rate-making ROACE of 10.70% included various adjustments to Hawaiian
Electric’s actual ROACE of 7.57% such as the exclusion of the $40 million of CIS project costs pursuant to the 2013
Agreement, and other expenses not considered in establishing electric rates (e.g., executive incentive compensation and certain
advertising). Earnings sharing credits are included in the annual decoupling filing for the following year.
Annual decoupling filings. On May 30, 2014, the PUC approved the revised annual decoupling filings for tariffed
rates for the Utilities that will be effective from June 1, 2014 through May 31, 2015. The tariffed rates include: (1) RAM
adjusted revenues (the components of the annual incremental changes are shown below) with the 2014 rate base RAM return on
51
investment calculated as the PUC ordered in its recent investigative docket on the decoupling mechanism, (2) accrued earnings
sharing credits to be refunded, and (3) the amount of the accrued RBA balance as of December 31, 2014 (and associated
revenue taxes) to be collected:
(in millions)
Annual incremental RAM adjusted revenues
Operations and maintenance
Invested capital
Total annual incremental RAM adjusted revenues
Accrued earnings sharing credits to be refunded
Accrued RBA balance as of December 31, 2014 (and associated revenue
taxes) to be collected
Hawaiian
Electric
Hawaii Electric
Light
Maui Electric
$
$
$
$
4.0
26.8
30.8
$
$
— $
0.9
3.9
4.8
$
$
— $
72.6
$
8.2
$
1.0
4.4
5.4
(0.4)
9.6
Results of operations.
•
2014 vs. 2013
2014
2,987
$
2013
2,980
$
Increase (decrease)
(dollars in millions, except per barrel amounts)
$
7
$
52
8
Revenues. Increase largely due to:
Higher rate base and O&M RAM
Higher purchased power costs
5 Maui Electric refund in 2013 due to final 2012 rate case decision
(32)
(28)
Lower KWH generated
Lower fuel prices
1,132
1,186
(54)
Fuel oil expense. Decrease largely due to lower KWHs generated and lower fuel
722
411
711
403
447
276
138
435
246
123
11
8
12
30
15
costs
Purchased power expense. Increase due to higher KWHs purchased as a result of
decreased availability of AES in 2013 and expanded capacity of HPower in 2014,
partly offset by lower purchased energy costs due to lower fuel prices
Operation and maintenance expense. Increase largely due to:
8
8
4
4
(9)
(5)
(5)
Smart Grid initial phase
Consultant costs associated with energy transformation plans
Storm restoration
Customer information system upgrade
Lower customer service costs that were elevated in 2013 during the stabilization
period for the new customer information system
Lower overhaul costs due to reduced scope of overhauls
Lower production costs due to deactivation of HPP
Other expenses. Increase primarily due to depreciation expense for plant
investments
Operating income. Increase due to higher revenues and a decrease in overall
expenses
Net income for common stock. Increase due to higher operating income
8.4%
8.0%
129.65
131.10
8,976
4,909
2,759
9,070
4,506
2,764
0.4%
(1.45)
(94)
403
(5)
Return on average common equity
Average fuel oil cost per barrel 1
Kilowatthour sales (millions) 2
Cooling degree days (Oahu)
Number of employees (at December 31)
52
•
2013 vs. 2012
2013
2,980
$
2012
3,109
$
Increase (decrease)
(dollars in millions, except per barrel amounts)
$
(129)
Revenues. Decrease largely due to:
$
(150)
Lower fuel prices and lower KWH sales
(12) Maui Electric test year 2012 final D&O
35
Higher decoupling revenues
1,186
711
1,297
725
403
397
(111)
(14)
6
Fuel oil expense. Decrease largely due to lower fuel costs and less KWHs generated
Purchased power expense. Decrease due to lower purchased power energy costs
offset by higher KWHs purchased
Operation and maintenance expense. Increase largely due to:
11
(8)
Higher customer service expenses (CIS and customer service support) offset by
Lower costs in overhauls, substation maintenance costs at Maui Electric and
overhead line maintenance costs at Maui Electric and Hawaii Electric Light
435
480
(45)
Other expenses. Decrease largely due to:
(40) Write down of CIS project costs in 2012
246
8
123
213
11
99
33
(3)
24
8.0%
6.9%
1.1%
131.10
138.09
9,070
4,506
2,764
9,206
4,532
2,658
(6.99)
(136)
(26)
106
(12)
Lower revenues in 2013 (which resulted in lower taxes, other than income taxes)
9
Increase in depreciation due to increase in plant investments
Operating income. Increase largely due to write down of CIS project costs in 2012
offset by higher customer service expenses
Allowance for funds used during construction
Net income for common stock. Increase largely due to write down of CIS project
costs recognized in 2012
Return on average common equity
Average fuel oil cost per barrel 1
Kilowatthour sales (millions) 2
Cooling degree days (Oahu)
Number of employees (at December 31)
1
2
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.
KWH sales were lower in 2014 and 2013 when compared to the prior year due largely to continued energy efficiency and conservation
efforts by customers and increasing levels of customer-sited renewable generation.
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. 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.
The following table summarizes certain details of each utility’s most recent rate cases, including the details of the increases
requested, whether the utility and the Consumer Advocate reached a settlement that they proposed to the PUC and the details of
any granted interim and final PUC D&O increases.
53
Test year
(dollars in millions)
Hawaiian Electric
2011 (1)
Request
Interim increase
Interim increase (adjusted)
Interim increase (adjusted)
Final increase
2014 (2)
Hawaii Electric Light
2010 (3)
Request
Interim increase
Interim increase (adjusted)
Final increase
2013 (4)
Request
Closed
Maui Electric
2012 (5)
Request
Interim increase
Final increase
2015 (6)
Date
(applied/
implemented)
Amount
% over
rates in
effect
ROACE
(%)
RORB
(%)
Rate
base
Stipulated
agreement
reached with
Consumer
Advocate
Common
equity
%
7/30/10
7/26/11
4/2/12
5/21/12
9/1/12
6/27/14
12/9/09
1/14/11
1/1/12
4/9/12
8/16/12
3/27/13
$ 113.5
53.2
58.2
58.8
58.1
$
20.9
6.0
5.2
4.5
6.6
3.1
3.4
3.4
3.4
6.0
1.7
1.5
1.3
10.75
10.00
10.00
10.00
10.00
10.75
10.50
10.50
10.00
8.54
$ 1,569
8.11
8.11
8.11
8.11
1,354
1,385
1,386
1,386
8.73
$
8.59
8.59
8.31
487
465
465
465
56.29
56.29
56.29
56.29
56.29
55.91
55.91
55.91
55.91
Yes
Yes
$
19.8
4.2
10.25
8.30
$
455
57.05
7/22/11
$
6/1/12
8/1/13
12/30/14
27.5
13.1
5.3
6.7
3.2
1.3
11.00
10.00
9.00
8.72
$
7.91
7.34
393
393
393
56.85
56.86
56.86
Yes
Note: The “Request Date” reflects the application filing date for the rate proceeding. All other line items reflect the effective dates of the
revised schedules and tariffs as a result of PUC-approved increases.
(1) Hawaiian Electric filed a request with the PUC for a general rate increase of $113.5 million, based on depreciation rates and
methodology as proposed by Hawaiian Electric in a separate depreciation proceeding. Hawaiian Electric’s request was primarily to pay
for major capital projects and higher O&M costs to maintain and improve service reliability and to recover the costs for several proposed
programs to help reduce Hawaii’s dependence on imported oil, and to further increase reliability and fuel security.
The $53.2 million, $58.2 million, and $58.8 million interim increases, and the $58.1 million final increase, include the $15 million in
annual revenues that were being recovered through the decoupling RAM prior to the first interim increase.
(2) See “Hawaiian Electric 2014 test year rate case” below.
(3) Hawaii Electric Light’s request was primarily to cover investments for system upgrade projects, two major transmission line upgrades
and increasing O&M expenses. On February 8, 2012, the PUC issued a final D&O, which reflected the approval of decoupling and cost-
recovery mechanisms, and on February 21, 2012, Hawaii Electric Light filed its revised tariffs to reflect the increase in rates. On April 4,
2012, the PUC issued an order approving the revised tariffs, which became effective April 9, 2012. Hawaii Electric Light implemented
the decoupling mechanism and began tracking the target revenues and actual recorded revenues via a revenue balancing account. Hawaii
Electric Light also reset the heat rates and implemented heat rate deadbands and the PPAC, which provides a surcharge mechanism that
more closely aligns cost recovery with costs incurred. The revised tariffs reflect a lower increase in annual revenue requirement
compared to the interim increase due to factors that became effective concurrently with the revised tariffs (lower depreciation rates and
lower ROACE) and therefore, no refund to customers was required.
(4) Hawaii Electric Light’s request was to pay for O&M expenses and additional investments in plant and equipment required to maintain
and improve system reliability and to cover the increased costs to support the integration of more renewable energy generation. As a
result of the 2013 Agreement and 2013 Order (described below), the rate case was withdrawn and the docket has been closed.
(5) Maui Electric’s request was to pay for O&M expenses and additional investments in plant and equipment required to maintain and
improve system reliability and to cover the increased costs to support the integration of more renewable energy generation. See
discussion on final D&O, including the refund to customers in September and October 2013 required as a result of the final D&O, in
Note 4 of the Consolidated Financial Statements.
(6) See “Maui Electric 2015 test year rate case” below.
54
Hawaiian Electric 2011 test year rate case. In the Hawaiian Electric 2011 test year rate case, the PUC had granted
Hawaiian Electric’s request to defer CIS project O&M expenses (limited to $2,258,000 per year in 2011 and 2012) that were to
be subject to a regulatory audit of project costs, and allowed Hawaiian Electric to accrue allowance for funds used during
construction (AFUDC) on these deferred costs until the completion of the regulatory audit.
On January 28, 2013, the Utilities and the Consumer Advocate entered into the 2013 Agreement to, among other things,
write-off $40 million of CIS Project costs in lieu of conducting the regulatory audits of the CIP CT-1 and the CIS projects, with
the remaining recoverable costs for the projects of $52 million to be included in rate base as of December 31, 2012. The parties
agreed that Hawaii Electric Light would withdraw its 2013 test year rate case and not file a rate case until its next turn in the
rate case cycle, for a 2016 test year, and Hawaiian Electric would delay the filing of its scheduled 2014 test year rate case to no
earlier than January 2, 2014. The parties also agreed that, starting in 2014, Hawaiian Electric will be allowed to record RAM
revenues starting on January 1 (instead of the prior start date of June 1) for the years 2014, 2015 and 2016. This resulted in
additional revenues of $7 million and $5 million for the first and second quarters of 2014, respectively, for a year-to-date
amount of $12 million. There were no additional revenues recorded in the third quarter of 2014 as a result of the 2013
Agreement. See “Commitments and contingencies—Utility projects” in Note 4 of the Consolidated Financial Statements for
additional information on the 2013 Agreement and the 2013 D&O and their effects.
Hawaiian Electric 2014 test year rate case. On October 30, 2013 Hawaiian Electric filed with the PUC a Notice of Intent
to file an application for a general rate case (on or after January 2, 2014, but before June 30, 2014, using a 2014 test year) and a
motion, which was subsequently recommended by the Consumer Advocate, for approval of test period waiver. Hawaiian
Electric’s filing of a 2014 rate case would be in accordance with a PUC order which calls for a mandatory triennial rate case
cycle. On March 7, 2014, the PUC issued an order granting Hawaiian Electric’s motion to waive the requirement to utilize a
split test year, and authorized a 2014 test year.
On June 27, 2014, Hawaiian Electric submitted an abbreviated rate case filing (abbreviated filing), stating that it intends to
forego the opportunity to seek a general rate increase in base rates, and if approved, this filing would result in no change in base
rates. Hawaiian Electric stated that it is foregoing a rate increase request in recognition that its customers are already in a
challenging high electricity bill environment. The abbreviated filing explained that Hawaiian Electric is aggressively attacking
the root causes of high rates, by, among other things, vigorously pursuing the opportunity to switch from oil to liquefied natural
gas, acquiring lower-cost renewable energy resources, pursuing opportunities to achieve operational efficiencies, and
deactivating older, high-cost generation. Instead of seeking a rate increase, Hawaiian Electric is focused on developing and
executing the new business model, plans and strategies required by the PUC’s April 2014 regulatory orders discussed in Note 4
of the Consolidated Financial Statements, as well as other actions that will reduce rates.
Hawaiian Electric further explained that the abbreviated filing satisfies the obligation to file a general rate case under the
three-year cycle established by the PUC in the decoupling final D&O. If the PUC determines that additional materials are
required, Hawaiian Electric stated it will work with the Consumer Advocate on a schedule to submit additional information as
needed. Hawaiian Electric asked for an expedited decision on this filing and stated that if the PUC decides that such a ruling is
not in order, Hawaiian Electric reserves the right to supplement the abbreviated filing with additional material to support the
increase in revenue requirements forgone by this filing-calculated to be $56 million over revenues at current effective rates.
Hawaiian Electric’s revenue at current effective rates includes: (1) the revenue from Hawaiian Electric’s base rates, including
the revenue from the energy cost adjustment clause and the purchased power adjustment clause, (2) the revenue that would be
included in the decoupling revenue balancing account (RBA) in 2014 based on 2014 test year forecasted sales, and (3) the
revenue from the 2014 rate adjustment mechanism (RAM) implemented in connection with the decoupling mechanism.
Under Hawaiian Electric’s proposal, the decoupling RBA and RAM would continue, subject to any change to these
mechanisms ordered by the PUC in Schedule B of the decoupling proceedings, the DSM surcharge would continue since
demand response (DR) program costs would not be rolled into base rates (as required in the April 28, 2014 DR Order) until the
next rate case, and the pension and OPEB tracking mechanisms would continue. Hawaiian Electric plans to file its next rate
case according to the normal rate case cycle using a 2017 test year. If circumstances change, Hawaiian Electric may file its next
rate case earlier.
Management cannot predict whether the PUC will accept this abbreviated filing to satisfy Hawaiian Electric’s obligation to
file a rate case in 2014, whether additional material will be required or whether Hawaiian Electric will be required to proceed
with a traditional rate proceeding.
Maui Electric 2015 test year rate case. On October 17, 2014, Maui Electric filed its notice of intent to file a general rate
case application by the end of 2014, utilizing a 2015 calendar test year. The rate case filing is required to satisfy the obligation
to file a general rate case under the three-year cycle established by the PUC in the decoupling final D&O. On December 30,
2014, Maui Electric filed its abbreviated 2015 test year rate case filing. In recognition that its customers have been enduring a
high bill environment, Maui Electric proposed no change to its base rates, thereby foregoing the opportunity to seek a general
55
rate increase. If Maui Electric were to seek an increase in base rates, its requested increase in revenue, based on its revenue
requirement for a normalized 2015 test year, would have been $11.6 million, or 2.8%, over revenues at current effective rates
with estimated 2015 rate adjustment mechanism (RAM) revenues. The normalized 2015 test year revenue requirement is based
on an estimated cost of common equity of 10.75%. Management cannot predict any actions by the PUC as a result of this filing.
Integrated resource planning and April 2014 regulatory orders. See “April 2014 regulatory orders” in Note 4 to the
Consolidated Financial Statements.
Renewable energy strategy. The Utilities’ policy is to support efforts to increase renewable energy in Hawaii. The Utilities
believe their actions will help stabilize customer bills as they become less dependent on costly and price-volatile fossil fuel. The
Utilities’ renewable energy strategy will also allow them to meet Hawaii’s RPS law, which requires electric utilities to meet an
RPS of 10%, 15%, 25% and 40% by December 31, 2010, 2015, 2020 and 2030, respectively. The Utilities met the 10% RPS for
2010 with a consolidated RPS of 20.7%, including savings from energy efficiency programs and solar water heating (or 9.5%
without DSM energy savings). Energy savings resulting from DSM energy efficiency programs and solar water heating will not
count toward the RPS after 2014. For 2014, the Utilities achieved an RPS without DSM energy savings of an estimated 21%,
primarily through a comprehensive portfolio of renewable energy power purchase agreements (PPAs), net energy metering
programs and biofuels. The Utilities have been successful in adding significant amounts of renewable energy resources to their
electric systems. The Utilities are on track to exceed their 2015 RPS goal, and lead the nation in terms of the amount of
photovoltaic (PV) systems installed by its customers. Additionally, the State continues to pursue reduction in energy use, as
embodied in its energy efficiency portfolio standard goals.
As more generating resources, whether utility scale or distributed generation, are added to the Utilities' electric systems and
as customers reduce their energy usage, the ability to accommodate additional generating resources and to accept energy from
existing resources is becoming more challenging. As a result, there is a growing risk that energy production from generating
resources may need to be curtailed and the interconnection of additional resources will need to be closely evaluated. Also,
under the state’s renewable energy strategy, there has been exponential growth in recent years in variable generation (e.g. solar
and wind) on Hawaii’s island grids. Much of this variable generation is in the form of distributed generators interconnected at
distribution circuits that cannot be directly controlled by system operators. As a consequence, grid resiliency in response to
events that cause significant frequency and/or voltage excursions has weakened, and the prospects for larger and more frequent
service outages have increased. The Utilities have been progressively making changes in their operating practices, are making
investments in grid modernization technologies, and are working with the solar industry to mitigate these risks and continue the
integration of more renewable energy.
Developments in the Utilities’ renewable energy strategy include the following (also see the projects discussed under
“Renewable Energy Projects” in Note 4 of the Consolidated Financial Statements):
•
•
•
•
•
•
In July 2011, the PUC directed Hawaiian Electric to submit a draft request for proposals (RFP) for the PUC’s
consideration for a competitive bidding process for 200 MW or more of renewable energy to be delivered to, or to be
sited on, the island of Oahu. In October 2011, Hawaiian Electric filed a draft RFP with the PUC. In July 2013, the
PUC issued orders related to the 200 MW RFP. First, it issued an order that Hawaiian Electric shall amend its current
draft of the Oahu 200 MW RFP to remove references to the Lanai Wind Project, eliminate solicitations for an undersea
transmission cable, and amend the draft RFP to reflect other guidance provided in the order. Second, it initiated an
investigative proceeding to review the progress of the Lanai Wind Project stating that there was an uncertainty whether
the project developer retained an equivalent ability to develop the project as when it submitted its bid in 2008 and its
term sheet in 2011. Third, the PUC initiated a proceeding to solicit information and evaluate whether an interisland
grid interconnection transmission system between the islands of Oahu and Maui is in the public interest, given the
potential for large-scale wind and solar projects on Maui. (see Note 4 of the Consolidated Financial Statements for
additional information).
In May 2012, the PUC approved Hawaiian Electric’s 3-year biodiesel supply contract with Renewable Energy Group
for continued biodiesel supply to CIP CT-1 of 3 million to 7 million gallons per year.
In May 2012, Maui Electric began purchasing wind energy from the 21-MW Kaheawa Wind Power II, LLC facility,
which went into commercial operation in July 2012.
In May 2012, Hawaiian Electric signed a contract, which was approved by the PUC, with the City and County of
Honolulu to purchase an additional 27 MW of capacity and energy from an expanded waste-to-energy HPower facility,
which was placed in service in April 2013.
In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua
Bioenergy for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on
the island of Hawaii.
In May 2012, the PUC instituted a proceeding for a competitive bidding process for up to 50 MW of firm renewable
geothermal dispatchable energy (Geothermal RFP) on the island of Hawaii. Bids were received in January 2015, and
56
•
•
•
•
•
•
•
in February 2015, Ormat Technologies, Inc. was selected to provide 25 MW of additional geothermal energy, subject
to successful contract negotiations and PUC approval of the final agreement.
In August 2012, the battery facility at a 30-MW Kahuku wind farm experienced a fire. After the interconnection
infrastructure was rebuilt and voltage regulation equipment was installed, the facility came up to full output in January
2014 to perform control system acceptance testing, and energy is being purchased at a base rate until PUC approval of
an amendment to the Power Purchase Agreement.
In August 2012, the PUC approved a waiver from the competitive bidding process to allow Hawaiian Electric to
negotiate with the U.S. Army for construction of a 50 MW utility-owned and operated firm, renewable and
dispatchable generation facility at Schofield Barracks on the island of Oahu and expected to be placed in service in
2017.
In September 2012, Hawaiian Electric began purchasing test wind energy from the 69-MW Kawailoa Wind, LLC
facility. The wind farm was placed into full commercial operation in November 2012.
In December 2012, the PUC approved a 3-year biodiesel supply contract with Pacific Biodiesel to supply 250,000 to 1
million gallons of biodiesel at the Honolulu International Airport Emergency Power Facility beginning in 2013.
In December 2012, the 21-MW Auwahi Wind Energy LLC facility was placed into commercial operation, selling
power to Maui Electric under a 20-year contract.
In December 2012, the 5-MW Kalaeloa Solar Two, LLC PV facility was placed into commercial operation, selling
power to Hawaiian Electric under a 20-year contract.
In February 2013, Hawaiian Electric issued an “Invitation for Low Cost Renewable Energy Projects on Oahu through
Request for Waiver from Competitive Bidding,” which seeks to lower the cost of electricity for customers in the near
term with qualified renewable energy projects on Oahu that can be quickly placed into service at a low cost per KWH.
Proposals were received and Hawaiian Electric obtained waivers from the PUC Competitive Bidding Framework for
certain projects, subject to certain conditions. In the fourth quarter of 2014, Hawaiian Electric filed applications
requesting PUC approval of power purchase agreements for renewable as-available energy for seven projects that were
granted waivers from the Competitive Bidding Framework.
In May 2013, Maui Electric requested a waiver from the PUC Competitive Bidding Framework to conduct
negotiations for a PPA for approximately 4.5 to 6.0 MW of firm power from a proposed Mahinahina Energy Park,
LLC project, fueled with biofuel. The PUC approved the waiver request, provided that an executed PPA must be filed
for PUC approval by February 2015. The parties did not execute a PPA by the PUC deadline, but continue to negotiate.
In October 2013, Hawaiian Electric requested approval from the PUC for a waiver from the competitive bidding
process and to commit $42.4 million for the purchase and installation of a 15 MW utility scale PV generation system
at its Kahe Power generation station property. In November 2014, the PUC denied the request for a waiver from the
competitive bidding process.
In October 2013, the PUC approved Hawaiian Electric’s 20-year contract with Hawaii BioEnergy to supply 10 million
gallons per year of biocrude at Kahe Power Plant to begin within five years of November 25, 2013.
In November 2013, the 5 MW Kalaeloa Renewable Energy Park, LLC PV facility was placed into commercial
operation selling power to Hawaiian Electric under a 20-year contract.
In December 2013, the PUC denied approval of Hawaii Electric Light’s contract with Aina Koa Pono-Ka’u LLC
(AKP) to supply 16 million gallons of biodiesel per year, citing the higher cost of the biofuel over the cost of
petroleum diesel.
In December 2013, Hawaiian Electric requested PUC approval for a waiver of the Na Pua Makani Power Partners,
LLC’s proposed 24-MW wind farm located in the Kahuku area on Oahu from the competitive bidding process and of
the PPA for Renewable As-Available Energy dated October 3, 2013 between Hawaiian Electric and Na Pua Makani
Power Partners, LLC for the proposed 24-MW wind farm. In December 2014, the PUC approved both the waiver
request and the PPA.
In April 2014, Hawaiian Electric requested PUC approval of a PPA for Renewable As-Available Energy with
Lanikuhana Solar, LLC for a proposed 20-MW PV facility on Oahu.
In June 2014, the PUC approved the Utilities 3-year biodiesel supply contract with Pacific Biodiesel Technologies,
LLC to spot purchase up to 200,000 gallons per month of as available biodiesel at cost parity to petroleum diesel.
• The Utilities began accepting energy from feed-in tariff projects in 2011. As of December 31, 2014, there were 11
•
•
•
•
•
•
•
•
MW, 1 MW and 2 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric,
Hawaii Electric Light and Maui Electric, respectively.
• As of December 31, 2014, there were approximately 214 MW, 46 MW and 48 MW of installed net energy metering
capacity from renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui
Electric, respectively. The amount of net energy metering capacity installed in 2014 was about 32% lower than the
amount installed in 2013, principally due to higher circuit saturations (resulting in the need for further technical
reviews and potential equipment modification and/or upgrades).
57
Other regulatory matters. In addition to the items below, also see “Hawaii Clean Energy Initiative” and “Utility projects” in
Note 4 of the Consolidated Financial Statements.
Adequacy of supply.
Hawaiian Electric. In January 2015, Hawaiian Electric filed its 2015 Adequacy of Supply (AOS) letter, which
indicated that based on its February 2014 sales and peak forecast for the 2015 to 2017 time period, Hawaiian Electric’s
generation capacity will be sufficient to meet reasonably expected demands for service and provide reasonable reserves for
emergencies through 2016, notwithstanding a generation shortfall event in January 2015, due to unexpected concurrent outages
of a utility generating unit and several IPPs.
In accordance to its planning criteria, Hawaiian Electric deactivated two fossil fuel generating units from active
service at its Honolulu Power Plant in January 2014 and anticipates deactivating two additional fossil fuel units at its Waiau
Power Plant in the 2016 timeframe. Hawaiian Electric is proceeding with future firm capacity additions in coordination with the
State of Hawaii Department of Transportation in 2015, and with the U.S. Department of the Army for a utility owned and
operated renewable, dispatchable, including black start capabilities, generation security project on federal lands, which may be
in service in the 2018 timeframe. Hawaiian Electric is continuing negotiations with two firm capacity IPPs on Oahu under PPAs
scheduled to expire in 2016 and 2022.
Hawaii Electric Light. In January 2015, Hawaii Electric Light filed its 2015 AOS letter, which indicated that Hawaii
Electric Light’s generation capacity through 2017 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 Hu Honua Bioenergy, LLC plant in 2016, and potentially
additional generation in the 2020-2025 timeframe. The addition of the Hu Honua Bioenergy plant will provide Hawaii Electric
Light with the opportunity to deactivate existing fossil fueled generating capacity.
Maui Electric. In January 2015, Maui Electric filed its 2015 AOS letter, which indicated that Maui Electric’s
generation capacity through 2018 is sufficient to meet the forecasted demands on the islands of Maui, Lanai, and Molokai.
Maui Electric anticipates needing additional firm capacity on Maui in the 2019 timeframe. In February 2014, Maui Electric
deactivated two fossil fuel generating units at its Kahului Power Plant. In January 2015, the two deactivated units at Kahului
Power Plant were reactivated for a 3-day period based on forecasts of insufficient total system capacity due to scheduled
maintenance for other generating units. Maui Electric anticipates the retirement of all generating units at the Kahului Power
Plant in the 2019 timeframe. Maui Electric plans to issue one or more RFPs for energy storage, demand response and firm
generating capacity, and to make system improvements needed to ensure reliability and voltage support in this timeframe.
The PSIPs, Distributed Generation Interconnection Plan, Integrated Interconnection Queue Plan and Demand Response
Portfolio Plan filed in response to the April 2014 regulatory orders may affect the resource plans.
April 2014 regulatory orders. In April 2014, the PUC issued four orders that collectively provide certain key policy,
resource planning, and operational directives to the Utilities. See “April 2014 regulatory orders” in Note 4 of the Consolidated
Financial Statements.
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 “Hawaii Clean Energy Initiative” and “Environmental regulation”
in Note 4 of the Consolidated Financial Statements and “Recent tax developments” above.
Renewable energy. In 2011, a Hawaii law was enacted that gives the PUC the authority to allow those electric utilities
(including the Utilities) that aggregate their renewable portfolios in measuring whether they achieve the renewable portfolio
standards under the Hawaii RPS law discussed above under "Renewable energy strategy" to distribute the costs and expenses of
renewable energy projects among those utilities. The bill also allows the PUC to establish a surcharge for such costs and
expenses without a rate case filing. Also passed in 2011, Act 10 provides for continued inclusion of customer-sited, grid-
connected renewable energy generation in the RPS calculations after 2015. This is the current practice in calculating RPS
levels, which provides electric utility ratepayers with a clear value from a program such as net energy metering.
Commitments and contingencies. See “Commitments and contingencies” in Note 4 of the Consolidated Financial Statements.
Potential impact of lava flows. In June 2014, lava from the Kilauea Volcano on the island of Hawaii began flowing toward
the town of Pahoa. Hawaii Electric Light is monitoring utility property and equipment near the affected areas and protecting
that property and equipment to the extent possible (e.g., building barriers around poles).
Recent accounting pronouncements. See “Recent accounting pronouncements and interpretations” in Note 1 of the
Consolidated Financial Statements.
58
Liquidity and capital resources. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate
cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and
draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures and
investments and to cover debt, retirement benefits and other cash requirements in the foreseeable future.
Hawaiian Electric’s consolidated capital structure was as follows:
December 31
(dollars in millions)
Short-term borrowings
Long-term debt, net
Preferred stock
Common stock equity
2014
2013
$
$
—
1,207
34
1,682
2,923
—% $
41
1
58
100% $
—
1,218
34
1,594
2,846
—%
43
1
56
100%
Hawaiian Electric’s short-term borrowings (other than from Hawaii Electric Light and Maui Electric) and line of credit
facility were as follows:
(in millions)
Short-term borrowings1
Commercial paper
Line of credit draws
Borrowings from HEI
Undrawn capacity under line of credit facility
Year ended
December 31, 2014
Average
balance
End-of-period
balance
December 31,
2013
$
56
$
— $
—
—
200
—
—
—
175
1
The maximum amount of external short-term borrowings in 2014 was $103 million. At December 31, 2014, Hawaii Electric Light and
Maui Electric had short-term borrowings from Hawaiian Electric of $11 million and $6 million, respectively, which intercompany
borrowings are eliminated in consolidation. At February 13, 2015, Hawaiian Electric had $52 million of outstanding commercial paper,
its line of credit facility was undrawn, it had no borrowings from HEI and it had loans to Hawaii Electric Light and Maui Electric of $21
million and $9 million, respectively.
Hawaiian Electric utilizes short-term debt, typically commercial paper, to support normal operations, to refinance short-
term debt and for other temporary requirements. Hawaiian Electric also borrows short-term from HEI for itself and on behalf of
Hawaii Electric Light and Maui Electric, and Hawaiian Electric may borrow from or loan to Hawaii Electric Light and Maui
Electric short-term. The intercompany borrowings among the Utilities, but not the borrowings from HEI, are eliminated in the
consolidation of Hawaiian Electric’s financial statements. The Utilities periodically utilize long-term debt, historically
borrowings of the proceeds of special purpose revenue bonds (SPRBs) issued by the Department of Budget and Finance of the
State of Hawaii (DBF) and more recently the issuance of privately placed taxable unsecured senior notes, to finance the
Utilities’ capital improvement projects, or to repay short-term borrowings used to finance such projects. The PUC must approve
issuances, if any, of equity and long-term debt securities by the Utilities.
Hawaiian Electric has a line of credit facility, as amended and restated on April 2, 2014, of $200 million. In January 2015,
the PUC approved Hawaiian Electric’s request to extend the term of the credit facility to April 2, 2019. See Note 7 of the
Consolidated Financial Statements.
The ratings of Hawaiian Electric’s commercial paper and debt securities could significantly impact the ability of Hawaiian
Electric to sell its commercial paper and issue debt securities and/or the cost of such debt. The rating agencies use a
combination of qualitative measures (e.g., assessment of business risk that incorporates an analysis of the qualitative factors
such as management, competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash
flow, debt, interest coverage and liquidity ratios) in determining the ratings of Hawaiian Electric securities.
Following the announcement that HEI has agreed to merge with NextEra Energy, Inc., on December 4, 2014, Fitch
affirmed the ‘BBB+’ long-term issuer default rating of Hawaiian Electric with a stable rating outlook. Fitch noted that “HECO
will benefit significantly from Nextera’s [sic] ownership, in Fitch’s view, given access to Nextera’s [sic] expertise in developing
renewable projects, superior operational performance and portfolio transformation to cleaner fuels in addition to access to
capital. However, the structural weakness in its service territory due to rising penetration of roof top solar compounded by the
uncertainty around the fleet modernization plan limits any positive rating actions at this time.” The key ratings drivers cited
59
were (1) modest improvement in business risk, (2) structural challenges in Hawaii, (3) regulatory approvals required, and (4)
credit metrics trajectory unchanged. Fitch also noted that “[f]uture developments that may, individually or collectively, lead to
negative rating action include:-- [a]n inability to earn an adequate and timely recovery on invested capital; -- [a]ccelerating
competitive inroads by distributed generation and energy efficiency; and -- [f]ailure to consummate acquisition by Nextera [sic]
and material deterioration in regulatory environment.”
On December 4, 2014, Moody’s affirmed the ratings of Hawaiian Electric (Baa1 stable). Moody’s views “NextEra’s
acquisition as potentially beneficial to HECO which has been experiencing numerous operational challenges due to pressure
from regulators and other stakeholders to reduce costs and expand the use of renewable generation.” Moody’s also noted that
the “rating could be downgraded or placed on negative outlook should the company’s relationship with the regulators
deteriorate to a point where it might affect the company’s credit metrics in a meaningful way, or if HECO’s cash flow to debt
metric declined to 13% or below on a sustained basis.”
On December 4, 2014, S&P placed the ‘BBB-’ issuer credit rating for Hawaiian Electric on CreditWatch with positive
implications. S&P indicated that “[i]n light of the level of NextEra’s investment in HEI, NextEra’s proposed method of funding
the acquisition, opportunities for growth, and stated commitment from management, we assess HEI and HECO as “core”
subsidiaries of NextEra. As a result, upon the close of the transaction, we expect to raise our issuer credit ratings on HEI and
HECO to be aligned with that of the ultimate parent NextEra.” S&P issued a subsequent report on January 26, 2015, stating
“the outlook on HECO mirrors the outlook on parent HEI. The ratings on HEI and its subsidiaries are on CreditWatch with
positive implications because of the proposed merger with higher-rated NextEra Energy Inc.”
As of February 13, 2015, the Fitch, Moody’s and S&P ratings of Hawaiian Electric were as follows:
Long-term issuer default, long-term issuer and corporate credit, respectively
Commercial paper
Special purpose revenue bonds
Hawaiian Electric-obligated preferred securities of trust subsidiary
Cumulative preferred stock (selected series)
Senior unsecured debt
Subordinated debt
Outlook
* Not rated.
Fitch Moody’s
Baa1
BBB+
P-2
F2
Baa1
*
*
Baa2
Baa3
*
Baa1
A-
BBB
*
Stable
Stable
S&P
BBB-
A-3
BBB-
BB
*
*
*
Watch-Positive
The above ratings reflect only the view, at the time the ratings are issued, of the applicable rating agency, from whom an
explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any
securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be
evaluated independently of any other rating.
Management believes that, if Hawaiian Electric’s commercial paper ratings were to be downgraded or if credit markets
were to further tighten, it could be more difficult and/or expensive to sell commercial paper or secure other short-term
borrowings. Similarly, management believes that if Hawaiian Electric’s long-term credit ratings were to be downgraded, or if
credit markets further tighten, it could be more difficult and/or expensive for DBF and/or the Company to sell SPRBs and other
debt securities, respectively, for the benefit of the Utilities in the future. Such limitations and/or increased costs could materially
adversely affect the results of operations, financial condition and liquidity of the Utilities.
SPRBs have been issued by the DBF to finance (and refinance) capital improvement projects of Hawaiian Electric and its
subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries
under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
The payment of principal and interest due on SPRBs currently outstanding and issued prior to 2009 are insured by Financial
Guaranty Insurance Company (FGIC), which was placed in a rehabilitation proceeding in the State of New York in June 2012.
On August 19, 2013 FGIC's plan of rehabilitation became effective and the rehabilitation proceeding terminated. The S&P and
Moody’s ratings of FGIC, which at the time the insured obligations were issued were higher than the ratings of the Utilities,
have been withdrawn. Management believes that if Hawaiian Electric’s long-term credit ratings were to be downgraded, or if
credit markets further tighten, it could be more difficult and/or expensive to sell bonds in the future.
In April 2014, Hawaiian Electric, Hawaii Electric Light and Maui Electric filed an application with the PUC for approval
of the sale of each utility’s common stock over a period from the date of approval in 2014 to December 31, 2016 (Hawaiian
Electric’s sale to HEI of up to $250 million and Hawaii Electric Light’s and Maui Electric’s sales to Hawaiian Electric of up to
60
$26 million and $47 million, respectively), and the purchase of the Hawaii Electric Light and Maui Electric common stock by
Hawaiian Electric over the same period. In July 2014, the Utilities modified their request to the PUC to approve the issuance
and sale of common stock in 2014 only in the amounts stated in the application (Hawaiian Electric’s issuance and sale of its
common stock to HEI of up to $60 million and Hawaii Electric Light’s and Maui Electric’s issuance and sale of their common
stock to Hawaiian Electric of up to $5 million and $20 million, respectively), which the PUC approved in November 2014. In
December 2014, Hawaiian Electric sold $40 million of its common stock to HEI pursuant to this approval. Hawaii Electric
Light and Maui Electric did not issue common stock in 2014.
The PUC has approved the use of an expedited approval procedure for the approval of long-term debt financings or
refinancings (including the issuance of taxable debt) by the Utilities, up to specified amounts, during the period 2013 through
2015, subject to certain conditions. On October 3, 2013, after obtaining such expedited approvals, the Utilities issued through a
private placement taxable non-collateralized senior notes with an aggregate principal amount of $236 million. In September
2014, the Utilities filed a request with the PUC under the expedited approval procedure for approval to issue unsecured
obligations bearing taxable interest through December 31, 2015 of up to $80 million (Hawaiian Electric $50 million, Hawaii
Electric Light $25 million and Maui Electric $5 million), which represents the remaining unused amount subject to the
expedited approval procedure for long-term debt financings. The proceeds are expected to be used, as applicable, to finance
capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures and/or to
reimburse funds used for payment of the capital expenditures. PUC approval to issue an additional $47 million to refinance
outstanding revenue bonds (Hawaiian Electric $40 million, Hawaii Electric Light $5 million and Maui Electric $2 million) can
be requested under the expedited approval procedure through 2015.
Cash flows from operating activities generally relate to the amount and timing of cash received from customers and
payments made to third parties. Using the indirect method of determining cash flows from operating activities, noncash expense
items such as depreciation and amortization, as well as changes in certain assets and liabilities, are added to (or deducted from)
net income. In 2014 and 2013, net cash provided by operating activities decreased by $9 million and increased by $115 million,
respectively, compared to the prior year. In 2014, noncash depreciation and amortization amounted to $174 million due to an
increase in plant and equipment and deferred income taxes increased $83 million. Further, net cash provided by operating
activities included a $28 million decrease in fuel oil stock, a decrease of $33 million in accounts receivable and accrued
unbilled revenues due to timing of customer payments, and offset by a $91 million decrease in accounts payable due to timing
of vendor payments. In 2013, noncash depreciation and amortization amounted to $159 million due to an increase in plant and
equipment and deferred income taxes increased $65 million. Further, net cash provided by operating activities included a net
decrease of $40 million in accounts receivable and accrued unbilled revenues due to more cash receipts from customers as a
result of improved collections, a $27 million decrease in fuel oil stock due to lower payments to fuel suppliers, and offset by a
$21 million decrease in accounts payable due to timing of vendor payments.
In 2014 and 2013, net cash used in investing activities decreased by $41 million and increased by $46 million, respectively,
compared to the prior year. In 2014 and 2013, capital expenditures amounted to $312 million and $342 million, respectively,
offset by contributions in aid of construction of $42 million and $32 million, respectively.
Financing activities provide supplemental cash for both day-to-day operations and capital requirements as needed. In 2014
and 2013, cash flows from financing activities decreased by $126 million and increased by $9 million, respectively, compared
to the prior year. In 2014, cash used financing activities consisted primarily of the payment of $90 million of common and
preferred stock dividends and the redemption of $11 million of special purpose revenue bonds, partially offset by net proceeds
received from the issuance of $40 million of common stock. In 2013, cash provided by financing activities consisted primarily
of net proceeds received from the issuance of $236 million of taxable unsecured senior notes and $79 million of common stock,
partially offset by the redemption of $166 million of special purpose revenue bonds and the payment of $84 million of common
and preferred stock dividends.
For the three-year period 2015 through 2017, the Utilities forecast $1.9 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 the outcome of competitive bidding for new generation. Hawaiian Electric’s consolidated cash flows from
operating activities (net income for common stock, adjusted for non-cash income and expense items such as depreciation,
amortization and deferred taxes), after the payment of common stock and preferred stock dividends, are currently not expected
to provide sufficient cash to cover the forecasted net capital expenditures. Debt and equity financing are expected to be required
to fund this estimated shortfall and to fund any unanticipated expenditures not included in the 2015 through 2017 forecast, such
as increases in the costs or acceleration of the construction of capital projects, unbudgeted acquisitions or investments in new
businesses and significant increases in retirement benefit funding requirements.
Proceeds from the issuance of equity, cash flows from operating activities, temporary increases in short-term borrowings
and existing cash and cash equivalents are expected to provide the forecasted $420 million needed for the net capital
expenditures and deferred software costs in 2015. For 2015, net capital expenditures and deferred software costs include
61
approximately $255 million for transmission and distribution projects, approximately $80 million for generation projects and
approximately $85 million for general plant and other projects.
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.
For a discussion of funding for the electric utilities’ retirement benefits plans, see Notes 1 and 10 of the Consolidated
Financial Statements and “Retirement benefits” above. The electric utilities were required to make contributions of $56 million
for 2014, $61 million for 2013 and $53 million for 2012 to the qualified pension plans to meet minimum funding requirements
pursuant to ERISA, including changes promulgated by the Pension Protection Act of 2006. The electric utilities made
additional voluntary contributions in 2014, 2013 and 2012. Contributions by the electric utilities to the retirement benefit plans
for 2014, 2013 and 2012 totaled $59 million, $81 million and $63 million, respectively, and are expected to total $84 million in
2015. In addition, the electric utilities paid directly $1 million of benefits in 2014, $1 million of benefits in 2013 and $1 million
of benefits in 2012 and expect to pay $1 million of benefits in 2015. Depending on the performance of the assets held in the
plans’ trusts and numerous other factors, additional contributions may be required in the future to meet the minimum funding
requirements of ERISA or to pay benefits to plan participants. The electric utilities believe they will have adequate cash flow or
access to capital resources to support any necessary funding requirements.
Selected contractual obligations and commitments. The following table presents aggregated information about total
payments due from the Utilities during the indicated periods under the specified contractual obligations and commitments:
December 31, 2014
(in millions)
Less than 1
year
Payments due by period
3-5
years
1-3
years
More than
5 years
Long-term debt
Interest on long-term debt
Operating leases
Open purchase order obligations ¹
Fuel oil purchase obligations (estimate based on December 31, 2014
fuel oil prices)
Purchase power obligations-minimum fixed capacity charges
Total (estimated)
$
$
— $
61
8
55
427
124
675
$
—
121
11
26
349
197
704
$
50
119
7
2
—
184
362
$
$
1,157
750
14
3
—
531
2,455
$
$
¹ Includes contractual obligations and commitments for capital expenditures and expense amounts.
Total
1,207
1,051
40
86
776
1,036
4,196
The table above does not include other categories of obligations and commitments, such as deferred taxes, trade payables,
amounts that will become payable in future periods under collective bargaining and other employment agreements and
employee benefit plans and potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing
mechanism). As of December 31, 2014, the fair value of the assets held in trusts to satisfy the obligations of the Utilities’
retirement benefit plans did not exceed the retirement benefit plans’ benefit obligation. Minimum funding requirements for
retirement benefit plans have not been included in the table above, but retirement benefit plan obligations, including estimated
minimum required contributions for 2015 are discussed in the section “Retirement benefits” in Hawaiian Electric’s MD&A
and Note 10 of the Consolidated Financial Statements.
See Note 4 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments.
Certain factors that may affect future results and financial condition. Also see “Forward-Looking Statements” and
“Certain factors that may affect future results and financial condition” for Consolidated HEI above.
Clean energy initiatives and Renewable Portfolio Standards (RPS). The far-reaching nature of the Utilities’ renewable
energy commitments and the RPS goals presents risks to the Company. Among such risks are: (1) the dependence on third party
suppliers of renewable purchased energy, which if the Utilities are unsuccessful in negotiating purchased power agreements
with such IPPs or if a major IPP fails to deliver the anticipated capacity in its purchased power agreement, could impact the
Utilities’ achievement of their commitments to RPS goals and/or the Utilities’ ability to deliver reliable service; (2) delays in
acquiring or unavailability of non-fossil fuel supplies for renewable generation; (3) the impact of intermittent power to the
electrical grid and reliability of service if appropriate supporting infrastructure is not installed or does not operate effectively;
62
(4) the likelihood that the Utilities may need to make substantial investments in related infrastructure, which could result in
increased borrowings and, therefore, materially impact the financial condition and liquidity of the Utilities; and (5) the
commitment to support a variety of initiatives, which, if approved by the PUC, may have a material impact on the results of
operations and financial condition of the Utilities depending on their design and implementation. These initiatives include, but
are not limited to, removing the system-wide caps on net energy metering (but studying distributed generation interconnections
on a per-circuit basis); and developing an Energy Efficiency Portfolio Standard. The implementation of these or other programs
may adversely impact the results of operations, financial condition and liquidity of the Utilities.
Regulation of electric utility rates. The rates the electric utilities are allowed to charge for their services, and the timeliness
of permitted rate increases, are among the most important items influencing their results of operations, financial condition and
liquidity. The PUC has broad discretion over the rates the electric utilities charge and other matters. Any adverse decision by
the PUC concerning the level or method of determining electric utility rates, the items and amounts permitted to be included in
rate base, the authorized returns on equity or rate base found to be reasonable, the potential consequences of exceeding or not
meeting such returns, or any prolonged delay in rendering a decision in a rate or other proceeding could have a material adverse
effect on the Company’s and Hawaiian Electric’s consolidated results of operations, financial condition and liquidity. Upon a
showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of
filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing
is not completed). There is no time limit for rendering a final D&O and interim rate increases are subject to refund with interest
if the interim increase is greater than the increase approved in the final D&O.
Fuel oil and purchased power. The electric utilities rely on fuel oil suppliers and IPPs to deliver fuel oil and power,
respectively. See “Fuel contracts” and “Power purchase agreements” in Note 4 of the Consolidated Financial Statements. The
Company estimates that 68% of the net energy the Utilities generate and purchase in 2015 will be from the burning of fossil
fuel oil as compared to 69% in 2014. Purchased KWHs provided approximately 46%, 44%, and 42% of the total net energy
generated and purchased in 2014, 2013 and 2012, respectively.
Failure or delay by the electric utilities’ oil suppliers and shippers to provide fuel pursuant to existing supply contracts, or
failure by a major IPP to deliver the firm capacity anticipated in its PPA, could interrupt the ability of the electric utilities to
deliver electricity, thereby materially adversely affecting the Company’s results of operations and financial condition. Hawaiian
Electric generally maintains an average system fuel inventory level equivalent to 47 days of forward consumption. Hawaii
Electric Light and Maui Electric generally maintain an inventory level equivalent to one month’s supply of both medium sulfur
fuel oil and diesel fuel. Some, but not all, of the Utilities’ PPAs require that the IPPs maintain minimum fuel inventory levels
and all of the firm capacity PPAs include provisions imposing substantial penalties for failure to produce the firm capacity
anticipated by those agreements.
Other operation and maintenance expenses. O&M expenses increased by 2% in 2014, 1% in 2013 and 4% in 2012 when
compared to the prior year. The change in O&M expenses (excluding expenses covered by surcharges or by third parties) was
1%, 1% and 4% for 2014, 2013 and 2012, respectively, when compared to the prior year. O&M expenses (excluding expenses
covered by surcharges or by third parties) for 2015 are projected to be approximately 2% higher than 2014.
Other regulatory and permitting contingencies. Many public utility projects require PUC approval and various permits
(e.g., environmental and land use permits) from other agencies. Delays in obtaining PUC approval or permits can result in
increased costs. If a project does not proceed or if the PUC disallows costs of the project, the project costs may need to be
written off in amounts that could have a material adverse effect on the Company. For example, two major capital improvement
utility projects, the Keahole project (consisting of CT-4, CT-5 and ST-7) and the East Oahu Transmission Project, encountered
opposition and were seriously delayed before being placed in service, with a writedown being required for both the Keahole
and EOTP projects in 2007 and 2011, respectively. More recently, the Utilities and the Consumer Advocate signed a settlement
agreement, subject to approval by the PUC, to write off $40 million of costs in 2012 in lieu of conducting the regulatory audits
of the CIP CT-1 and the CIS projects. See Note 4 of the Consolidated Financial Statements for a discussion of additional
regulatory contingencies.
Competition. Although competition in the generation sector in Hawaii is moderated by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric utilities, the PUC has promoted a more competitive
electric industry environment through its decisions concerning competitive bidding and distributed generation (DG). An
increasing amount of generation is provided by IPPs and customer distributed generation.
Competitive bidding. In December 2006, the PUC issued a decision that included a final competitive bidding
framework, which became effective immediately. The final framework states, among other things, that: (1) a utility is required
to use competitive bidding to acquire a future generation resource or a block of generation resources unless the PUC finds
bidding to be unsuitable; (2) the framework does not apply in certain situations identified in the framework; (3) waivers from
competitive bidding for certain circumstances will be considered; (4) the utility is required to select an independent observer
63
from a list approved by the PUC whenever the utility or its affiliate seeks to advance a project proposal (i.e., in competition
with those offered by bidders); (5) the utility may consider its own self-bid proposals in response to generation needs identified
in its RFP; and (6) for any resource to which competitive bidding does not apply (due to waiver or exemption), the utility
retains its traditional obligation to offer to purchase capacity and energy from a Qualifying Facility (QF) at avoided cost upon
reasonable terms and conditions approved by the PUC.
The Kalaeloa Solar Two photovoltaic energy PPA and the Kawailoa Wind windfarm PPA are two renewable projects that
resulted from Hawaiian Electric’s Renewable Energy RFP under the Competitive Bidding Framework.
The Utilities received PUC approval for exemptions from the competitive framework to negotiate modifications to existing
PPAs that generate electricity from renewable resources, including the City & County of Honolulu’s HPower facility expansion
and the Puna Geothermal Venture geothermal facility expansion. Also, certain renewable energy projects were “grandfathered”
from the competitive bidding process, including the Kahuku Wind Power, Auwahi Wind Energy LLC, and Kaheawa Wind
Power II wind farms. The PUC can also grant waivers to renewable energy projects that are not exempt from the Competitive
Bidding Framework such as for the Hu Honua biomass facility.
Distributed generation. In January 2006, the PUC issued a D&O indicating that its policy is to promote the
development of a market structure that assures DG is available at the lowest feasible cost, DG that is economical and reliable
has an opportunity to come to fruition and DG that is not cost-effective does not enter the system. The D&O affirmed the ability
of the Utilities to procure and operate DG for utility purposes at utility sites. The PUC also indicated its desire to promote the
development of a competitive market for customer-sited DG. The D&O allows the utility to provide DG services on a
customer-owned site as a regulated service when (1) the DG resolves a legitimate system need, (2) the DG is the lowest cost
alternative to meet that need and (3) it can be shown that, in an open and competitive process acceptable to the PUC, the
customer operator was unable to find another entity ready and able to supply the proposed DG service at a price and quality
comparable to the utility’s offering.
Environmental matters. The Utilities' generating stations operate under air pollution control permits issued by the Hawaii
Department of Health (DOH) and, in a limited number of cases, by the federal Environmental Protection Agency (EPA).
Hawaii law requires an environmental assessment for proposed waste-to-energy facilities, landfills, oil refineries, power-
generating facilities greater than 5 MW and wastewater facilities, except individual wastewater systems. Meeting this
requirement results in increased project costs.
The 1990 amendments to the Clean Air Act (CAA), changes to the National Ambient Air Quality Standard (NAAQS) for
ozone, and adoption of a NAAQS for fine particulate matter resulted in substantial changes for the electric utility industry such
as the installation of additional emissions controls, retirements of older generating units and switches to lower emissions fuels.
Further significant impacts may occur under newly adopted rules (e.g., one-hour NAAQS for sulfur dioxide and nitrogen
dioxide, control of GHGs under the GHG PSD Rule), under rules deemed applicable to the Utilities’ facilities (e.g., Regional
Haze Rule), if currently proposed legislation, rules and standards are adopted (e.g., GHG emission reduction rules), or if new
legislation, rules or standards are adopted in the future. Similarly, recently issued rules governing cooling water intake may
significantly impact Hawaiian Electric’s steam generating facilities on Oahu.
Management believes that the recovery through rates of most, if not all, of any costs incurred by the Utilities in complying
with environmental requirements would be allowed by the PUC, but no assurance can be given that this will in fact be the case.
In addition, there can be no assurance that a significant environmental liability will not be incurred by the Utilities or that the
related costs will be recoverable through rates. See “Environmental regulation” in Note 4 of the Consolidated Financial
Statements.
Technological developments. New technological developments (e.g., the commercial development of energy storage, fuel
cells, DG and generation from renewable sources) may impact the Utilities’ future competitive position, results of operations,
financial condition and liquidity.
Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” for
Consolidated HEI above.
Property, plant and equipment. Property, plant and equipment are reported at cost. Self-constructed electric utility plant
includes engineering, supervision, and administrative and general costs, and an allowance for the cost of funds used during the
construction period. These costs are recorded in construction in progress and are transferred to property, plant and equipment
when construction is completed and the facilities are either placed in service or become useful for public utility purposes. Upon
the retirement or sale of electric utility plant, no gain or loss is recognized. The cost of the plant retired is charged to
accumulated depreciation. Amounts collected from customers for cost of removal (expected to exceed salvage value in the
future) are included in regulatory liabilities.
64
The Utilities evaluate the impact of applying lease accounting standards to their new PPAs, PPA amendments and other
arrangements they enter into. A possible outcome of the evaluation is that an arrangement results in its classification as a capital
lease, which could have a material effect on Hawaiian Electric’s consolidated balance sheet if a significant amount of capital
assets of the IPP and lease obligations needed to be recorded.
Management believes that the PUC will allow recovery of property, plant and equipment in its electric rates. If the PUC
does not allow recovery of any such costs, the electric utility would be required to write off the disallowed costs at that time.
See the discussion under “Utility projects” in Note 4 of the Consolidated Financial Statements concerning costs of major
projects that have not yet been approved for inclusion in the applicable utility’s rate base.
Regulatory assets and liabilities. The Utilities are regulated by the PUC. In accordance with accounting standards for
regulatory operations, the Company’s financial statements reflect assets, liabilities, revenues and costs of the Utilities based on
current cost-based rate-making regulations. The actions of regulators can affect the timing of recognition of revenues, expenses,
assets and liabilities.
Regulatory liabilities represent amounts collected from customers for costs that are expected to be incurred in the future.
Regulatory assets represent incurred costs that have been deferred because their recovery in future customer rates is probable.
As of December 31, 2014, the consolidated regulatory liabilities and regulatory assets of the Utilities amounted to $345 million
and $905 million, respectively, compared to $349 million and $576 million as of December 31, 2013, respectively. Regulatory
liabilities and regulatory assets are itemized in Note 4 of the Consolidated Financial Statements. Management continually
assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable
regulatory environment. Because current rates include the recovery of regulatory assets existing as of the last rate case and rates
in effect allow the Utilities to earn a reasonable rate of return, management believes that the recovery of the regulatory assets as
of December 31, 2014 is probable. This determination assumes continuation of the current political and regulatory climate in
Hawaii, and is subject to change in the future.
Management believes that the operations of the Utilities currently satisfy the criteria for regulatory accounting. If events or
circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory assets, net of
regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may result in a
material adverse effect on the Company's results of operations, financial condition and liquidity.
Revenues. Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to energy
consumed in the accounting period, but not yet billed to customers, and RBA revenues or refunds for the difference between
PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthour sales. As of
December 31, 2014, revenues applicable to energy consumed, but not yet billed to customers, amounted to $138 million and the
RBA revenues recognized in 2014 amounted to $69 million.
Revenue amounts recorded pursuant to a PUC interim order are subject to refund, with interest, pending a final order. The
rate schedules of the Utilities include ECACs under which electric rates are adjusted for changes in the weighted-average price
paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and
purchased power. The rate schedules of the Utilities also include PPACs under which electric rates are more closely aligned
with purchase power costs incurred. Management believes that a material adverse effect on the Company’s results of
operations, financial condition and liquidity may result if the ECACs, PPACs or RBAs were lost.
Consolidation of variable interest entities. A business enterprise must evaluate whether it should consolidate a variable
interest entity (VIE). The Company evaluates the impact of applying accounting standards for consolidation to its relationships
with IPPs with whom the Utilities execute new PPAs or execute amendments of existing PPAs. A possible outcome of the
analysis is that Hawaiian Electric or its subsidiaries may be found to meet the definition of a primary beneficiary of a VIE
which finding may result in the consolidation of the IPP in the Consolidated Financial Statements. The consolidation of IPPs
could have a material effect on the Consolidated Financial Statements, including the recognition of a significant amount of
assets and liabilities, and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential
recognition of such losses. The Utilities do not know how the consolidation of IPPs would be treated for regulatory or credit
ratings purposes. See Notes 1 and 6 of the Consolidated Financial Statements.
65
Bank
Executive overview and strategy. When ASB was acquired by HEI in 1988, it was a traditional thrift with assets of $1 billion
and net income of about $13 million. ASB has grown by both acquisition and internal growth, but has been optimizing its
balance sheet in recent years as a result of its multi-year performance improvement project, which has resulted in a reduction in
asset size and a concomitant improvement in profitability and capital efficiency. ASB ended 2014 with assets of $5.6 billion and
net income of $51 million, compared to assets of $5.2 billion as of December 31, 2013 and net income of $58 million in 2013.
ASB is a full-service community bank serving both consumer and commercial customers. In order to remain competitive
and continue building core franchise value, ASB continues to develop and introduce new products and services in order to meet
the needs of those markets such as mobile banking. Additionally, the banking industry is constantly changing and ASB is
making the investments in people and technology necessary to adapt and remain competitive. ASB’s ongoing challenge is to
continue to increase revenues and control expenses.
The interest rate environment and the quality of ASB’s assets will continue to impact its financial results.
ASB continues to face a challenging interest rate environment. The persistent, low level of interest rates and excess
liquidity in the financial system have impacted new loan production rates and made it challenging to find investments with
adequate risk-adjusted returns, which resulted in a negative impact on ASB’s asset yields and net interest margin. The potential
for compression of ASB’s margin when interest rates rise is an ongoing concern.
As part of its interest rate risk management process, ASB uses simulation analysis to measure net interest income
sensitivity to changes in interest rates (see “Quantitative and Qualitative Disclosures about Market Risk”). ASB then employs
strategies to limit the impact of changes in interest rates on net interest income. ASB’s key strategies include:
1. attracting and retaining low-cost, core deposits, particularly those in non-interest bearing transaction accounts;
2.
reducing the overall exposure to fixed-rate residential mortgage loans and diversifying the loan portfolio with higher-
spread, shorter-maturity loans and/or variable-rate loans such as commercial, commercial real estate and consumer
loans;
3. managing costing liabilities to optimize cost of funds and manage interest rate sensitivity; and
4.
focusing new investments on shorter duration or variable rate securities.
ASB’s loan quality improved in 2014 as a result of stabilized or increasing property values, more financial flexibility of
borrowers, and overall general economic improvement in the state of Hawaii. ASB’s annualized net charge-offs as a percentage
of total average loans improved to 0.01% for 2014 compared to 0.09% for 2013. However, ASB’s provision for loan losses for
2014 was $6.1 million compared to $1.5 million for 2013 primarily due to loan loss reserves needed for growth in the loan
portfolio.
Effective July 2013, ASB became non-exempt from the Durbin Amendment to the Dodd-Frank Act which resulted in lower
debit card interchange fees. For 2014 and 2013, the estimated net income impact of the lower debit card interchange fees was
$6 million and $3 million, respectively. If the spin-off of ASB occurs as contemplated by the Merger Agreement, ASB expects
to be exempt from the Durbin Amendment.
66
Results of operations.
•
2014 vs. 2013
(in millions)
Interest income
2014
2013
$
191
$
186
Increase
(decrease)
5
$
Noninterest income
61
72
(11)
Revenues
Interest expense
252
11
258
10
(6)
1
Provision for loan losses
6
1
5
Primary reason(s)
The impact of higher average earning asset balances was partly offset
by lower yields on earning assets. ASB’s average loan portfolio
balance for 2014 was $327 million higher than 2013 as the average
HELOC, residential, commercial real estate and commercial loan
balances increased by $110 million, $53 million, $116 million and
$57 million, respectively. The growth in these loan portfolios was
consistent with ASB’s portfolio mix targets and loan growth strategy.
The loan portfolio yield continued to be impacted by the interest rate
environment as new loan production yields were lower than the
average portfolio yield. The average investment and mortgage-related
securities portfolio balance decreased by $51 million as ASB sold its
$79 million municipal bond portfolio. ASB used excess liquidity to
fund the loan growth.
Lower debit card interchange fees as a result of ASB being non-
exempt from the Durbin Amendment and lower mortgage banking
income as a result of a slowdown in refinance activity. 2013
noninterest income included the gain from the sale of the credit card
portfolio of $2.3 million.
The impact of higher average interest-bearing liabilities was partly
offset by lower rates resulting from the low interest rate environment.
Average deposit balances for 2014 increased by $224 million
compared to 2013 due to an increase in core deposits of $243 million,
partly offset by a decrease in term certificates of $19 million. Also,
the other borrowings average balance increased by $44 million.
Loan loss reserves established for the growth in the loan portfolio.
The 2013 provision for loan losses included the release of loan loss
reserves related to the sale of ASB’s credit card portfolio.
Noninterest expense
160
160
— Higher printing expenses as the printing function was outsourced
beginning in the fourth quarter of 2013 and additional consulting
expenses for ASB’s mobile banking product and technology security,
offset by lower compensation and benefits expense related to the
frozen defined benefit plan and lower payroll taxes.
Expenses
Operating income
Net income
Return on average
common equity 1
177
75
51
171
87
58
6
(12)
(7)
Lower noninterest income.
Lower operating income, partly offset by lower taxes.
9.6%
11.4%
(1.8)%
67
•
2013 vs. 2012
(in millions)
Interest income
2013
2012
$
186
$
190
Increase
(decrease)
(4)
$
Noninterest income
72
76
(4)
Revenues
Interest expense
258
10
266
11
(8)
(1)
Provision for loan losses
1
13
(12)
Noninterest expense
160
153
Expenses
Operating income
Net income
Return on average
common equity 1
171
87
58
177
89
59
11.4%
11.7%
(0.3)%
7
(6)
(2)
Primary reason(s)
The impact of higher average earning asset balances was more than
offset by lower yields on earning assets. ASB’s average loan portfolio
balance for 2013 was $221 million higher than 2012 as the average
HELOC, residential and commercial real estate loan balances
increased by $95 million, $76 million and $39 million, respectively.
The growth in these loan portfolios was consistent with ASB’s
portfolio mix targets and loan growth strategy. The loan portfolio
yield continued to be impacted by the interest rate environment as
new loan production yields were lower than the average portfolio
yield. The average investment and mortgage-related securities
portfolio balance decreased by $35 million as ASB sold $70 million
of agency obligations. ASB used excess liquidity to fund the loan
growth.
Lower gains on sales of loans as residential loan production has
decreased in 2013 compared to 2012 with the upward movement of
loan rates and a decrease in debit card fees as a result of being non-
exempt from the Durbin Amendment, partly offset by higher fee
income from other financial products and the gain on sale of the
credit card portfolio.
Lower funding costs as a result of the low interest rate environment.
Average deposit balances for 2013 increased by $166 million
compared to 2012 due to an increase in core deposits of $230 million,
partly offset by a decrease in term certificates of $64 million. The
other borrowings average balance decreased by $11 million due to
lower retail repurchase agreements, partly offset by higher
outstanding FHLB advances.
The provision for loan losses benefited from lower net charge-offs
and improved credit quality associated with the continued
improvement in Hawaii’s economy, partly offset by loan loss reserves
established for the growth in the loan portfolio.
Higher compensation and benefits expenses related to increased
business volume, sales and performance incentives and higher
inflation-related employee benefit costs.
Lower net interest and noninterest income, and higher noninterest
expenses, partly offset by a lower provision for loan losses.
(1)
Lower operating income, partly offset by lower taxes.
1
Calculated using the average daily balances.
See Note 5 of the Consolidated Financial Statements for a discussion of guarantees and further information about ASB.
68
Average balance sheet and net interest margin. The following table provides a summary of our consolidated average
balances including major categories of interest-earning assets and interest-bearing liabilities:
2014
Interest1
income/
expense
Average
balance
Yield/
rate
(%)
Average
balance
2013
Interest1
income/
expense
Yield/
rate
(%)
Average
balance
2012
Interest1
income/
expense
Yield/
rate
(%)
$ 171,142
$
310
0.18
$ 170,695
$
239
0.14
$ 203,751
$
269
0.13
5,096
20
0.39
11,370
43
0.38
—
—
—
525,949
11,336
11,600
429
2.16
3.69
519,220
69,377
11,192
2,494
2.16
3.60
560,102
63,336
12,040
2,328
2.15
3.68
537,549
11,765
2.19
588,597
13,686
2.33
623,438
14,368
2.30
(dollars in thousands)
Assets:
Other investments 2
Securities purchased under resale
agreements
Available-for-sale investment securities
Taxable
Non-taxable
Total available-for-sale investment
securities
Loans
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial
Consumer
Total loans 3,4
2,023,816
557,924
790,701
16,276
783,670
110,440
90,591
23,904
25,716
1,106
29,294
8,730
4,282,827
179,341
Total interest-earning assets
4,996,614
191,436
Allowance for loan losses
Non-interest-earning assets
Total Assets
(42,242)
460,923
$5,415,295
Liabilities and Stockholder’s Equity:
Savings
Interest-bearing checking
Money market
Time certificates
$1,879,373
1,134
738,651
171,889
434,934
126
214
3,603
5,077
Total interest-bearing deposits
3,224,847
4.48
4.28
3.25
6.79
3.74
7.90
4.19
3.83
0.06
0.02
0.12
0.83
0.16
1,970,918
441,734
680,445
20,985
726,597
114,871
93,293
19,547
20,442
1,308
29,188
9,191
3,955,550
172,969
4,726,212
186,937
(42,114)
426,608
$ 5,110,706
$ 1,805,363
1,052
665,941
182,343
454,021
3,107,668
106
232
3,702
5,092
4.73
4.42
3.00
6.23
4.02
8.00
4.37
3.96
0.06
0.02
0.13
0.82
0.16
1,894,603
402,410
585,797
34,744
714,679
101,933
99,056
18,387
16,106
2,097
30,925
9,486
3,734,166
176,057
4,561,355
190,694
(39,323)
433,521
$ 4,955,553
$ 1,727,754
1,128
612,629
202,539
517,752
3,060,674
111
319
4,865
6,423
5.23
4.57
2.75
6.04
4.33
9.31
4.71
4.18
0.07
0.02
0.16
0.94
0.21
Advances from Federal Home Loan
Bank
Securities sold under agreements to
repurchase
Total interest-bearing liabilities
Non-interest bearing liabilities:
Deposits
Other
Stockholder’s equity
Total Liabilities and Stockholder’s
Equity
Net interest income
Net interest margin (%)5
100,389
3,146
3.13
64,630
2,432
3.76
50,014
2,176
4.35
155,012
3,480,248
2,585
10,808
1.67
0.31
146,758
3,319,056
2,553
10,077
1.74
0.30
172,683
3,283,371
2,693
11,292
1.56
0.34
1,285,964
112,314
536,769
$5,415,295
1,179,559
104,906
507,185
$ 5,110,706
1,060,121
108,692
503,369
$ 4,955,553
$ 180,628
$176,860
$179,402
3.62
3.74
3.93
1
2
3
4
5
Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $0.2 million,
$0.9 million and $0.8 million for 2014, 2013 and 2012, respectively.
Includes federal funds sold, interest bearing deposits and stock in the Federal Home Loan Bank of Seattle ($83 million, $95 million and
$97 million as of December 31, 2014, 2013 and 2012, respectively).
Includes loans held for sale, at lower of cost or fair value.
Includes loan fees of $3.7 million, $5.2 million and $4.9 million for 2014, 2013 and 2012, respectively, together with interest accrued
prior to suspension of interest accrual on nonaccrual loans.
Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities and other factors. Earnings of ASB depend primarily on net interest income, which is
the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment
69
has been impacted by disruptions in the financial markets over a period of several years and these conditions have continued to
have a negative impact on ASB’s net interest margin.
Loan originations and mortgage-related securities are ASB’s primary earning assets.
Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for
financing, availability of funds and management’s responses to these factors. See Note 5 of the Consolidated Financial
Statements for the composition of ASB’s loans receivable.
The increase in the total loan portfolio from $4.1 billion at the end of 2013 to $4.4 billion at the end of 2014 was primarily
due to growth in the commercial real estate, HELOC and residential 1-4 family loan portfolios, which was consistent with
ASB’s portfolio mix targets and loan growth strategy.
Home equity — key credit statistics.
December 31
Outstanding balance (in thousands)
Percent of portfolio in first lien position
Net charge-off ratio
Delinquency ratio
2014
818,815
$
2013
739,331
$
40.9 %
(0.07)%
0.25 %
38.2%
0.06%
0.28%
December 31, 2014
Outstanding balance (in thousands)
Total
$ 818,815
Interest only
$ 607,064
2014-2015
885
$
2016-2018
$ 100,269
Thereafter
$ 505,910
End of draw period – interest only
Current
amortizing
$ 211,751
% of total
100%
74%
—%
12%
62%
26%
The home equity line of credit (HELOC) portfolio makes up 18% 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 94% of the total HELOC portfolio and
is the current product offering. Within this product type, borrowers also have a “Fixed Rate Loan Option” to convert a part of
their available line of credit into a 5, 7 or 10-year fully amortizing fixed rate loan with level principal and interest payments. As
of December 31, 2014, approximately 20% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Nearly all originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the
draw period. These older vintage equity lines represent 6% of the portfolio and are included in the amortizing balances
identified in the table above.
Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the
delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a
collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing
the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the
successful bidder, the property is classified as real estate owned until it is sold.
See “Allowance for loan losses” in Note 5 of the Consolidated Financial Statements for information with respect to
nonperforming assets. The level of nonperforming loans has continued to decrease with the improving Hawaii economy.
Allowance for loan losses. See “Allowance for loan losses” in Note 5 of the Consolidated Financial Statements for the
tables which sets forth the allocation of ASB’s allowance for loan losses. For 2014, the allowance for loan losses increased by
$5.5 million primarily due to loan loss reserves for the growth in the loan portfolio and higher loss rates for loan portfolios with
higher risk such as commercial real estate and unsecured personal loans.
Available-for sale investment securities. ASB’s investment portfolio was comprised as follows:
December 31
(dollars in thousands)
U.S. Treasury and federal agency obligations
Mortgage-related securities — FNMA, FHLMC and GNMA
Municipal bonds
Total available-for-sale investment securities
2014
2013
Balance
$ 119,560
430,834
—
$ 550,394
% of total
Balance
% of total
22% $ 80,973
369,444
78
—
78,590
100% $ 529,007
15%
70
15
100%
70
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. The increase in investment securities was due to
the purchase of federal agency obligations and mortgage-related securities to replace the municipal bond portfolio that was sold
in 2014.
The net unrealized gains on ASB’s investment securities were primarily caused by lower interest rates. All contractual cash
flows of those investments are guaranteed by an agency of the U.S. government. See “Investment securities” in Note 1 for a
discussion of securities impairment assessment.
As of December 31, 2014, 2013 and 2012, ASB did not have any private-issue mortgage-related securities.
Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by
market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain
challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances
from the FHLB of Seattle and securities sold under agreements to repurchase continue to be additional sources of funds. As of
December 31, 2014, ASB’s costing liabilities consisted of 94% deposits and 6% other borrowings. As of December 31, 2013,
ASB’s costing liabilities consisted of 95% deposits and 5% other borrowings. See Note 5 of the Consolidated Financial
Statements for the composition of ASB’s deposit liabilities and other borrowings.
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 those instruments, respectively. In addition, changes in credit spreads also
impact the fair values of those instruments.
As of December 31, 2014 and 2013, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities
(including securities pledged for repurchase agreements) in AOCI of $0.5 million compared to an unrealized loss, net of taxes,
of $4 million as of December 31, 2013. See “Quantitative and qualitative disclosures about market risk.”
Legislation and regulation. ASB is subject to extensive regulation, principally by the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Depending on ASB’s level of regulatory capital and
other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends
to its shareholder. See the discussion below under “Liquidity and capital resources.” Also see “Federal Deposit Insurance
Corporation restoration plan” and “Deposit insurance coverage” in Note 5 of the Consolidated Financial Statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Regulation of the financial services
industry, including regulation of HEI, ASB Hawaii and ASB, has changed and will continue to change as a result of the
enactment of the Dodd-Frank Act, which became law in July 2010. Importantly for HEI, ASB Hawaii and ASB, under the
Dodd-Frank Act, on July 21, 2011, all of the functions of the Office of Thrift Supervision (OTS) transferred to the OCC, the
FDIC, the Federal Reserve Board (FRB) and the Consumer Financial Protection Bureau (Bureau). Supervision and regulation
of HEI and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally
chartered savings bank, moved to the OCC. While the laws and regulations applicable to HEI and ASB did not generally
change, the applicable laws and regulations are being interpreted, and new and amended regulations may be adopted, by the
FRB, OCC and the Bureau. In addition, HEI will continue to be required to serve as a source of strength to ASB in the event of
its financial distress. If the Spin-Off of ASB Hawaii occurs as contemplated by the Merger Agreement, HEI (or its successor)
will no longer be required to serve as a source of strength to ASB. The Dodd-Frank Act also imposes new restrictions on the
ability of a savings bank to pay dividends should it fail to remain a qualified thrift lender.
More stringent affiliate transaction rules now apply to ASB in the securities lending, repurchase agreement and derivatives
areas. Standards were raised with respect to the ability of ASB to merge with or acquire another institution. In reviewing a
potential merger or acquisition, the approving federal agency will need to consider the extent to which the proposed transaction
will result in “greater or more concentrated risks to the stability of the U.S. banking or financial system.”
The Dodd-Frank Act established the Bureau. It has authority to prohibit practices it finds to be unfair, deceptive or abusive,
and it may also issue rules requiring specified disclosures and the use of new model forms. On January 10, 2013, the Bureau
issued the Ability-to-Repay rule which closed for comment on February 25, 2013. For mortgages, under the proposed Ability-
to-Repay rule, among other things, (i) potential borrowers will have to supply financial information, and lenders must verify it,
(ii) to qualify for a particular loan, a consumer will have to have sufficient assets or income to pay back the loan, and
(iii) lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term - not
just during an introductory period when the rate may be lower.
71
ASB may also be subject to new state regulation because of a provision in the Dodd-Frank Act that acknowledges that a
federal savings bank may be subject to state regulation and allows federal law to preempt a state consumer financial law on a
“case by case” basis only when (1) the state law would have a discriminatory effect on the bank compared to that on a bank
chartered in that state; (2) the state law prevents or significantly interferes with a bank’s exercise of its power; or (3) the state
law is preempted by another federal law.
The Dodd-Frank Act also adopts a number of provisions that will impact the mortgage industry, including the imposition of
new specific duties on the part of mortgage originators (such as ASB) to act in the best interests of consumers and to take steps
to ensure that consumers will have the capability to repay loans they may obtain, as well as provisions imposing new disclosure
requirements and requiring appraisal reforms.
Also, the Dodd-Frank Act directs the Bureau to publish rules and forms that combine certain disclosures that consumers
receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate
Settlement Procedures Act. Consistent with this requirement, the Bureau amended Regulation X (Real Estate Settlement
Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure requirements and forms in Regulation Z for
most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure
requirements and implementing new requirements, the final rule provides extensive guidance regarding compliance with those
requirements. This rule is effective August 1, 2015.
The “Durbin Amendment” to the Dodd-Frank Act required the FRB to issue rules to ensure that debit card interchange fees
are “reasonable and proportional” to the processing costs incurred. In June 2011, the FRB issued a final rule establishing
standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. Under the
final rule, effective October 1, 2011, the maximum permissible interchange fee that an issuer may receive for an electronic debit
transaction is 21-24 cents, depending on certain components. Financial institutions and their affiliates that have less than $10
billion in assets are exempt from this Amendment; however, on July 1, 2013, ASB became non-exempt as the consolidated
assets of HEI exceeded $10 billion. ASB’s debit card interchange fees were impacted as a result of the application of this
Amendment, by approximately $6 million after tax in 2014.
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, nor a proposal on how to apply the Basel III capital rules to SLHCs that are
substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.
Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding
companies, would initially be subject to the following minimum regulatory capital requirements: a common equity tier 1 capital
ratio of 4.5%, a tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a 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 risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital
conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of
a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would
establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability
to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized
approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and address shortcomings in risk-based
capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule
are:
72
Minimum Capital Requirements
Effective dates
Capital conservation buffer
Common equity ratio + conservation buffer
Tier 1 capital ratio + conservation buffer
Total capital ratio + conservation buffer
Tier 1 leverage ratio
Countercyclical capital buffer — not applicable to ASB
1/1/2015
1/1/2016
1/1/2017
1/1/2018
1/1/2019
4.50%
6.00%
8.00%
4.00%
0.625%
5.125%
6.625%
8.625%
4.00%
0.625%
1.25%
5.75%
7.25%
9.25%
4.00%
1.25%
1.875%
6.375%
7.875%
9.875%
4.00%
1.875%
2.50%
7.00%
8.50%
10.50%
4.00%
2.50%
The final rule is effective January 1, 2015 for ASB. 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 Spin-Off of ASB Hawaii occurs as contemplated by the Merger Agreement, HEI
(or its successor) will no longer be subject to the final capital rules as applied to SLHCs. 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.
Stock in FHLB of Seattle. As of December 31, 2014, ASB’s stock in FHLB of Seattle of $69.3 million was carried at cost
because it can only be redeemed at par. There is a minimum required investment in such stock based on measurements of
ASB’s capital, assets and/or borrowing levels, and ASB’s investment is substantially in excess of that requirement. In 2014 and
2013, the FHLB of Seattle paid ASB cash dividends of $88,000 and $47,000, respectively. FHLB of Seattle did not pay any
cash dividends in 2012.
In September 2012, the Federal Housing Finance Agency (Finance Agency) classified the FHLB of Seattle as “adequately
capitalized.” After receiving approval from the Finance Agency, the FHLB of Seattle began repurchasing excess stock,
repurchasing a total of $23.2 million and $3.5 million of excess stock from ASB in 2014 and 2013, respectively.
In September 2014, the FHLB of Seattle announced that it had entered into an agreement to merge with the FHLB of Des
Moines and in December 2014, the Finance Agency approved the banks’ application to merge. The merger agreement is
pending approval and the voting process is scheduled to begin in mid-January and conclude in late February. The impact of this
merger on ASB is uncertain at this time.
Commitments and contingencies. See Note 5 of the Consolidated Financial Statements.
Potential impact of lava flows. In June 2014, lava from the Kilauea Volcano on the island of Hawaii began flowing toward
the town of Pahoa. ASB has been monitoring its loan exposure on properties most likely to be impacted by the projected path of
the lava flow. At December 31, 2014, the outstanding amount of the residential, commercial real estate and home equity lines of
credit loans collateralized by property in areas most likely affected by the lava flow totaled $13 million. For residential 1-4
mortgages in the area, ASB required lava insurance to cover the dwelling replacement cost as a condition of making the loan.
As of December 31, 2014, ASB provided $1.8 million reserves for a commercial real estate loan impacted by the lava flows.
The impact to property values and borrowers’ ability to repay their loans as a result of the lava flow cannot be determined at
this time, but ASB does not expect the impact on ASB's financial condition or results of operations to be material.
Recent accounting pronouncements. See “Recent accounting pronouncements and interpretations” in Note 1 of the
Consolidated Financial Statements.
Liquidity and capital resources.
December 31
(dollars in millions)
Total assets
Available-for-sale investment and mortgage-related securities
Loans receivable held for investment, net
Deposit liabilities
Other bank borrowings
2014
% change
2013
% change
$
5,565
550
4,389
4,623
291
$
6
4
7
6
19
5,244
529
4,110
4,372
245
4
(21)
10
3
25
As of December 31, 2014, ASB was one of Hawaii’s largest financial institutions based on assets of $5.6 billion and
deposits of $4.6 billion.
73
ASB’s principal sources of liquidity are customer deposits, borrowings and the maturity and repayment of portfolio loans
and securities. ASB’s deposits as of December 31, 2014 were $251 million higher than December 31, 2013. ASB’s principal
sources of borrowings are advances from the FHLB and securities sold under agreements to repurchase from broker/dealers and
commercial account holders. As of December 31, 2014, FHLB borrowings totaled $100 million, representing 1.8% of assets.
ASB is approved to borrow from the FHLB up to 35% of ASB’s assets to the extent it provides qualifying collateral and holds
sufficient FHLB stock. As of December 31, 2014, ASB’s unused FHLB borrowing capacity was approximately $1.2 billion. As
of December 31, 2014, securities sold under agreements to repurchase totaled $191 million, representing 3.4% of assets. ASB
utilizes deposits, advances from the FHLB and securities sold under agreements to repurchase to fund maturing and withdrawn
deposits, repay maturing borrowings, fund existing and future loans and purchase investment and mortgage-related securities.
As of December 31, 2014, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.7 billion,
including commitments to lend $0.5 million to borrowers whose loan terms have been impaired or modified in troubled debt
restructurings. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining
liquidity at satisfactory levels.
As of December 31, 2014 and 2013, ASB had $36.9 million and $48.5 million of loans on nonaccrual status, respectively,
or 0.8% and 1.2% of net loans outstanding, respectively. As of December 31, 2014 and 2013, ASB had $0.9 million and
$1.2 million, respectively, of real estate acquired in settlement of loans
In 2014, operating activities provided cash of $42 million. Net cash of $299 million was used by investing activities
primarily due to a net increase in loans held for investment of $284 million, purchases of investment securities of $184 million
and capital expenditures of $28 million, partly offset by repayments of investment securities of $91 million, proceeds from the
sales of investment securities of $80 million, redemption of FHLB stock of $23 million and proceeds from the sale of real estate
acquired in settlement of loans of $3 million. Financing activities provided net cash of $261 million primarily due to a net
increase in deposits of $251 million and proceeds from securities sold under agreements to repurchase of $56 million, partly
offset by the payment of common stock dividends of $36 million and a net decrease in retail repurchase agreements of $9
million.
ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords
protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for
growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms
as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered
by competing institutions. As of December 31, 2014, ASB was well-capitalized (see “Regulation—Capital requirements” below
for ASB’s capital ratios).
For a discussion of ASB dividends, see “Common stock equity” in Note 5 of the Consolidated Financial Statements.
Certain factors that may affect future results and financial condition. Also see “Forward-Looking Statements” and
“Certain factors that may affect future results and financial condition” for Consolidated HEI above.
Competition. The banking industry in Hawaii is highly competitive. ASB is one of Hawaii’s largest financial institutions,
based on total assets, and is in direct competition for deposits and loans, not only with larger institutions, but also with smaller
institutions that are heavily promoting their services in certain niche areas, such as providing financial services to small- and
medium-sized businesses, and national organizations offering financial services. ASB’s main competitors are banks, savings
associations, credit unions, mortgage brokers, finance companies and securities brokerage firms. These competitors offer a
variety of lending, deposit and investment products to retail and business customers.
The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing,
convenience of locations, hours of operation and perceptions of the institution’s financial soundness and safety. To meet
competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient
branch locations with interbranch deposit and withdrawal privileges at each branch and convenient automated teller machines.
ASB also conducts advertising and promotional campaigns.
The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality
and range of lending and other services offered. ASB believes that it is able to compete for such loans primarily through the
competitive interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of
the services it provides to individual borrowers and the business community.
ASB is a full-service community bank serving both consumer and commercial customers and has been diversifying its loan
portfolio from single-family home mortgages to higher-spread, shorter-duration consumer, commercial and commercial real
estate loans. The origination of consumer, commercial and commercial real estate loans involves risks and other considerations
different from those associated with originating residential real estate loans. For example, the sources and level of competition
may be different and credit risk is generally higher than for residential mortgage loans. These different risk factors are
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considered in the underwriting and pricing standards and in the allowance for loan losses established by ASB for its consumer,
commercial and commercial real estate loans.
U.S. capital markets and credit and interest rate environment. Volatility in U.S. capital markets may negatively impact the
fair values of investment and mortgage-related securities held by ASB. As of December 31, 2014, the fair value and carrying
value of the investment and mortgage-related securities held by ASB were $0.6 billion.
Interest rate risk is a significant risk of ASB’s operations. ASB actively manages this risk, including managing the
relationship of its interest-sensitive assets to its interest-sensitive liabilities. Persistent low levels of interest rates have made it
challenging to find investments with adequate risk-adjusted returns and had a negative impact on ASB’s asset yields and net
interest margin. If the current interest rate environment persists, the potential for compression of ASB’s net interest margin will
continue. ASB also manages the credit risk associated with its lending and securities portfolios, but a deep and prolonged
recession led by a material decline in housing prices could materially impair the value of its portfolios. See “Quantitative and
Qualitative Disclosures about Market Risk” below.
Technological developments. New technological developments (e.g., significant advances in internet banking) may impact
ASB’s future competitive position, results of operations and financial condition.
Environmental matters. Prior to extending a loan collateralized by real property, ASB conducts due diligence to assess
whether or not the property may present environmental risks and potential cleanup liability. In the event of default and
foreclosure of a loan, ASB may become the owner of the mortgaged property. For that reason, ASB seeks to avoid lending upon
the security of, or acquiring through foreclosure, any property with significant potential environmental risks; however, there can
be no assurance that ASB will successfully avoid all such environmental risks.
Regulation. ASB is subject to examination and comprehensive regulation by the Department of Treasury, OCC and the
FDIC, and is subject to reserve requirements established by the Board of Governors of the Federal Reserve System. Regulation
by these agencies focuses in large measure on the adequacy of ASB’s capital and the results of periodic “safety and soundness”
examinations conducted by the OCC.
Capital requirements. The OCC, which is ASB’s principal regulator, administers two sets of capital standards—
minimum regulatory capital requirements and prompt corrective action requirements. The FDIC also has prompt corrective
action capital requirements. As of December 31, 2014, ASB was in compliance with OCC minimum regulatory capital
requirements and was “well-capitalized” within the meaning of OCC prompt corrective action regulations and FDIC capital
regulations, as follows:
• ASB met applicable minimum regulatory capital requirements (noted in parentheses) as of December 31, 2014 with a
tangible capital ratio of 8.9% (1.5%), a core capital ratio of 8.9% (4.0%) and a total risk-based capital ratio of 12.3%
(8.0%).
• ASB met the capital requirements to be generally considered “well-capitalized” (noted in parentheses) as of
December 31, 2014 with a leverage ratio of 8.9% (5.0%), a Tier-1 risk-based capital ratio of 11.3% (6.0%) and a total
risk-based capital ratio of 12.3% (10.0%).
The purpose of the prompt corrective action capital requirements is to establish thresholds for varying degrees of oversight
and intervention by regulators. Declines in levels of capital, depending on their severity, will result in increasingly stringent
mandatory and discretionary regulatory consequences. Capital levels may decline for any number of reasons, including
reductions that would result if there were losses from operations, deterioration in collateral values or the inability to dispose of
real estate owned (typically acquired by foreclosure). The regulators have substantial discretion in the corrective actions they
might direct and could include restrictions on dividends and other distributions that ASB may make to HEI (through ASB
Hawaii) and the requirement that ASB develop and implement a plan to restore its capital. Under an agreement with regulators
entered into by HEI when it acquired ASB, HEI currently could be required to contribute to ASB up to an additional
$28.3 million of capital, if necessary, to maintain ASB’s capital position.
Examinations. ASB is subject to periodic “safety and soundness” examinations and other examinations by the OCC.
In conducting its examinations, the OCC utilizes the Uniform Financial Institutions Rating System adopted by the Federal
Financial Institutions Examination Council, which system utilizes the “CAMELS” criteria for rating financial institutions. The
six components in the rating system are: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to
market risk. The OCC examines and rates each CAMELS component. An overall CAMELS rating is also given, after taking
into account all of the component ratings. A financial institution may be subject to formal regulatory or administrative direction
or supervision such as a “memorandum of understanding” or a “cease and desist” order following an examination if its
CAMELS rating is not satisfactory. An institution is prohibited from disclosing the OCC’s report of its safety and soundness
examination or the component and overall CAMELS rating to any person or organization not officially connected with the
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institution as an officer, director, employee, attorney or auditor, except as provided by regulation. The OCC also regularly
examines ASB’s information technology practices and its performance under Community Reinvestment Act measurement
criteria.
The Federal Deposit Insurance Act, as amended, addresses the safety and soundness of the deposit insurance system,
supervision of depository institutions and improvement of accounting standards. Pursuant to this Act, federal banking agencies
have promulgated regulations that affect the operations of ASB and its holding companies (e.g., standards for safety and
soundness, real estate lending, accounting and reporting, transactions with affiliates and loans to insiders). FDIC regulations
restrict the ability of financial institutions that fail to meet relevant capital measures to engage in certain activities, such as
offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of
December 31, 2014, ASB was “well-capitalized” and thus not subject to these restrictions.
Qualified Thrift Lender status. ASB is a “qualified thrift lender” (QTL) under its federal thrift charter and, in order to
maintain this status, ASB is required to maintain at least 65% of its assets in “qualified thrift investments,” which include
housing-related loans (including mortgage-related securities) as well as certain small business loans, education loans, loans
made through credit card accounts and a basket (not exceeding 20% of total assets) of other consumer loans and other assets.
Institutions that fail to maintain QTL status are subject to various penalties, including limitations on their activities. In ASB’s
case, the activities of HEI, ASB Hawaii and HEI’s other subsidiaries would also be subject to restrictions if ASB failed to
maintain its QTL status, and a failure or inability to comply with those restrictions could effectively result in the required
divestiture of ASB. As of December 31, 2014, ASB was a qualified thrift lender.
Unitary savings and loan holding company. The Gramm-Leach-Bliley Act of 1999 (Gramm Act) permitted banks,
insurance companies and investment firms to compete directly against each other, thereby allowing “one-stop shopping” for an
array of financial services. Although the Gramm Act further restricted the creation of so-called “unitary savings and loan
holding companies” (i.e., companies such as HEI whose subsidiaries include one or more savings associations and one or more
nonfinancial subsidiaries), the unitary savings and loan holding company relationship among HEI, ASB Hawaii and ASB is
“grandfathered” under the Gramm Act so that HEI and its subsidiaries will be able to continue to engage in their current
activities so long as ASB maintains its QTL status. Under the Gramm Act, any proposed sale of ASB would have to satisfy
applicable statutory and regulatory requirements and potential acquirers of ASB would most likely be limited to companies that
are already qualified as, or capable of qualifying as, either a traditional savings and loan association holding company or a bank
holding company, or as one of the authorized financial holding companies permitted under the Gramm Act. There have been
legislative proposals in the past which would operate to eliminate the thrift charter or the grandfathered status of HEI as a
unitary thrift holding company and effectively require the divestiture of ASB.
Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” for
Consolidated HEI above.
Allowance for loan losses. See Note 1 of the Consolidated Financial Statements and the discussion above under “Earning
assets, costing liabilities and other factors.” ASB maintains an allowance for loan losses believed to be adequate to absorb
losses inherent in its loan portfolio. The level of allowance for loan losses is based on a continuing assessment of existing risks
in the loan portfolio, historical loss experience, changes in collateral values and current conditions (for example, economic
conditions, real estate market conditions and interest rate environment). The allowance for loan losses is allocated to loan types
using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The
formula-based approach emphasizes loss factors primarily derived from actual historical default and loss rates, which are
combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan
categories. Adverse changes in any of these factors could result in higher charge-offs and provision for loan losses.
ASB disaggregates the loan portfolio into loan segments for purposes of determining the allowance for loan losses.
Commercial and commercial real estate loans are defined as non-homogeneous loans. ASB utilizes a risk rating system for
evaluating the credit quality of such loans. Loans are rated based on the degree of risk at origination and periodically thereafter,
as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction
risk). ASB's credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal
risk rating system and timeliness of rating changes. Non-homogeneous loans are categorized into the regulatory asset quality
classifications: Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. For loans classified as
substandard, an analysis is done to determine if the loan is impaired. A loan is deemed impaired when it is probable that ASB
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is deemed
impaired, ASB applies a valuation methodology to determine whether there is an impairment shortfall. The measurement of
impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan’s
original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral, net of
costs to sell. For all loans collateralized by real estate whose repayment is dependent on the sale of the underlying collateral
property, ASB measures impairment by utilizing the fair value of the collateral, net of costs to sell; for other loans that are not
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considered collateral dependent, generally the discounted cash flow method is used to measure impairment. For loans
collateralized by real estate that are classified as troubled debt restructured ("TDR") loans, the present value of the expected
future cash flows of the loans may also be used to measure impairment as these loans are expected to perform according to their
restructured terms. Impairment shortfalls are charged to the provision for loan losses and included in the allowance for loan
losses. However, impairment shortfalls that are deemed to be confirmed losses (uncollectible) are charged off, with the loan
written down by the amount of the confirmed loss.
Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically
underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on
delinquency status. The homogeneous loan portfolios are stratified into individual products with common risk characteristics
and segmented into various secured and unsecured loan product types. For the homogeneous portfolio, the quality of the loan is
best indicated by the repayment performance of an individual borrower. ASB supplements performance data with an 11-risk
rating retail credit model that assigns a probability of default to each borrower based primarily on the borrower's current Fair
Isaac Corporation ("FICO") score and for HELOC and unsecured consumer products, the bankruptcy score. Current FICO and
bankruptcy data is purchased and appended to all homogeneous loans on a quarterly basis and used to estimate the borrower’s
probability of default and the loss given default.
ASB's methodology for determining the allowance for loan losses was generally based on historic loss rates using various
look-back periods. During the second quarter of 2014, ASB implemented enhancements to the loss rate calculation for
estimating the allowance for loan losses that included several refinements to determining the probability of default and the loss
given default for the various segments of the loan portfolio that are more statistically sound than those previously employed.
The result is an estimated loss rate established for each loan. ASB believes that these enhancements improve the precision in
estimating the allowance for loan losses. The enhancement did not have a material effect on the total allowance for loan losses
or the provision for loan losses for 2014 and did result in the full allocation of the previously unallocated portion of the
allowance for loan losses.
In conjunction with the above enhancement, management also adopted an enhanced risk rating system for monitoring and
managing credit risk in the non-homogenous loan portfolios that measures general creditworthiness at the borrower level. The
numerical-based, risk rating “PD Model” takes into consideration fiscal year-end financial information of the borrower and
identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that
demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given
default value is assigned to each loan to measure loss in the event of default based on loan specific features such as collateral
that mitigates the amount of loss in the event of default. Together the PD Model and loss given default construct provide a more
quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the
ultimate collectability of each loan. Additionally, qualitative factors may be included in the estimation process.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the
consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded
credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss
rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the
allowance for loan losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other
noninterest expense in the consolidated statements of income.
Management believes its allowance for loan losses adequately estimates actual loan losses that will ultimately be incurred.
However, such estimates are based on currently available information and historical experience, and future adjustments may be
required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due to
changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these
differences and subsequent adjustments could be material.
Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or
earlier if management believes that the probability of collection is insufficient to warrant further accrual. A loan may be
returned to accrual status if (i) principal and interest payments have been brought current and ASB expects repayment of the
remaining contractual principal and interest, (ii) the loan has otherwise become well-secured and collection efforts are
reasonably expected to result in repayment of the debt, or (iii) the borrower has been making regularly scheduled payments in
full for the prior six months and it is reasonably assured that the loan will be brought fully current within a reasonable period.
Cash receipts on nonaccruing loans are generally applied to reduce the unpaid principal balance.
Loans considered to be uncollectible are charged-off against the allowance. The amount and timing of charge-offs on loans
includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority and the overall
financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance. Loans that
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have been charged-off against the allowance are periodically monitored to evaluate whether further adjustments to the
allowance are necessary. Loans in the commercial and commercial real estate portfolio are charged-off when the loan is risk
rated “doubtful” or “loss”. The loan or a portion thereof is determined to be uncollectible after considering the borrower’s
overall financial condition and collateral deficiency. A loan is considered uncollectible when: (a) the borrower is delinquent in
principal or interest 90 days or more; (b) significant improvement in the borrower’s repayment capacity is doubtful; and/or (c)
collateral value is insufficient to cover outstanding indebtedness and no other viable assets exist.
Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is
determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A loan is
considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that
collateral value is insufficient to cover outstanding indebtedness and no other viable assets exist; (c) notification of the
borrower’s bankruptcy is received; or (d) in cases where ASB is in a subordinate position to other debt, the senior lien holder
has foreclosed and extinguished the junior lien.
Other consumer loans are generally charged-off when the balance becomes 120 days delinquent.
See "Nonperforming loans" in Note 1 of the Consolidated Financial Statements for additional information regarding ASB's
nonperforming loans.
Troubled debt restructurings. A loan modification is deemed to be a TDR when ASB grants a concession ASB would not
otherwise consider if it were not for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails
to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of
the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed
borrower improve their financial position to eventually be able to repay the loan fully, provided the borrower has demonstrated
both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or
liquidation with the goal of minimizing losses and maximizing recovery.
ASB may consider various types of concessions in granting a TDR, including maturity date extensions, extended
amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants
principal forgiveness in TDR modifications. Residential loan modifications generally involve interest rate reduction, extending
the amortization period, or interest only payments for a period of time. Land loans at origination are typically structured as a
three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically
involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest
monthly payments. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization
period, and temporary deferral of principal payments. ASB generally do not reduce the interest rate on commercial loan TDR
modifications. Occasionally, additional collateral and/or guaranties are obtained.
Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. These
nonaccruing TDRs can be returned to accrual status when principal and interest have been current for at least six months and a
well-documented evaluation of the borrower’s financial condition has been performed and indicates future payments are
reasonably assured.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the
allowance for loan losses based on the appropriate method of measuring impairment. The financial impact of the calculated
impairment amount is an increase to the allowance for loan losses associated with the modified loan. When available
information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off
against the allowance for loan losses.
Fair value. Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a
liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally
determined based on assumptions that market participants would use in pricing the asset or liability and are based on market
data obtained from independent third party sources. However, in certain cases, ASB uses its own assumptions based on the best
information available in certain circumstances. These valuations are estimates at a specific point in time, based on relevant
market information, information about the financial instrument and judgments regarding future expected loss experience,
economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any
premium or discount that could result if ASB were to sell its entire holdings of a particular financial instrument at one time.
Because no active trading market exists for a portion of its financial instruments, fair value estimates cannot be determined with
precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses
could have a significant effect on fair value estimates, but have not been considered in making such estimates.
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ASB classifies its financial assets and liabilities that are measured at fair value in accordance with the three level valuation
hierarchy outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and is used t measure
fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs
to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are
not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the
asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data,
there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more
significant due to the lack of observable market data.
Significant assets measured at fair value on a recurring basis include ASB's mortgage-related securities available for sale.
These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The
third-party pricing services use a variety of methods to determine fair value including quoted prices for similar securities in an
active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic
prepayment speeds, and other observable market factors. To enhance the robustness of the pricing process, ASB compares its
standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance
range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be
conducted by the investment manager and a challenge to the price may be made. Fair value in such cases will be based on the
value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been
independently determined by a third-party pricing vendor or non-affiliated broker.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes.
Examples of nonrecurring uses of fair value include loan impairments for certain loans and goodwill.
See "Investment securities" and "Derivative financial instruments" in Note 5 and Note 16 of the Consolidated Financial
Statements for additional information regarding ASB's fair value measurements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEI and Hawaiian Electric (in the case of Hawaiian Electric, only the information related to Hawaiian Electric and its
subsidiaries is applicable):
The Company manages various market risks in the ordinary course of business, including credit risk and liquidity risk. The
Company believes the electric utility and the “other” segment’s exposures to these two risks are not material as of
December 31, 2014.
Credit risk for ASB is the risk that borrowers or issuers of securities will not be able to repay their obligations to the bank.
Credit risk associated with ASB’s lending portfolios is controlled through its underwriting standards, loan rating of commercial
and commercial real estate loans, on-going monitoring by loan officers, credit review and quality control functions in these
lending areas and adequate allowance for loan losses. Credit risk associated with the securities portfolio is mitigated through
investment portfolio limits, experienced staff working with analytical tools, monthly fair value analysis and on-going
monitoring and reporting such as investment watch reports and loss sensitivity analysis. See “Allowance for loan losses” above
and in Note 5 of the Consolidated Financial Statements.
Liquidity risk for ASB is the risk that the bank will not meet its obligations when they become due. Liquidity risk is
mitigated by ASB’s asset/liability management process, on-going analytical analysis, monitoring and reporting information
such as weekly cash-flow analyses and maintenance of liquidity contingency plans.
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The Utilities are exposed to some commodity price risk primarily related to their fuel supply and IPP contracts. The
Utilities' commodity price risk is substantially mitigated so long as they have their current ECACs in their rate schedules. The
Utilities currently have no hedges against its commodity price risk.
The Company currently has no direct exposure to market risk from trading activities nor foreign currency exchange rate
risk.
The Company considers interest rate risk to be a very significant market risk as it could potentially have a significant effect
on the Company’s results of operations, financial condition and liquidity, especially as it relates to ASB, but also as it may
affect the discount rate used to determine retirement benefit liabilities, the market value of retirement benefit plans’ assets and
the Utilities’ allowed rates of return. Interest rate risk can be defined as the exposure of the Company’s earnings to adverse
movements in interest rates.
Bank interest rate risk
The Company’s success is dependent, in part, upon ASB’s ability to manage interest rate risk (IRR). ASB’s interest-rate
risk profile is strongly influenced by its primary business of making fixed-rate residential mortgage loans and taking in retail
deposits. Large mismatches in the amounts or timing between the maturity or repricing of interest sensitive assets or liabilities
could adversely affect ASB’s earnings and the market value of its interest-sensitive assets and liabilities in the event of
significant changes in the level of interest rates. Many other factors also affect ASB’s exposure to changes in interest rates, such
as general economic and financial conditions, customer preferences, and competition for loans or deposits.
ASB’s Asset/Liability Management Committee (ALCO), whose voting members are officers and employees of ASB, is
responsible for managing interest rate risk and carrying out the overall asset/liability management objectives and activities of
ASB as approved by the ASB Board of Directors. ALCO establishes policies under which management monitors and
coordinates ASB’s assets and liabilities.
See Note 5 of the Consolidated Financial Statements for a discussion of the use of rate lock commitments on loans held for
sale and forward sale contracts to manage some interest rate risk associated with ASB’s residential loan sale program.
Management of ASB measures interest-rate risk using simulation analysis with an emphasis on measuring changes in net
interest income (NII) and the market value of interest-sensitive assets and liabilities in different interest-rate environments. The
simulation analysis is performed using a dedicated asset/liability management software system enhanced with a mortgage
prepayment model and a collateralized mortgage obligation database. The simulation software is capable of generating
scenario-specific cash flows for all instruments using the specified contractual information for each instrument and product
specific prepayment assumptions for mortgage loans and mortgage-related securities.
NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios. NII
sensitivity is measured as the change in NII in the alternate interest-rate scenarios as a percentage of the base case NII. The
base case interest-rate scenario is established using the current yield curve and assumes interest rates remain constant over the
next twelve months. The alternate scenarios are created by assuming “rate ramps” or gradual interest changes and accomplished
by moving the yield curve in a parallel fashion, over the next twelve month period, in increments of +/- 100 basis points. The
simulation model forecasts scenario-specific principal and interest cash flows for the interest-bearing assets and liabilities, and
the NII is calculated for each scenario. Key balance sheet modeling assumptions used in the NII sensitivity analysis include: the
size of the balance sheet remains relatively constant over the simulation horizon and maturing assets or liabilities are reinvested
in similar instruments in order to maintain the current mix of the balance sheet. In addition, assumptions are made about the
prepayment behavior of mortgage-related assets, future pricing spreads for new assets and liabilities, and the speed and
magnitude with which deposit rates change in response to changes in the overall level of interest rates. Other NII sensitivity
analysis may include scenarios such as yield curve twists or non-static balance sheet changes (such as changes to key balance
sheet drivers).
Consistent with OCC guidelines, the market value or economic capitalization of ASB is measured as economic value of
equity (EVE). EVE represents the theoretical market value of ASB’s net worth and is defined as the present value of expected
net cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present
value of expected net cash flows from existing off-balance sheet contracts. Key assumptions used in the calculation of ASB’s
EVE include the prepayment behavior of loans and investments, the possible distribution of future interest rates, pricing
spreads for assets and liabilities in the alternate scenarios and the rate and balance behavior of deposit accounts with
indeterminate maturities. EVE is calculated in multiple scenarios. As with the NII simulation, the base case is represented by
the current yield curve. Alternate scenarios are created by assuming immediate parallel shifts in the yield curve in increments of
+/- 100 basis points (bp) up to + 300 bp. The change in EVE is measured as the change in EVE in a given rate scenario from
80
the base case and expressed as a percentage. To gain further insight into the IRR profile, additional analysis is periodically
performed in alternate scenarios including rate shifts of greater magnitude and changes in key balance sheet drivers.
ASB’s interest-rate risk sensitivity measures as of December 31, 2014 and 2013 constitute “forward-looking statements”
and were as follows:
Change in interest rates
(basis points)
+300
+200
+100
-100
Change in NII
(gradual change in interest rates)
Change in EVE
(instantaneous change in interest rates)
December 31,
2014
December 31,
2013
December 31,
2014
1.9%
0.7
0.1
(0.5)
1.3%
0.3
—
(0.5)
(6.1)%
(2.9)
(0.7)
(2.5)
December 31, 2013
(10.7)%
(6.9)
(3.3)
0.6
Management believes that ASB’s interest rate risk position as of December 31, 2014 represents a reasonable level of risk.
The NII profile under the rising interest rate scenarios was more asset sensitive for all rate increases as of December 31, 2014
compared to December 31, 2013. The shift in balance sheet mix from residential mortgage loans with long-term repricing
horizons to commercial real estate and HELOC loans with a short-term repricing horizon made us more asset sensitive. In
addition, the flattening of the yield curve resulted in more cash flows maturing or repricing within the 12 month horizon.
ASB’s base EVE increased to $947 million as of December 31, 2014 compared to $906 million as of December 31, 2013
due to growth in capital and flattening of the yield curve.
The change in EVE to rising rates became less sensitive as of December 31, 2014 compared to December 31, 2013. The
flattening of the yield curve, with long term rates falling, caused mortgage rates to decrease and led to faster prepayment
expectations and shortened the duration of the fixed rate mortgage portfolio. On the liability side of the balance sheet, core
deposit balances grew and the decay rate of certain of those core deposits were updated, which lengthened the duration, helped
mitigate asset sensitivity, and thereby reduced overall EVE sensitivity.
The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage
change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance
changes and pricing strategies, and should not be relied upon as indicative of actual results. To the extent market conditions and
other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation
results. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate
scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate
appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management
might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period
and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent
management’s views of future market movements, the level of future earnings, or the timing of any changes in earnings within
the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and
speed with which rates change, actual changes in ASB’s balance sheet, and management’s responses to the changes in interest
rates.
Other than bank interest rate risk
The Company’s general policy is to manage “other than bank” interest rate risk through use of a combination of short-term
debt, long-term debt (currently fixed-rate debt) and preferred securities. As of December 31, 2014, management believes the
Company is exposed to “other than bank” interest rate risk because of its periodic borrowing requirements, the impact of
interest rates on the discount rate and the market value of plan assets used to determine retirement benefits expenses and
obligations (see “Retirement benefits” in HEI’s MD&A and Note 10 of the Consolidated Financial Statements) and the possible
effect of interest rates on the electric utilities’ allowed rates of return (see “Electric utility—Certain factors that may affect
future results and financial condition—Regulation of electric utility rates”). Other than these exposures, management believes
its exposure to “other than bank” interest rate risk is not material. The Company’s longer-term debt, in the form of borrowings
of proceeds of revenue bonds, registered Medium-Term Notes and privately-placed Senior Notes, is at fixed rates (see Note 16
of the Consolidated Financial Statements for the fair value of long-term debt, net-other than bank).
81
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEI and Hawaiian Electric:
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm - HEI
Report of Independent Registered Public Accounting Firm - Hawaiian Electric
Consolidated Financial Statements
HEI
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Hawaiian Electric
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Capitalization at December 31, 2014 and 2013
Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Page
83
84
85
85
86
87
88
89
90
90
91
92
94
95
96
82
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Hawaiian Electric Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial
position of Hawaiian Electric Industries, Inc. and its subsidiaries (the “Company”) at December 31, 2014 and 2013, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial
statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the Annual Report of Management on Internal Control
over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on
the financial statement schedules and on the Company’s internal control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2015
83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder
of Hawaiian Electric Company, Inc.:
In our opinion, the accompanying consolidated balance sheets and statements of capitalization and the related consolidated
statements of income, comprehensive income, changes in common stock equity and cash flows present fairly, in all material
respects, the financial position of Hawaiian Electric Company, Inc. and its subsidiaries (the "Company") at December 31, 2014
and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2015
84
Consolidated Statements of Income
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands, except per share amounts)
Revenues
Electric utility
Bank
Other
Total revenues
Expenses
Electric utility
Bank
Other
Total expenses
Operating income (loss)
Electric utility
Bank
Other
Total operating income
Interest expense, net – other than on deposit liabilities and other bank borrowings
Allowance for borrowed funds used during construction
Allowance for equity funds used during construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income for common stock
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Weighted-average number of common shares outstanding
Net effect of potentially dilutive shares
Adjusted weighted-average shares
2014
2013
2012
$
2,987,323
252,497
$
2,980,172
258,147
$
3,109,439
265,539
(278)
151
17
3,239,542
3,238,470
3,374,995
2,711,555
2,734,659
2,896,427
176,878
22,185
171,090
17,302
177,106
17,266
2,910,618
2,923,051
3,090,799
275,768
75,619
(22,463)
328,924
(76,352)
2,579
6,771
261,922
91,712
170,210
1,890
168,320
1.65
1.64
1.24
101,968
969
102,937
$
$
$
$
245,513
87,057
(17,151)
315,419
(75,479)
2,246
5,561
247,747
84,341
163,406
1,890
161,516
1.63
1.62
1.24
98,968
655
99,623
$
$
$
$
213,012
88,433
(17,249)
284,196
(78,151)
4,355
7,007
217,407
76,859
140,548
1,890
138,658
1.43
1.42
1.24
96,908
430
97,338
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
85
Consolidated Statements of Comprehensive Income
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Net income for common stock
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for sale investment securities:
Net unrealized gains (losses) on available-for sale investment securities arising during
the period, net of (taxes) benefits of $(3,856), $9,037 and ($631) for 2014, 2013 and
2012, respectively
Less: reclassification adjustment for net realized gains included in net income, net of
taxes of $1,132, $488 and $53 for 2014, 2013 and 2012, respectively
Derivatives qualified as cash flow hedges:
2014
2013
2012
$
168,320
$
161,516
$
138,658
5,840
(13,686)
(1,715)
(738)
956
(81)
Less: reclassification adjustment to net income, net of tax benefits of $150, $150 and
$150 for 2014, 2013 and 2012, respectively
236
235
236
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of $149,364,
($142,478) and $63,303 for 2014, 2013 and 2012, respectively
Less: amortization of transition obligation, prior service credit and net losses
recognized during the period in net periodic benefit cost, net of tax benefits of
$7,245, $14,870 and $9,764 for 2014, 2013 and 2012, respectively
Less: reclassification adjustment for impact of D&Os of the PUC included in
regulatory assets, net of (taxes) benefits of ($132,373), $141,777 and ($48,299) for
2014, 2013 and 2012, respectively
Other comprehensive income (loss), net of taxes
(234,166)
223,177
(99,159)
11,344
23,280
15,291
207,833
(10,628)
(222,595)
9,673
75,471
(7,286)
Comprehensive income attributable to Hawaiian Electric Industries, Inc.
$
157,692
$
171,189
$
131,372
The accompanying notes are an integral part of these consolidated financial statements.
86
Consolidated Balance Sheets
Hawaiian Electric Industries, Inc. and Subsidiaries
December 31
(dollars in thousands)
ASSETS
Cash and cash equivalents
Accounts receivable and unbilled revenues, net
Available-for-sale investment securities
Stock in Federal Home Loan Bank of Seattle, at cost
Loans receivable held for investment, net
Loans held for sale, at lower of cost or fair value
Property, plant and equipment, net
Land
Plant and equipment
Construction in progress
Less – accumulated depreciation
Regulatory assets
Other
Goodwill
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable
Interest and dividends payable
Deposit liabilities
Short-term borrowings—other than bank
Other bank borrowings
Long-term debt, net—other than bank
Deferred income taxes
Regulatory liabilities
Contributions in aid of construction
Defined benefit pension and other postretirement benefit plans
liability
Other
Total liabilities
Preferred stock of subsidiaries - not subject to mandatory
redemption
Commitments and contingencies (Notes 4 and 5)
Shareholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares;
issued: none
Common stock, no par value, authorized 200,000,000 shares;
issued and outstanding: 102,565,266 shares and 101,259,800
shares at December 31, 2014 and 2013, respectively
Retained earnings
Accumulated other comprehensive income (loss), net of taxes
2014
2013
$
175,542
313,696
550,394
69,302
4,389,033
8,424
$
220,036
346,785
529,007
92,546
4,110,113
5,302
$
94,093
6,137,417
168,214
6,399,724
(2,250,950)
$
$
74,272
5,836,922
146,742
6,057,936
(2,192,422)
$
$
$
4,148,774
905,264
541,542
82,190
11,184,161
186,425
25,336
4,623,415
118,972
290,656
1,506,546
631,734
344,849
466,432
632,845
531,230
9,358,440
34,293
—
1,521,297
297,509
3,865,514
575,924
512,627
82,190
10,340,044
212,331
26,716
4,372,477
105,482
244,514
1,492,945
529,260
349,299
432,894
288,539
524,224
8,578,681
34,293
—
1,488,126
255,694
Net unrealized gains (losses) on securities
Unrealized losses on derivatives
Retirement benefit plans
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
462
(289)
(27,551)
$
$
(27,378)
1,791,428
11,184,161
(3,663)
(525)
(12,562)
$
(16,750)
1,727,070
10,340,044
The accompanying notes are an integral part of these consolidated financial statements.
87
Consolidated Statements of Changes in Shareholders’ Equity
Hawaiian Electric Industries, Inc. and Subsidiaries
(in thousands, except per share amounts)
Balance, December 31, 2011
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock:
Dividend reinvestment and stock purchase plan
Retirement savings and other plans
Expenses and other, net
Dividend equivalents paid on equity-classified awards
Common stock dividends ($1.24 per share)
Balance, December 31, 2012
Net income for common stock
Other comprehensive income, net of taxes
Issuance of common stock:
Partial settlement of equity forward
Dividend reinvestment and stock purchase plan
Retirement savings and other plans
Expenses and other, net
Common stock dividends ($1.24 per share)
Balance, December 31, 2013
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock:
Partial settlement of equity forward
Dividend reinvestment and stock purchase plan
Retirement savings and other plans
Expenses and other, net
Common stock dividends ($1.24 per share)
Common stock
Shares
Amount
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
96,038
$ 1,349,446
$
198,397
$
(19,137) $ 1,528,706
—
—
1,560
330
—
—
—
—
—
41,295
8,196
4,547
—
—
97,928
1,403,484
—
—
1,300
1,612
420
—
—
—
—
33,409
41,692
9,203
338
—
138,658
—
—
—
—
(101)
(120,150)
216,804
161,516
—
—
—
—
—
(122,626)
—
(7,286)
138,658
(7,286)
—
—
—
—
—
41,295
8,196
4,547
(101)
(120,150)
(26,423)
1,593,865
—
9,673
161,516
9,673
—
—
—
—
—
33,409
41,692
9,203
338
(122,626)
101,260
$ 1,488,126
$
255,694
$
(16,750) $ 1,727,070
—
—
1,000
95
210
—
—
—
—
24,873
2,461
6,816
(979)
—
168,320
—
—
—
—
—
(126,505)
—
(10,628)
168,320
(10,628)
—
—
—
—
—
24,873
2,461
6,816
(979)
(126,505)
Balance, December 31, 2014
102,565
$ 1,521,297
$
297,509
$
(27,378) $ 1,791,428
The accompanying notes are an integral part of these consolidated financial statements.
88
Consolidated Statements of Cash Flows
Hawaiian Electric Industries, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
Other amortization
Provision for loan losses
Impairment of utility assets
Loans receivable originated and purchased, held for sale
Proceeds from sale of loans receivable, held for sale
Gain on sale of credit card portfolio
Increase in deferred income taxes
Excess tax benefits from share-based payment arrangements
Allowance for equity funds used during construction
Change in cash overdraft
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net
Decrease in fuel oil stock
Increase in regulatory assets
Decrease in accounts, interest and dividends payable
Change in prepaid and accrued income taxes and utility revenue taxes
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Available-for-sale investment securities purchased
Principal repayments on available-for-sale investment securities
Proceeds from sale of available-for-sale investment securities
Redemption of stock from Federal Home Loan Bank of Seattle
Net increase in loans held for investment
Proceeds from sale of real estate acquired in settlement of loans
Capital expenditures
Contributions in aid of construction
Proceeds from sale of credit card portfolio
Other
Net cash used in investing activities
Cash flows from financing activities
Net increase in deposit liabilities
Net increase in short-term borrowings with original maturities of three months or less
Net decrease in retail repurchase agreements
Proceeds from other bank borrowings
Repayments of other bank borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Excess tax benefits from share-based payment arrangements
Net proceeds from issuance of common stock
Common stock dividends
Preferred stock dividends of subsidiaries
Other
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
The accompanying notes are an integral part of these consolidated financial statements.
89
2014
2013
2012
$ 170,210
$ 163,406
$ 140,548
172,762
8,476
6,126
—
(155,755)
155,030
—
59,184
(277)
(6,771)
(1,038)
33,089
28,041
(17,000)
(92,294)
12,845
22,251
(93,400)
301,479
(183,778)
91,013
79,564
23,244
(283,810)
3,213
(339,721)
41,806
—
(39)
(568,508)
160,061
4,667
1,507
—
(249,022)
273,775
(2,251)
80,399
(430)
(5,561)
1,038
16,038
27,332
(65,461)
(23,153)
(19,406)
(33,014)
(2,779)
327,146
(112,654)
158,558
71,367
3,476
(398,426)
9,212
(353,879)
32,160
26,386
40
(563,760)
150,389
7,958
12,883
40,000
(519,622)
513,000
—
90,848
(61)
(7,007)
—
(18,501)
10,129
(72,401)
(39,738)
21,079
(228)
(94,734)
234,542
(243,633)
191,253
3,548
1,742
(112,730)
11,336
(325,480)
45,982
—
935
(427,047)
250,938
13,490
(9,465)
130,601
(75,000)
125,000
(111,400)
277
26,898
(126,458)
(1,890)
(456)
222,535
(44,494)
220,036
$ 175,542
142,561
21,789
(1,418)
130,000
(80,000)
286,000
(216,000)
430
55,086
(98,383)
(1,890)
(1,187)
236,988
374
219,662
$ 220,036
159,884
14,872
(37,291)
5,000
(5,000)
457,000
(375,500)
61
23,613
(96,202)
(1,890)
(2,645)
141,902
(50,603)
270,265
$ 219,662
Consolidated Statements of Income
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Impairment of utility assets
Total expenses
Operating income
Allowance for equity funds used during construction
Interest expense and other charges, net
Allowance for borrowed funds used during construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian Electric
Preferred stock dividends of Hawaiian Electric
Net income for common stock
2014
2013
2012
$
2,987,323
$
2,980,172
$
3,109,439
1,131,685
722,008
410,612
166,387
280,863
—
2,711,555
275,768
6,771
(64,757)
2,579
220,361
80,725
139,636
915
138,721
1,080
137,641
$
1,185,552
710,681
403,270
154,025
281,131
—
2,734,659
245,513
5,561
(59,279)
2,246
194,041
69,117
124,924
915
124,009
1,080
122,929
$
1,297,419
724,240
397,429
144,498
292,841
40,000
2,896,427
213,012
7,007
(62,055)
4,355
162,319
61,048
101,271
915
100,356
1,080
99,276
$
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Net income for common stock
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
2014
2013
2012
$
137,641
$
122,929
$
99,276
Net gains (losses) arising during the period, net of (taxes) benefits of $139,236,
($129,601) and $57,375 for 2014, 2013 and 2012, respectively
Less: amortization of transition obligation, prior service credit and net losses recognized
during the period in net periodic benefit cost, net of tax benefits of $6,504, $13,180
and $8,709 for 2014, 2013 and 2012, respectively
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory
assets, net of (taxes) benefits of ($132,373), $141,777 and ($48,069) for 2014, 2013
and 2012, respectively
Other comprehensive income (loss), net of taxes
(218,608)
203,479
(90,082)
10,212
20,694
13,673
207,833
(222,595)
(563)
1,578
75,471
(938)
Comprehensive income attributable to Hawaiian Electric Company, Inc.
$
137,078
$
124,507
$
98,338
The accompanying notes are an integral part of these consolidated financial statements.
90
Consolidated Balance Sheets
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less accumulated depreciation of $1,227 and $1,223 at
respective dates
Total property, plant and equipment, net
Current assets
Cash and equivalents
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization (see Consolidated Statements of Capitalization)
Common stock equity
Cumulative preferred stock – not subject to mandatory redemption
Commitments and contingencies (Note 4)
Long-term debt, net
Total capitalization
Current liabilities
Current portion of long-term debt
Accounts payable
Interest and preferred dividends payable
Taxes accrued
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other postretirement benefit plans liability
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total capitalization and liabilities
The accompanying notes are an integral part of these consolidated financial statements.
91
2014
2013
$
$
52,299
6,009,482
(2,175,510)
158,616
4,044,887
6,563
4,051,450
51,883
5,701,875
(2,111,229)
143,233
3,785,762
6,567
3,792,329
13,762
158,484
137,374
4,283
106,046
57,250
66,383
71,421
615,003
833,843
8,323
81,838
924,004
5,590,457
1,682,144
34,293
$
$
62,825
175,448
144,124
14,062
134,087
59,044
52,857
69,738
712,185
506,186
9,003
67,426
582,615
5,087,129
1,593,564
34,293
1,206,546
2,922,983
1,206,545
2,834,402
—
163,934
22,316
250,402
632
65,146
502,430
602,872
344,217
79,492
595,395
76,636
1,698,612
466,432
5,590,457
$
11,400
189,559
21,652
249,445
1,916
63,881
537,853
507,161
347,383
73,539
262,162
91,735
1,281,980
432,894
5,087,129
$
$
$
Consolidated Statements of Capitalization
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(dollars in thousands, except par value)
Common stock equity
Common stock of $6 2/3 par value
Authorized: 50,000,000 shares. Outstanding:
2014, 15,805,327 shares and 2013, 15,429,105 shares
Premium on capital stock
Retained earnings
Accumulated other comprehensive income, net of taxes - retirement benefit plans
Common stock equity
Cumulative preferred stock not subject to mandatory redemption
Authorized: 5,000,000 shares of $20 par value and 7,000,000 shares of $100 par value.
Series
Par Value
Par
Value
(dollars in thousands, except par value and shares outstanding)
C-4 1/4%
(Hawaiian Electric)
20
$
D-5%
E-5%
H-5 1/4%
I-5%
J-4 3/4%
K-4.65%
G-7 5/8%
H-7 5/8%
20
20
20
20
20
20
100
100
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaiian Electric)
(Hawaii Electric Light)
(Maui Electric)
2014
2013
$
105,388
$
102,880
578,938
997,773
45
541,452
948,624
608
1,682,144
1,593,564
Shares
outstanding
December 31,
2014 and 2013
2014
2013
150,000
$
3,000
$
50,000
150,000
250,000
89,657
250,000
175,000
70,000
50,000
1,000
3,000
5,000
1,793
5,000
3,500
7,000
5,000
3,000
1,000
3,000
5,000
1,793
5,000
3,500
7,000
5,000
1,234,657
34,293
34,293
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
92
Consolidated Statements of Capitalization (continued)
Hawaiian Electric Company, Inc. and Subsidiaries
December 31
(in thousands)
Long-term debt
Obligations to the State of Hawaii for the repayment of Special Purpose Revenue Bonds (subsidiary obligations
unconditionally guaranteed by Hawaiian Electric):
2014
2013
Hawaiian Electric, 6.50%, series 2009, due 2039
Hawaii Electric Light, 6.50%, series 2009, due 2039
Hawaiian Electric, 4.60%, refunding series 2007B, due 2026
Hawaii Electric Light, 4.60%, refunding series 2007B, due 2026
Maui Electric, 4.60%, refunding series 2007B, due 2026
Hawaiian Electric, 4.65%, series 2007A, due 2037
Hawaii Electric Light, 4.65%, series 2007A, due 2037
Maui Electric, 4.65%, series 2007A, due 2037
Hawaiian Electric, 4.80%, refunding series 2005A, due 2025
Hawaii Electric Light, 4.80%, refunding series 2005A, due 2025
Maui Electric, 4.80%, refunding series 2005A, due 2025
Hawaii Electric Light, 5.50%, refunding series 1999A, paid in 2014
Total obligations to the State of Hawaii
Other long-term debt – unsecured:
Taxable senior notes:
Hawaii Electric Light, 3.83%, Series 2013A, due 2020
Hawaiian Electric, 4.45%, Series 2013A, due 2022
Hawaii Electric Light, 4.45%, Series 2013B, due 2022
Hawaiian Electric, 4.84%, Series 2013B, due 2027
Hawaii Electric Light, 4.84%, Series 2013C, due 2027
Maui Electric, 4.84%, Series 2013A, due 2027
Hawaiian Electric, 5.65%, Series 2013C, due 2043
Maui Electric, 5.65%, Series 2013B, due 2043
Hawaiian Electric, 3.79%, Series 2012A, due 2018
Hawaii Electric Light, 3.79%, Series 2012A, due 2018
Maui Electric, 3.79%, Series 2012A, due 2018
Hawaiian Electric, 4.03%, Series 2012B, due 2020
Maui Electric, 4.03%, Series 2012B, due 2020
Hawaiian Electric, 4.55%, Series 2012C, due 2023
Hawaii Electric Light, 4.55%, Series 2012B, due 2023
Maui Electric, 4.55%, Series 2012C, due 2023
Hawaiian Electric, 4.72%, Series 2012D, due 2029
Hawaiian Electric, 5.39%, Series 2012E, due 2042
Hawaiian Electric, 4.53%, Series 2012F, due 2032
Total taxable senior notes
6.50 %, series 2004, Junior subordinated deferrable interest debentures, due 2034
Total other long-term debt – unsecured
Total long-term debt
Less unamortized discount
Less current portion long-term debt
Long-term debt, net
Total capitalization
The accompanying notes are an integral part of these consolidated financial statements.
93
$
90,000
$
60,000
62,000
8,000
55,000
100,000
20,000
20,000
40,000
5,000
2,000
—
462,000
14,000
40,000
12,000
50,000
30,000
20,000
50,000
20,000
30,000
11,000
9,000
62,000
20,000
50,000
20,000
30,000
35,000
150,000
40,000
693,000
51,546
744,546
90,000
60,000
62,000
8,000
55,000
100,000
20,000
20,000
40,000
5,000
2,000
11,400
473,400
14,000
40,000
12,000
50,000
30,000
20,000
50,000
20,000
30,000
11,000
9,000
62,000
20,000
50,000
20,000
30,000
35,000
150,000
40,000
693,000
51,546
744,546
1,206,546
1,217,946
—
—
1,206,546
$
2,922,983
$
1
11,400
1,206,545
2,834,402
Consolidated Statements of Changes in Common Stock Equity
Hawaiian Electric Company, Inc. and Subsidiaries
(in thousands)
Balance, December 31, 2011
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2012
Net income for common stock
Other comprehensive income, net of taxes
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2013
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2014
Common stock
Premium
on
capital
Shares
Amount
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
14,234
$
94,911
$ 426,921
$
881,041
$
(32) $
1,402,841
—
—
431
—
—
—
2,877
—
—
—
41,124
99,276
—
—
—
(73,044)
14,665
97,788
468,045
15,429
102,880
541,452
—
(81,578)
—
—
764
—
—
—
5,092
—
—
—
376
—
—
—
2,508
—
—
—
73,407
—
—
37,486
907,273
122,929
—
—
948,624
137,641
—
—
15,805
$ 105,388
$ 578,938
$
997,773
$
—
(88,492)
—
(938)
—
—
(970)
—
1,578
—
—
608
—
(563)
—
—
45
99,276
(938)
44,001
(73,044)
1,472,136
122,929
1,578
78,499
(81,578)
1,593,564
137,641
(563)
39,994
(88,492)
$
1,682,144
The accompanying notes are an integral part of these consolidated financial statements.
94
Consolidated Statements of Cash Flows
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31
(in thousands)
Cash flows from operating activities
Net income
2014
2013
2012
$
139,636
$
124,924
$
101,271
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
166,387
154,025
144,498
Other amortization
Impairment of utility assets
Increase in deferred income taxes
Change in tax credits, net
Allowance for equity funds used during construction
Change in cash overdraft
Changes in assets and liabilities
Decrease (increase) in accounts receivable
Decrease (increase) in accrued unbilled revenues
Decrease in fuel oil stock
Decrease (increase) in materials and supplies
Increase in regulatory assets
Decrease in accounts payable
Change in prepaid and accrued income taxes and revenue taxes
Increase (decrease) in defined benefit pension and other postretirement
benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Other
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
Preferred stock dividends of Hawaiian Electric and subsidiaries
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
8,091
—
82,947
6,062
(6,771)
(1,038)
26,743
6,750
28,041
1,794
(17,000)
(90,632)
(4,036)
(961)
(62,959)
283,054
5,077
—
64,507
7,017
(5,561)
1,038
49,445
(9,826)
27,332
(7,959)
(65,461)
(20,828)
(2,028)
2,240
(31,499)
292,443
6,998
40,000
86,878
6,075
(7,007)
—
(47,004)
3,528
10,129
(7,897)
(72,401)
(38,913)
25,239
(744)
(73,419)
177,231
(311,574)
(342,485)
(310,091)
41,806
—
32,160
(230)
45,982
—
(269,768)
(310,555)
(264,109)
(88,492)
(1,995)
40,000
—
(11,400)
(462)
(62,349)
(49,063)
62,825
(81,578)
(1,995)
78,500
236,000
(166,000)
(1,149)
63,778
45,666
17,159
$
13,762
$
62,825
$
(73,044)
(1,995)
44,000
457,000
(368,500)
(2,230)
55,231
(31,647)
48,806
17,159
The accompanying notes are an integral part of these consolidated financial statements.
95
Notes to Consolidated Financial Statements
1 · Summary of significant accounting policies
General
Hawaiian Electric Industries, Inc. (HEI) is a holding company with direct and indirect subsidiaries principally engaged in
electric utility and banking businesses, primarily in the State of Hawaii. HEI is the parent holding company of Hawaiian
Electric Company, Inc. (Hawaiian Electric) and indirect parent holding company of American Savings Bank, F. S. B. (ASB).
HEI’s common stock is traded on the New York Stock Exchange.
Hawaiian Electric and its wholly-owned operating subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric
Light) and Maui Electric Company, Limited (Maui Electric), are regulated public electric utilities (collectively, the Utilities) in
the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other
than Kauai. Hawaiian Electric also owns Renewable Hawaii, Inc. (RHI), Uluwehiokama Biofuels Corp. (UBC) and HECO
Capital Trust III. See Note 3.
ASB is a federally chartered savings bank providing a full range of banking services to individual and business
customers through its branch system in Hawaii.
Basis of presentation. In preparing the consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP), management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change for the Company include the amounts reported for
investment and mortgage-related securities (ASB only); property, plant and equipment; pension and other postretirement
benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities (Utilities only); electric utility
revenues (Utilities only); and allowance for loan losses (ASB only).
Consolidation. The HEI consolidated financial statements include the accounts of HEI and its subsidiaries (collectively, the
Company). The Hawaiian Electric consolidated financial statements include the accounts of Hawaiian Electric and its
subsidiaries. The consolidated financial statements exclude subsidiaries which are variable interest entities (VIEs) when the
Company or the Utilities are not the primary beneficiaries. Investments in companies over which the Company or the Utilities
have the ability to exercise significant influence, but not control, are accounted for using the equity method. All material
intercompany accounts and transactions have been eliminated in consolidation. See Note 6 for information regarding
unconsolidated VIEs.
Cash and cash equivalents. The Utilities consider cash on hand, deposits in banks, money market accounts, certificates of
deposit, short-term commercial paper of non-affiliates and liquid investments (with original maturities of three months or less)
to be cash and cash equivalents. The Company considers the same items to be cash and cash equivalents as well as ASB’s
deposits with the Federal Home Loan Bank (FHLB) of Seattle, federal funds sold (excess funds that ASB loans to other banks
overnight at the federal funds rate) and securities purchased under resale agreements.
Equity method. Investments in up to 50%-owned affiliates over which the Company or the Utilities have the ability to
exercise significant influence over the operating and financing policies and investments in unconsolidated subsidiaries (e.g.
HECO Capital Trust III) are accounted for under the equity method, whereby the investment is carried at cost, plus (or minus)
the equity in undistributed earnings (or losses) and minus distributions since acquisition. Equity in earnings or losses is
reflected in operating revenues. Equity method investments are also evaluated for OTTI. Also see Note 6 below.
Property, plant and equipment. Property, plant and equipment are reported at cost. Self-constructed electric utility plant
includes engineering, supervision, administrative and general costs and an allowance for the cost of funds used during the
construction period. These costs are recorded in construction in progress and are transferred to utility plant when construction is
completed and the facilities are either placed in service or become useful for public utility purposes. Costs for betterments that
make utility plant more useful, more efficient, of greater durability or of greater capacity are also capitalized. Upon the
retirement or sale of electric utility plant, generally no gain or loss is recognized. The cost of the plant retired is charged to
accumulated depreciation. Amounts collected from customers for cost of removal (expected to exceed salvage value in the
future) are included in regulatory liabilities.
96
Depreciation. Depreciation is computed primarily using the straight-line method over the estimated lives of the assets being
depreciated. Electric utility plant additions in the current year are depreciated beginning January 1 of the following year in
accordance with rate-making. Electric utility plant has lives ranging from 20 to 88 years for production plant, from 25 to 65
years for transmission and distribution plant and from 5 to 65 years for general plant. The Utilities’ composite annual
depreciation rate, which includes a component for cost of removal, was 3.1% in 2014, 2013 and 2012.
Leases. HEI, the Utilities and ASB have entered into lease agreements for the use of equipment and office space. The
provisions of some of the lease agreements contain renewal options.
The Company's operating lease expense was $19 million in 2014, 2013 and 2012. The Utilities' operating lease expense
was $9 million, $8 million and $8 million in 2014, 2013 and 2012, respectively. The Company's and the Utilities' future
minimum lease payments are as follows:
(in millions)
2015
2016
2017
2018
2019
Thereafter
HEI
Hawaiian
Electric
$
$
17
15
12
9
7
23
83
$
$
8
6
5
4
3
14
40
Retirement benefits. Pension and other postretirement benefit costs are charged primarily to expense and electric utility plant
(in the case of the Utilities). Funding for the Company’s qualified pension plans (Plans) is based on actuarial assumptions
adopted by the Pension Investment Committee administering the Plans on the advice of an enrolled actuary. The participating
employers contribute amounts to a master pension trust for the Plans in accordance with the funding requirements of the
Employee Retirement Income Security Act of 1974, as amended (ERISA), including changes promulgated by the Pension
Protection Act of 2006, and considering the deductibility of contributions under the Internal Revenue Code. The Company
generally funds at least the net periodic pension cost during the year, subject to limits and targeted funded status as determined
with the consulting actuary. Under a pension tracking mechanism approved by the Public Utilities Commission of the State of
Hawaii (PUC), the Utilities generally will make contributions to the pension fund at the greater of the minimum level required
under the law or net periodic pension cost.
Certain health care and/or life insurance benefits are provided to eligible retired employees and the employees’
beneficiaries and covered dependents. The Company generally funds the net periodic postretirement benefit costs other than
pensions (except for executive life) and the amortization of the regulatory asset for postretirement benefits other than pensions
(OPEB), while maximizing the use of the most tax advantaged funding vehicles, subject to cash flow requirements and reviews
of the funded status with the consulting actuary. The Utilities must fund OPEB costs as specified in the OPEB tracking
mechanisms, which were approved by the PUC. Future decisions in rate cases could further impact funding amounts.
The Company and the Utilities recognize on their respective balance sheets the funded status of their defined benefit
pension and other postretirement benefit plans, as adjusted by the impact of decisions of the PUC.
Environmental expenditures. The Company and the Utilities are subject to numerous federal and state environmental statutes
and regulations. In general, environmental contamination treatment costs are charged to expense, unless it is probable that the
PUC would allow such costs to be recovered in future rates, in which case such costs would be capitalized as regulatory assets.
Also, environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency
of property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the
property for sale. Environmental costs are either capitalized or charged to expense when environmental assessments and/or
remedial efforts are probable and the cost can be reasonably estimated.
Financing costs. Financing costs related to the registration and sale of HEI common stock are recorded in shareholders’
equity.
HEI uses the straight-line method, which approximates the effective interest method, to amortize the long-term debt
financing costs of the holding company over the term of the related debt.
The Utilities use the straight-line method, which approximates the effective interest method, to amortize long-term debt
financing costs and premiums or discounts over the term of the related debt. Unamortized financing costs and premiums or
97
discounts on the Utilities' long-term debt retired prior to maturity are classified as regulatory assets (costs and premiums) or
liabilities (discounts) and are amortized on a straight-line basis over the remaining original term of the retired debt. The method
and periods for amortizing financing costs, premiums and discounts, including the treatment of these items when long-term
debt is retired prior to maturity, have been established by the PUC as part of the rate-making process.
HEI and the Utilities use the straight-line method to amortize the fees and related costs paid to secure a firm commitment
under their line-of-credit arrangements.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial
reporting bases and the tax bases of the Company’s and the Utilities' assets and liabilities at federal and state tax rates expected
to be in effect when such deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected
to be realized.
The Company recognizes investment tax credits as a reduction of income tax expense in the period the assets giving rise to
such credits are placed in service, except for the Utilities' investment tax credits, which are deferred and amortized over the
estimated useful lives of the properties to which the credits relate, in accordance with Accounting Standards Codification
(ASC) Topic 980, “Regulated Operations.”
The Utilities are included in the consolidated income tax returns of HEI. However, income tax expense has been computed
for financial statement purposes as if the Utilities filed separate consolidated Hawaiian Electric income tax returns.
Governmental tax authorities could challenge a tax return position taken by management. If the Company’s position does
not prevail, the Company’s results of operations and financial condition may be adversely affected as the related deferred or
current income tax asset might be impaired and written down or an unanticipated tax liability might be incurred.
The Company and the Utilities use a “more-likely-than-not” recognition threshold and measurement standard for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Fair value measurements. Fair value estimates are estimates of the price that would be received to sell an asset, or paid upon
the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value
estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and
are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their
own assumptions about market participant assumptions based on the best information available in the circumstances. These
valuations are estimates at a specific point in time, based on relevant market information, information about the financial
instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various
financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the
Company or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active
trading market exists for a portion of the Company’s and the Utilities' financial instruments, fair value estimates cannot be
determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash
flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains
and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to
measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs
to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are
not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the
asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data,
98
there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more
significant due to the lack of observable market data.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes.
Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan
impairments for certain loans, goodwill and asset retirement obligations (AROs).
Earnings per share (HEI only). Basic earnings per share (EPS) is computed by dividing net income for common stock by the
weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly, except that dilutive
common shares for stock compensation and the equity forward transactions are added to the denominator. HEI uses the two-
class method of computing EPS as restricted stock grants include non-forfeitable rights to dividends and are participating
securities.
Under the two-class method, HEI's EPS was comprised as follows for both participating securities and unrestricted
common stock:
Distributed earnings
Undistributed earnings
2014
2013
2012
Basic
1.24
0.41
1.65
Diluted
1.24
0.40
1.64
$
$
$
$
Basic
1.24
0.39
1.63
Diluted
1.24
0.38
1.62
$
$
$
$
Basic
1.24
0.19
1.43
Diluted
1.24
0.18
1.42
$
$
$
$
As of December 31, 2014 there were no shares that were antidilutive. As of December 31, 2013 and December 31, 2012,
the antidilutive effect of stock appreciation rights (SARs) on 102,000 shares of HEI common stock (for which the exercise
prices were greater than the closing market prices of HEI’s common stock on such dates), was not included in the computation
of diluted EPS.
Share-based compensation. The Company and the Utilities apply the fair value based method of accounting to account for its
stock compensation, including the use of a forfeiture assumption. See Note 11.
Impairment of long-lived assets and long-lived assets to be disposed of. The Company and the Utilities review long-lived
assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to
sell.
Recent accounting pronouncements.
Obligations resulting from joint and several liability. In February 2013, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint
and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date,” which
provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability
arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance requires entities to
measure these obligations as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it
expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the
obligation as well as other information.
The Company and the Utilities retrospectively adopted ASU No. 2013-04 in the first quarter of 2014 and it did not have a
material impact on the Company’s or the Utilities' results of operations, financial condition or liquidity.
Unrecognized tax benefits (UTBs). In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists,” which requires the netting of UTBs against a deferred tax asset for a loss or other tax carryforwards that
would apply in settlement of the uncertain tax positions. UTBs should be netted against all available same-jurisdiction loss or
other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs.
The Company and the Utilities prospectively adopted ASU No. 2013-11 in the first quarter of 2014 and it did not have a
material impact on the Company’s or the Utilities' results of operations, financial condition or liquidity.
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Investments in Qualified Affordable Housing Projects. In January 2014, the FASB issued ASU No. 2014-01, Investments-
Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” which
permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects
using the proportional amortization method if certain conditions are met. The amendments also require additional disclosures.
The Company has not determined whether it will adopt ASU No. 2014-01 in the first quarter of 2015.
Reclassification of loans upon foreclosure. In January 2014, the FASB issued ASU No. 2014-04, "Receivables-Troubled
Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer
Mortgage Loans upon Foreclosure,” which clarifies when an in substance repossession or foreclosure occurs, and a creditor is
considered to have received physical possession of residential real estate property collateralizing a consumer loan. A creditor is
considered to have received physical possession of residential real estate property collateralizing a consumer loan upon either:
(1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) the borrower
conveying all interest in the residential real estate property to the creditor to satisfy that loan through a deed in lieu of
foreclosure or through a similar legal agreement. The amendment also requires additional disclosures.
The Company plans to prospectively adopt ASU No. 2014-04 in the first quarter of 2015 and does not expect the adoption
to have a material impact on the Company’s results of operations, financial condition or liquidity.
Revenues from contracts. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers:
(Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
(1) identify the contract/s with a customer, (2) identify the performance obligations in the contract, (3) determine the
transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue
when, or as, the entity satisfies a performance obligation.
The Company plans to adopt ASU No. 2014-09 in the first quarter of 2017, but has not determined the method of adoption
(full or modified retrospective application) nor the impact of adoption on its results of operations, financial condition or
liquidity.
Repurchase agreements. In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860):
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure,” which changes the accounting for repurchase-
to-maturity transactions and repurchase financing arrangements. It also requires additional disclosures about repurchase
agreements and other similar transactions. The ASU requires a new disclosure for transactions economically similar to
repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred
financial assets throughout the term of the transaction. The ASU also requires expanded disclosures about the nature of
collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.
The Company plans to adopt ASU No. 2014-11 in the first quarter of 2015 and does not expect the adoption to have a
material impact on the Company's results of operations, financial condition or liquidity.
Reclassifications. Hawaiian Electric changed its consolidated statements of income for each quarter in 2013 from a utility
presentation to a commercial company presentation, under which all operating revenues and expenses (including non-regulated
revenues and expenses) are included in the determination of operating income. Additionally, income tax expense, which was
previously included partially in operating expenses and partially in other income (deductions), is now entirely presented
directly above net income in income taxes and includes income taxes related to non-regulated revenues and expenses. On HEI’s
consolidated balance sheet as of December 31, 2013, non-utility plant, net, amounting to $7 million was reclassified from
“Other” assets to “Plant and equipment” (including related amounts of accumulated depreciation). These and other
reclassifications made to prior years’ financial statements to conform to the 2014 presentation did not affect previously reported
results of operations.
Electric utility
Regulation by the Public Utilities Commission of the State of Hawaii (PUC). The Utilities are regulated by the PUC and
account for the effects of regulation under FASB ASC Topic 980, “Regulated Operations.” As a result, the actions of regulators
can affect the timing of recognition of revenues, expenses, assets and liabilities. Management believes the Utilities’ operations
currently satisfy the ASC Topic 980 criteria. If events or circumstances should change so that those criteria are no longer
satisfied, the Utilities expect that their regulatory assets, net of regulatory liabilities, would be charged to the statement of
income in the period of discontinuance.
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Accounts receivable. Accounts receivable are recorded at the invoiced amount. The Utilities generally assess a late payment
charge on balances unpaid from the previous month. The allowance for doubtful accounts is the Utilities’ best estimate of the
amount of probable credit losses in the Utilities existing accounts receivable. On a monthly basis, the Utilities adjust their
allowance, with a corresponding charge (credit) on the statement of income, based on its historical write-off experience.
Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for
recovery is considered remote. At both December 31, 2014 and 2013, the allowance for customer accounts receivable, accrued
unbilled revenues and other accounts receivable was $2 million.
Contributions in aid of construction. The Utilities receive contributions from customers for special construction
requirements. As directed by the PUC, contributions are amortized on a straight-line basis over 30 to 55 years as an offset
against depreciation expense.
Electric utility revenues. Electric utility revenues are based on rates authorized by the PUC. Prior to the implementation of
decoupling, revenues related to the sale of energy were generally recorded when service was rendered or energy was delivered
to customers and included revenues applicable to energy consumed in the accounting period but not yet billed to the customers.
The rate schedules of the Utilities include energy cost adjustment clauses (ECACs) under which electric rates are adjusted
for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative
amounts of company-generated power and purchased power. The rate schedules also include purchased power adjustment
clauses (PPACs) under which the remaining purchase power expenses are recovered through surcharge mechanisms. The
amounts collected through the ECACs and PPACs are required to be reconciled quarterly.
Upon the implementation of decoupling (Hawaiian Electric on March 1, 2011, Hawaii Electric Light on April 9, 2012 and
Maui Electric on May 4, 2012), the Utilities: (1) recognize monthly revenue balancing account (RBA) revenues or refunds for
the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from
kilowatthour sales, (2) recognize a revenue escalation component via a rate adjustment mechanism (RAM) for certain operation
and maintenance (O&M) expenses and rate base changes and (3) recognize (when applicable) an earnings sharing mechanism,
which would provide for a reduction of revenues between rate cases in the event the utility’s ratemaking return on average
common equity (ROACE) exceeds the ROACE allowed in its most recent rate case.
The Utilities’ revenues include amounts for various Hawaii state revenue taxes. Revenue taxes are generally recorded as an
expense in the year the related revenues are recognized. However, the Utilities’ revenue tax payments to the taxing authorities
in the period are based on the prior year’s billed revenues (in the case of public service company taxes and PUC fees) or on the
current year’s cash collections from electric sales (in the case of franchise taxes). For 2014, 2013 and 2012, the Utilities
included approximately $267 million, $266 million and $280 million, respectively, of revenue taxes in “revenues” and in
“taxes, other than income taxes” expense.
Power purchase agreements. If a power purchase agreement (PPA) falls within the scope of ASC Topic 840, “Leases,” and
results in the classification of the agreement as a capital lease, the Utilities would recognize a capital asset and a lease
obligation. Currently, none of the PPAs are required to be recorded as a capital lease.
The Utilities evaluate PPAs to determine if the PPAs are VIEs, if the Utilities are primary beneficiaries and if consolidation
is required. See Note 6.
Repairs and maintenance costs. Repairs and maintenance costs for overhauls of generating units are generally expensed as
they are incurred.
Allowance for funds used during construction (AFUDC). AFUDC is an accounting practice whereby the costs of debt and
equity funds used to finance plant construction are credited on the statement of income and charged to construction in progress
on the balance sheet. If a project under construction is delayed for an extended period of time, AFUDC on the delayed project
may be stopped after assessing the causes of the delay and probability of recovery.
The weighted-average AFUDC rate was 7.7% in 2014, 7.6% in 2013 and 7.6% in 2012, and reflected quarterly compounding.
Bank (HEI only)
Investment securities. Investments in debt and equity securities are classified as held-to-maturity (HTM), trading or
available-for-sale (AFS). ASB determines the appropriate classification at the time of purchase. Debt and equity securities that
ASB intends to and has the ability to hold to maturity are classified as HTM securities and reported at cost. Marketable debt
and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses included in earnings. Marketable debt and equity
securities not classified as either HTM or trading securities are classified as AFS and reported at fair value. Unrealized gains
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and losses, for AFS securities deemed other-than-temporary impairment (OTTI), not related to credit losses, are excluded from
earnings and reported on a net basis in accumulated other comprehensive income (AOCI) until realized.
Interest income is recorded on an accrual basis. Discounts and premiums on securities are accreted or amortized into
interest income over the remaining lives of the securities, adjusted for actual portfolio prepayments for investment securities or
based on changes in anticipated prepayments for mortgage-related securities, using the interest method. The specific
identification method is used in determining realized gains and losses on the sales of securities. ASB uses actual prepayment
experience and estimates of future prepayments to determine the constant effective yield necessary to apply the interest method
of income recognition. Estimates of future prepayments are based on the underlying collateral characteristics and historic
prepayment behavior of each security.
For securities that are not trading securities, individual securities are assessed for impairment at least on a quarterly basis,
and more frequently when economic or market conditions warrant. A security is impaired if the fair value of the security is
less than its carrying value at the financial statement date. When a security is impaired, ASB determines whether this
impairment is temporary or other-than-temporary. If ASB does not expect to recover the entire amortized cost basis of the
security, an OTTI exists. If ASB intends to sell the security, or will more likely than not be required to sell the security before
recovery of its amortized cost, the OTTI must be recognized in earnings. If ASB does not intend to sell the security, and it is
not more likely than not that ASB will be required to sell the security before recovery of its amortized cost, the OTTI must be
separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related
to the credit loss is recognized in earnings, while the remaining OTTI is recognized in AOCI.
Stock in Federal Home Loan Bank (FHLB) of Seattle is carried at cost and is reviewed at least periodically for impairment,
with valuation adjustments recognized in noninterest income.
Loans receivable. ASB carries loans receivable at amortized cost less the allowance for loan losses, loan origination fees (net
of direct loan origination costs), commitment fees and purchase premiums and discounts. Interest on loans is credited to income
as it is earned. Discounts and premiums are accreted or amortized over the life of the loans using the interest method.
Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment in yield over the
life of the loan using the interest method or taken into income when the loan is paid off or sold. Nonrefundable commitment
fees (net of direct loan origination costs, if applicable) received for commitments to originate or purchase loans are deferred
and, if the commitment is exercised, recognized as an adjustment of yield over the life of the loan using the interest method.
Nonrefundable commitment fees received for which the commitment expires unexercised are recognized as income upon
expiration of the commitment.
Mortgage loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. A sale is
recognized only when the consideration received is other than beneficial interests in the assets sold and control over the assets
is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by
the difference between the net sales proceeds and the allocated basis of the loans sold.
Allowance for loan losses. ASB maintains an allowance for loan losses that it believes is adequate to absorb losses inherent in
its loan portfolio. The level of allowance for loan losses is based on a continuing assessment of existing risks in the loan
portfolio, historical loss experience, changes in collateral values and current conditions (e.g., economic conditions, real estate
market conditions and interest rate environment). The allowance for loan losses is allocated to loan types using both a formula-
based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based
approach emphasizes loss factors primarily derived from actual historical default and loss rates, which are combined with an
assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Adverse
changes in any of these factors could result in higher charge-offs and provision for loan losses.
ASB disaggregates its portfolio loans into portfolio segments for purposes of determining the allowance for loan losses.
Commercial and commercial real estate loans are defined as non-homogeneous loans and ASB utilizes a risk rating system for
evaluating the credit quality of the loans. Loans are rated based on the degree of risk at origination and periodically thereafter,
as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction
risk). ASB’s credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal
risk rating system and timeliness of rating changes. Non-homogeneous loans are categorized into the regulatory asset quality
classifications-Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. For loans classified as
substandard, an analysis is done to determine if the loan is impaired. A loan is deemed impaired when it is probable that ASB
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is deemed
impaired, ASB applies a valuation methodology to determine whether there is an impairment shortfall. The measurement of
impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the
loan’s original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral,
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net of costs to sell. For all loans collateralized by real estate whose repayment is dependent on the sale of the underlying
collateral property, ASB measures impairment by utilizing the fair value of the collateral, net of costs to sell; for other loans
that are not considered collateral dependent, generally the discounted cash flow method is used to measure impairment. For
loans collateralized by real estate that are classified as troubled debt restructured loans, the present value of the expected future
cash flows of the loans may also be used to measure impairment as these loans are expected to perform according to their
restructured terms. Impairments are charged to the provision for loan losses and included in the allowance for loan losses.
However, confirmed losses (uncollectible) are charged off, with the loan written down by the amount of the confirmed loss.
Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically
underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on
delinquency status. The homogeneous loan portfolios are stratified into individual products with common risk characteristics
and segmented into various secured and unsecured loan product types. For the homogeneous portfolio, the quality of the loan is
best indicated by the repayment performance of an individual borrower. ASB does supplement performance data with an 11-
risk rating retail credit model that assigns a probability of default to each borrower based primarily on the borrower's current
Fair Isaac Corporation (FICO) score and for the home equity line of credit (HELOC) and unsecured consumer products, the
bankruptcy score (BK). Current FICO and BK data is purchased and appended to all homogeneous loans on a quarterly basis
and used to estimate the borrower’s probability of default and the loss given default.
ASB also considers the following qualitative factors for all loans in estimating the allowance for loan losses:
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changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in the nature, volume and terms of the loan portfolio;
changes in lending management and other relevant staff;
changes in loan quality (past due, non-accrual, classified loans);
changes in the quality of the loan review system;
changes in the value of underlying collateral;
effect of, and changes in the level of, any concentrations of credit; and
effect of other external and internal factors.
ASB’s methodology for determining the allowance for loan losses was generally based on historic loss rates using various
look-back periods. During the second quarter of 2014, ASB implemented enhancements to the loss rate calculation for
estimating the allowance for loan losses that included several refinements to determining the probability of default and the loss
given default for the various segments of the loan portfolio that are more statistically sound than those previously employed.
The result is an estimated loss rate established for each borrower. ASB also updated its measurement of the loss emergence
period in the calculation of the allowance for loan losses. The loss emergence period is broadly defined as the period that it
takes, on average, for the lender to identify the specific borrower and amount of loss incurred by the bank for a loan that has
suffered from a loss-causing event. In most cases, the loss emergence period was within a twelve month period; however, as
credit quality and conditions improve, management has observed that the loss emergence period has extended and has
incorporated this observed change in the estimate of the allowance for loan losses. Management believes these enhancements
will improve the precision in estimating the allowance for loan losses. The enhancements did not have a material effect on the
total allowance for loan losses or the provision for loan losses for 2014. The enhancements did result in the full allocation of
the previously unallocated portion of the allowance for loan losses.
In conjunction with the above enhancement, management also adopted an enhanced risk rating system for monitoring and
managing credit risk in the non-homogenous loan portfolios, that measures general creditworthiness at the borrower level. The
numerical-based, risk rating “PD Model” takes into consideration fiscal year-end financial information of the borrower and
identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that
demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given
default (LGD) value is assigned to each loan to measure loss in the event of default based on loan specific features such as
collateral that mitigates the amount of loss in the event of default. Together the PD Model and LGD construct provide a more
quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the
ultimate collectability of each loan.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb
estimated probable losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the
consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded
credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss
rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the
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allowance for loan losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other
noninterest expense in the consolidated statements of income.
Management believes its allowance for loan losses adequately estimates actual loan losses that will ultimately be incurred.
However, such estimates are based on currently available information and historical experience, and future adjustments may be
required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due to
changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these
differences and subsequent adjustments could be material.
Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or
earlier if management believes that the probability of collection is insufficient to warrant further accrual. A loan may be
returned to accrual status if (i) principal and interest payments have been brought current and repayment of the remaining
contractual principal and interest is expected to be made, (ii) the loan has otherwise become well-secured and collection efforts
are reasonably expected to result in repayment of the debt, or (iii) the borrower has been making regularly scheduled payments
in full for the prior six months and it is reasonably assured that the loan will be brought fully current within a reasonable
period. Cash receipts on nonaccruing loans are generally applied to reduce the unpaid principal balance.
Loans considered to be uncollectible are charged-off against the allowance for loan losses. The amount and timing of
charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien
priority and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the
allowance for loan losses. Loans that have been charged-off against the allowance for loan losses are periodically monitored to
evaluate whether further adjustments to the allowance are necessary. Loans in the commercial and commercial real estate
portfolio are charged-off when the loan is risk-rated “Doubtful” or “Loss”. The loan or a portion thereof is determined to be
uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A loan is considered
uncollectible when: (a) the borrower is delinquent in principal or interest 90 days or more; (b) significant improvement in the
borrower’s repayment capacity is doubtful; and/or (c) collateral value is insufficient to cover outstanding indebtedness and no
other viable assets exist.
Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is
determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A loan is
considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that
collateral value is insufficient to cover outstanding indebtedness and no other viable assets exist; (c) notification of the
borrower’s bankruptcy is received; or (d) in cases where ASB is in a subordinate position to other debt, the senior lien holder
has foreclosed and ASB's the junior lien is extinguished.
Other consumer loans are generally charged-off when the balance becomes 120 days delinquent.
Loans modified in a troubled debt restructuring. Loans are considered to have been modified in a troubled debt
restructuring (TDR) when, due to a borrower’s financial difficulties, ASB makes concessions to the borrower that it would not
otherwise consider for a non-troubled borrower. Modifications may include interest rate reductions, interest only payments for
an extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in
the normal market place, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or
repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status until the
borrower has demonstrated sustained repayment performance for a period of six consecutive months. However, performance
prior to the modification, or significant events that coincide with the modification, are included in assessing whether the
borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or
after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, or there is
reasonable doubt over the full collectability of principal and interest, the loan remains on nonaccrual status.
Real estate acquired in settlement of loans. ASB records real estate acquired in settlement of loans at fair value, less
estimated selling expenses. ASB obtains appraisals based on recent comparable sales to assist management in estimating the
fair value of real estate acquired in settlement of loans. Subsequent declines in value are charged to expense through a valuation
allowance. Costs related to holding real estate are charged to operations as incurred.
Goodwill. At December 31, 2014 and 2013, the amount of goodwill was $82.2 million. The goodwill is with respect to ASB
and is the Company’s only intangible asset with an indefinite useful life and is tested for impairment annually at December 31
using data as of September 30.
FASB ASU No. 2011-8, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”(ASU No.
2011-8) permits an entity to first assess qualitative factors (Step 0) to determine whether it is more likely than not (that is, a
likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform Step 1 of a two-step goodwill impairment test. An entity has an unconditional option to
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bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. In
evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount under ASU
No. 2011-8, an entity shall assess relevant events and circumstances such as:
• macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, or
other developments in equity and credit markets;
industry and market considerations such as a deterioration in the environment in which an entity operates, an increased
competitive environment, a change in the market for an entity’s products or services, or a regulatory or political
development;
cost factors that have a negative effect on earnings and cash flows;
overall financial performance such as a decline in actual or planned revenues or earnings compared with actual and
projected results of relevant prior periods;
other relevant entity-specific events such as changes in management, key personnel, strategy, or customers;
contemplation of bankruptcy; or litigation;
events affecting a reporting unit such as a change in the composition or carrying amount of its net assets;
if applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
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If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair
value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test under
ASC Topic 350, "Intangibles-Goodwill and Other" (ASC 350), are unnecessary. We performed a Step 0 analysis and
determined that it was not more likely than not that the fair value of the Company was less than its carrying value and a Step 1
goodwill impairment analysis was not considered necessary. The most recent Step 1 goodwill impairment analysis under ASC
350 was performed at December 31, 2013 and the estimated fair value of the Company exceeded its carrying value by 60%. For
the three years ended December 31, 2014, there has been no impairment of goodwill.
Mortgage banking. Mortgage loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis.
A sale is recognized only when the consideration received is other than beneficial interests in the assets sold and control over
the assets is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the allocated basis of the loans sold. ASB is obligated to
subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as
noncompliance with eligibility requirements, customer fraud, or servicing violations. This primarily occurs during a loan file
review.
ASB recognizes a mortgage servicing asset when a mortgage loan is sold with servicing rights retained. This mortgage
servicing right (MSR) is initially capitalized at its presumed fair value based on market data at the time of sale and accounted
for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing assets or liabilities are included as a
component of gain on sale of loans. Under ASC Topic 860, “Transfers and Servicing,” we amortize the MSR in proportion to
and over the period of estimated net servicing income and assess for impairment at each reporting date.
ASB's MSR is stratified based on predominant risk characteristics of the underlying loans including loan type and note
rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect
industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding
prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.
Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value,
with any associated provision recorded as a component of loan servicing fees included in "Other income, net" in the
consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is
deemed to be unrecoverable.
ASB compares the fair value of MSR to an estimated value calculated by an independent third-party. The third-party relies
on both published and unpublished sources of market related assumptions and their own experience and expertise to arrive at a
value. ASB uses the third-party value only to assess the reasonableness of fair value.
Loan servicing fee income represents income earned for servicing mortgage loans owned by investors. It includes
mortgage servicing fees and other ancillary servicing income, net of guaranty fees. Servicing fees are generally calculated on
the outstanding principal balances of the loans serviced and are recorded as income when earned.
Tax Credit Investments. ASB invests in limited liability entities formed to operate qualifying affordable housing projects.
The affordable housing investments provide tax benefits to investors in the form of tax deductions from operating losses
and tax credits. As a limited partner, ASB has no significant influence over the operations. These investments are initially
105
recorded at the initial capital contribution with a liability recognized for the commitment to contribute additional capital over
the term of the investment.
Under the equity method of accounting, ASB recognized its share of the project's pre-tax operating losses in "Other
expense" in the statements of income.
For these limited liability entities, ASB assesses whether it is the primary beneficiary of the limited liability entity, which is
a variable interest entity (VIE). The primary beneficiary of a VIE is determined to be the party that meets both of the following
criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the
obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
Generally, ASB, as a limited partner, is not deemed to be the primary beneficiary as it does not meet the power criterion, i.e., no
power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and no direct ability to
unilaterally remove the general partner.
All tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or
conditions indicate that it is deemed probable that ASB will not recover its investment. Potential indicators of impairment
might arise when there is evidence that some or all tax credits previously claimed would be recaptured, or that expected
remaining credits would no longer be available to the limited liability entities. If an investment is determined to be impaired, it
is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent recoveries in
value.
At December 31, 2014 and 2013, the carrying amount of qualifying affordable housing investments was $32.5 million and
$14.5 million, respectively, and included in other assets in the consolidated balance sheets.
ASB’s unfunded commitments to fund to its affordable housing investments were $14.8 million and $0.6 million as of
December 31, 2014 and 2013, respectively. These unfunded commitments are unconditional and legally binding and are
recorded in accounts payable and other liabilities with an increase in other assets in the consolidated balance sheets.
106
2 · Proposed Merger
On December 3, 2014, HEI, NextEra Energy, Inc., a Florida corporation (NEE), NEE Acquisition Sub I, LLC, a Delaware
limited liability company and a wholly owned subsidiary of NEE (Merger Sub II) and NEE Acquisition Sub II, Inc., a Delaware
corporation and a wholly owned subsidiary of NEE (Merger Sub I), entered into an Agreement and Plan of Merger (the Merger
Agreement). The Merger Agreement provides for Merger Sub I to merge with and into HEI (the Initial Merger), with HEI
surviving, and then for HEI to merge with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary
of NEE (the Merger). The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986,
as amended, and be tax-free to HEI shareholders.
Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding share of HEI common
stock will automatically be converted into the right to receive 0.2413 shares of common stock of NEE (the Exchange Ratio).
No adjustment to the Exchange Ratio is made in the Merger Agreement for any changes in the market prices of either HEI or
NEE common stock between December 3, 2014 and the closing of the Merger.
The Merger Agreement contemplates that, immediately prior to the closing of the Merger, HEI will distribute to its
shareholders all of the issued and outstanding shares of common stock of ASB Hawaii, the direct parent company of ASB (such
distribution referred to as the Spin-Off), with ASB Hawaii becoming a new public company. In addition, the Merger Agreement
contemplates that, immediately prior to the closing of the Merger, HEI will pay its shareholders a special dividend of $0.50 per
share.
The closing of the Merger is subject to various conditions, including, among others, (i) the approval of holders of 75% of
the outstanding shares of HEI common stock, (ii) effectiveness of the registration statement for the NEE common stock to be
issued in the Initial Merger and the listing of such shares on the New York Stock Exchange, (iii) expiration or termination of the
applicable Hart-Scott-Rodino Act waiting period, (iv) receipt of all required regulatory approvals from, among others, the
Federal Energy Regulatory Commission (FERC), the Federal Communications Commission and the Hawaii Public Utilities
Commission, (v) the absence of any law or judgment in effect or pending in which a governmental entity has imposed or is
seeking to impose a legal restraint that would prevent or make illegal the closing of the Merger, (vi) the absence of any material
adverse effect with respect to either HEI or NEE, (vii) subject to certain exceptions, the accuracy of the representations and
warranties of, and compliance with covenants by, each of the parties to the Merger Agreement, (viii) receipt by each of HEI and
NEE of a tax opinion of its counsel regarding the tax treatment of the transactions contemplated by the Merger Agreement, (ix)
effectiveness of the ASB Hawaii registration statement necessary to consummate the Spin-Off, and (x) the determination by
each of HEI and NEE that, upon completion of the Spin-Off, HEI will no longer be a savings and loan holding company or be
deemed to control ASB for purposes of the Home Owners' Loan Act. The Spin-Off will be subject to various conditions,
including, among others, the approval of the Federal Reserve Board (FRB).
The Merger Agreement contains customary representations, warranties and covenants of HEI and NEE.
HEI is also subject to a “no shop” restriction that limits its ability to solicit alternative acquisition proposals, provide
information or engage in discussion with third parties, except under limited circumstances to permit HEI’s board of directors to
comply with its fiduciary duties.
The Merger Agreement contains certain termination rights for both HEI and NEE, including the right of either party to
terminate the Merger Agreement if the Merger has not been consummated by December 3, 2015 (subject to a 6-month
extension if required to obtain necessary regulatory approvals), and further provides that upon termination of the Merger
Agreement under specified circumstances, HEI or NEE, as the case may be, would be required to pay the other party a
termination fee of $90 million and reimburse the other party for up to $5 million of its documented out-of-pocket expenses
incurred in connection with the Merger Agreement.
PUC application. In January 2015, NEE and Hawaiian Electric filed an application with the PUC requesting approval of
the proposed Merger of Hawaiian Electric. The application also requests modification of certain conditions agreed to by HEI
and the PUC in 1982 for the merger and corporate restructuring of Hawaiian Electric, and confirmation that with approval of
the Merger Agreement, the recommendations in the 1995 Dennis Thomas Report (resulting from a proceeding to review the
relationship between HEI and Hawaiian Electric and any impact of HEI’s then diversified activities on the Utilities) will no
longer be applicable. The application includes a commitment that, for at least four years following the completion of the
transaction, Hawaiian Electric will not submit any applications seeking a general base rate increase and will forego recovery of
the incremental operations and maintenance rate adjustment under decoupling during that period, which amounts to
approximately $60 million in cumulative savings for customers, subject to certain exceptions and conditions, including that the
following remain in effect: the RBA tariff provisions, the Rate Base RAM, the Renewable Energy Infrastructure Program, and
Renewable Energy Infrastructure Surcharge, the IRP/DSM Recovery tariff provisions, the ECAC tariff provisions, the PPA
tariff provision and the Pension and OPEB tracker mechanism. Various parties, including governmental, environmental and
107
commercial interests, have moved to intervene in the proceeding. A PUC decision on the intervention motions and establishing
a procedural schedule for the docket is pending.
Other requests. On January 29, 2015, HEI submitted its application to the FERC requesting all necessary authorization to
consummate the transactions contemplated by the Merger Agreement. On February 1, 2015, HEI submitted a letter to FRB
requesting deregistration as a Savings & Loan Holding Company (SLHC).
Pending litigation and other matters.
Litigation. HEI and its subsidiaries are subject to various legal proceedings that arise from time to time. Some of these
proceedings may seek relief or damages in amounts that may be substantial. Because these proceedings are complex, many
years may pass before they are resolved, and it is not feasible to predict their outcomes. Some of these proceedings involve
claims HEI and Hawaiian Electric believe may be covered by insurance, and HEI and Hawaiian Electric have advised their
insurance carriers accordingly.
Since the December 3, 2014 announcement of the merger agreement, eight purported class action complaints were filed in
the Circuit Court of the First Circuit for the State of Hawaii by alleged stockholders of HEI against HEI, Hawaiian Electric (in
one complaint), the individual directors of HEI, NEE and NEE's acquisition subsidiaries. The lawsuits are captioned as follows:
Miller v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2531-12 KTN (December 15, 2014) (the Miller Action);
Walsh v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2541-12 JHC (December 15, 2014) (the Walsh Action); Stein
v. Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2555-12 KTN (December 17, 2014) (the Stein Action); Brown v.
Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2643-12 RAN (December 30, 2014) (the Brown Action); Cohn v.
Hawaiian Electric Industries, Inc., et al., Case No. 14-1-2642-12 KTN (December 30, 2014) (the Cohn State Action); Guenther
v. Watanabe, et al., Case No. 15-1-003-01 ECN (January 2, 2015) (the Guenther Action); Hudson v. Hawaiian Electric
Industries, Inc., et al., Case No. 15-1-0013-01 JHC (January 5, 2015) (the Hudson Action); Grieco v. Hawaiian Electric
Industries, Inc., et al., Case No. 15-1-0094-01 KKS (January 21, 2015) (the Grieco Action). On January 12, 2015, plaintiffs in
the Miller Action, the Walsh Action, the Stein Action, the Brown Action, the Guenther Action, and the Hudson Action filed a
motion to consolidate their actions and to appoint co-lead counsel. On February 13, 2015, the Court held a hearing on this
motion. On January 23, 2015, the Cohn State Action was voluntarily dismissed. Thereafter, the same alleged stockholder
plaintiff filed a purported class action complaint in the United States District Court for the District of Hawaii against HEI, the
individual directors of HEI, NEE and NEE's acquisition subsidiaries. The lawsuit is captioned as Cohn v. Hawaiian Electric
Industries, Inc. et al., 15-cv-00029-JMS-KSC (January 27, 2015) (the Cohn Federal Action).
All eight actions allege, among other things, that members of HEI's Board breached their fiduciary duties in connection
with the proposed transaction, and that the Merger Agreement involves an unfair price, was the product of an inadequate sales
process, and contains unreasonable deal protection devices that purportedly preclude competing offers. The complaints further
allege that HEI, NEE and/or its acquisition subsidiaries aided and abetted the purported breaches of fiduciary duty. The
plaintiffs in these lawsuits seek, among other things, (i) a declaration that the Merger Agreement was entered into in breach of
HEI's directors' fiduciary duties, (ii) an injunction enjoining the HEI Board from consummating the Merger, (iii) an order
directing the HEI Board to exercise their duties to obtain a transaction which is in the best interests of HEI's stockholders, (iv) a
rescission of the Merger to the extent that it is consummated, and/or (v) damages suffered as a result of the defendants' alleged
actions. In addition, the Cohn Federal Action alleges that the HEI board of directors violated its fiduciary duties and federal
securities laws by omitting material facts from the Registration Statement on Form S-4.
HEI and Hawaiian Electric believe the allegations of the complaints are without merit and intends to defend these lawsuits
vigorously.
Other matters. In January 2015, various clean energy and environmental groups filed a motion and applications with the
PUC to delay consideration of the Company’s proposed Merger pending its decision on the Power Supply Improvement Plans,
Distributed Generation Interconnection Plan, Integrated Demand Response Portfolio Plan, decoupling, and issues regarding
customer-based distributed energy resources. The Utilities and NEE filed oppositions to these applications with the PUC and
asked for their dismissal.
108
3 · Segment financial information
The electric utility and bank segments are strategic business units of the Company that offer different products and services
and operate in different regulatory environments. The accounting policies of the segments are the same as those described for
the Company in the summary of significant accounting policies, except as otherwise indicated and except that federal and state
income taxes for each segment are calculated on a “stand-alone” basis. HEI evaluates segment performance based on net
income. Each segment accounts for intersegment sales and transfers as if the sales and transfers were to third parties, that is, at
current market prices. Intersegment revenues consist primarily of interest, rent and preferred stock dividends.
Electric utility
Hawaiian Electric and its wholly-owned operating subsidiaries, Hawaii Electric Light and Maui Electric, are public electric
utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in
Hawaii other than Kauai, and are regulated by the PUC. The Utilities have been aggregated into the electric utility segment
primarily because all three entities: (1) are involved in the business of supplying electric energy in the same geographical
location (i.e., the State of Hawaii), (2) have similar production processes that include electric generators (e.g., conventional oil-
fired steam units and combustion turbines), (3) serve similar customers within their franchise territories (e.g., residential,
commercial and industrial customers), (4) use similar electric grids to distribute the energy to their customers, (5) are regulated
by the PUC and undergo similar rate-making processes, (6) have similar economic characteristics, and (7) perform financial
reporting oversight and management of the business at the consolidated level. Hawaiian Electric also owns the following
nonregulated subsidiaries: Renewable Hawaii, Inc. (RHI), which was formed to invest in renewable energy projects; HECO
Capital Trust III, which is a financing entity; and Uluwehiokama Biofuels Corp. (UBC), which was formed to own a new
biodiesel refining plant to be built on the island of Maui, which project has been terminated.
Bank
ASB is a federally chartered savings bank providing a full range of banking services to individual and business customers
through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Office of the
Comptroller of the Currency (OCC) (previously by the Department of Treasury, Office of Thrift Supervision (OTS)) and the
Federal Deposit Insurance Corporation (FDIC), and is subject to reserve requirements established by the Board of Governors of
the Federal Reserve System.
Other
“Other” includes amounts for the holding companies (HEI and ASB Hawaii, Inc.), other subsidiaries not qualifying as
reportable segments and intercompany eliminations.
109
Segment financial information was as follows:
(in thousands)
2014
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) for common stock
Capital expenditures
Assets (at December 31, 2014)
2013
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) for common stock
Capital expenditures
Assets (at December 31, 2013)
2012
Revenues from external customers
Intersegment revenues (eliminations)
Revenues
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) for common stock
Capital expenditures
Assets (at December 31, 2012)
Electric utility
Bank
Other
Total
$
2,987,299
$
252,497
$
(254) $
3,239,542
24
2,987,323
174,478
64,757
220,361
80,725
139,636
1,995
137,641
311,574
—
252,497
5,399
10,808
75,619
24,127
51,492
—
51,492
28,073
5,590,457
5,565,241
(24)
(278)
1,361
11,595
(34,058)
(13,140)
(20,918)
(105)
(20,813)
74
28,463
—
3,239,542
181,238
87,160
261,922
91,712
170,210
1,890
168,320
339,721
11,184,161
$
2,980,139
$
258,147
$
184
$
3,238,470
33
2,980,172
159,102
59,279
194,041
69,117
124,924
1,995
122,929
342,485
—
258,147
4,230
10,077
87,059
29,525
57,534
—
57,534
11,193
5,087,129
5,243,824
(33)
151
1,396
16,200
(33,353)
(14,301)
(19,052)
(105)
(18,947)
201
9,091
—
3,238,470
164,728
85,556
247,747
84,341
163,406
1,890
161,516
353,879
10,340,044
$
3,109,353
$
265,539
$
103
$
3,374,995
86
3,109,439
151,496
62,055
162,319
61,048
101,271
1,995
99,276
310,091
5,108,793
—
265,539
5,334
11,292
89,021
30,384
58,637
—
58,637
14,979
5,041,673
(86)
17
1,517
16,096
(33,933)
(14,573)
(19,360)
(105)
(19,255)
410
(1,334)
—
3,374,995
158,347
89,443
217,407
76,859
140,548
1,890
138,658
325,480
10,149,132
Intercompany electricity sales of the Utilities to the bank and “other” segments are not eliminated because those segments
would need to purchase electricity from another source if it were not provided by the Utilities, the profit on such sales is
nominal and the elimination of electric sales revenues and expenses could distort segment operating income and net income for
common stock.
Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees
to another financial institution if they were to bank with another institution, the profit on such fees is nominal and the
elimination of bank fee income and expenses could distort segment operating income and net income for common stock.
110
4 · Electric utility segment
Regulatory assets and liabilities. In accordance with ASC Topic 980, “Regulated Operations,” the Utilities’ financial
statements reflect assets, liabilities, revenues and expenses based on current cost-based rate-making regulations. Their
continued accounting under ASC Topic 980 generally requires that rates are established by an independent, third-party
regulator; rates are designed to recover the costs of providing service; and it is reasonable to assume that rates can be charged to
and collected from customers. Management believes the Utilities’ operations currently satisfy the ASC Topic 980 criteria. If
events or circumstances should change so that those criteria are no longer satisfied, the Utilities expect that the regulatory
assets, net of regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may
result in a material adverse effect on the Company’s and the Utilities' financial condition, results of operations and/or liquidity.
Regulatory assets represent deferred costs expected to be fully recovered through rates over PUC-authorized periods.
Generally, the Utilities do not earn a return on their regulatory assets; however, they have been allowed to recover interest on
certain regulatory assets and to include certain regulatory assets in rate base. Regulatory liabilities represent amounts included
in rates and collected from ratepayers for costs expected to be incurred in the future. For example, the regulatory liability for
cost of removal in excess of salvage value represents amounts that have been collected from ratepayers for costs that are
expected to be incurred in the future to retire utility plant. Generally, the Utilities include regulatory liabilities in rate base or are
required to apply interest to certain regulatory liabilities. In the table below, noted in parentheses are the original PUC
authorized amortization or recovery periods and, if different, the remaining amortization or recovery periods as of
December 31, 2014 are noted.
Regulatory assets were as follows:
December 31
(in thousands)
2014
2013
Retirement benefit plans (balance primarily varies with plans’ funded statuses)
$
683,243
$
350,821
Income taxes, net (1 to 55 years)
Decoupling revenue balancing account (1 to 2 years)
Unamortized expense and premiums on retired debt and equity issuances (19 to 30 years; 6 to 18 years
remaining)
Vacation earned, but not yet taken (1 year)
Postretirement benefits other than pensions (18 years; less than 1 year remaining)
Other (1 to 50 years; 1 to 46 years remaining)
Included in:
Current assets
Long-term assets
Regulatory liabilities were as follows:
December 31
(in thousands)
Cost of removal in excess of salvage value (1 to 60 years)
Retirement benefit plans (5 years beginning with respective utility’s next rate case)
Other (5 years; 1 to 2 years remaining)
Included in:
Current liabilities
Long-term liabilities
86,836
80,183
15,569
10,248
18
29,167
905,264
71,421
833,843
905,264
$
$
$
85,430
90,386
17,342
9,149
62
22,734
575,924
69,738
506,186
575,924
$
$
$
2014
2013
$
331,000
$
315,164
12,413
1,436
344,849
632
344,217
344,849
$
$
$
31,546
2,589
349,299
1,916
347,383
349,299
$
$
$
The regulatory asset and liability relating to retirement benefit plans was recorded as a result of pension and OPEB
tracking mechanisms adopted by the PUC in rate case decisions for the Utilities in 2007 (see Note 10).
111
Major customers. The Utilities received 12% ($350 million), 11% ($340 million) and 11% ($349 million) of their operating
revenues from the sale of electricity to various federal government agencies in 2014, 2013 and 2012, respectively.
Cumulative preferred stock. The following series of cumulative preferred stock are redeemable only at the option of the
respective company at the following prices in the event of voluntary liquidation or redemption:
December 31, 2014
Series
C, D, E, H, J and K (Hawaiian Electric)
I (Hawaiian Electric)
G (Hawaii Electric Light)
H (Maui Electric)
Voluntary
liquidation
price
Redemption
price
$
$
20
20
100
100
21
20
100
100
Hawaiian Electric is obligated to make dividend, redemption and liquidation payments on the preferred stock of each of its
subsidiaries if the respective subsidiary is unable to make such payments, but this obligation is subordinated to Hawaiian
Electric's obligation to make payments on its own preferred stock.
Related-party transactions. HEI charged the Utilities $7 million, $6.2 million and $6.1 million for general management and
administrative services in 2014, 2013 and 2012, respectively. The amounts charged by HEI to its subsidiaries for services
provided by HEI employees are allocated primarily on the basis of time expended in providing such services.
Hawaiian Electric’s short-term borrowings totaled nil at December 31, 2014 and 2013. The interest charged on short-term
borrowings from HEI is based on the lower of HEI’s or Hawaiian Electric’s effective weighted average short-term external
borrowing rate. If both HEI and Hawaiian Electric do not have short-term external borrowings, the interest is based on the
average of the effective rate for 30-day dealer-placed commercial paper quoted by the Wall Street Journal plus 0.15%.
Borrowings among the Utilities are eliminated in consolidation. Interest charged by HEI to Hawaiian Electric was nil in
each of 2014 and 2013 and de minimis in 2012.
Commitments and contingencies.
Fuel contracts. The Utilities have contractual agreements to purchase minimum quantities of fuel oil, diesel fuel and
biodiesel for multi-year periods, some through October 2017. Fossil fuel prices are tied to the market prices of crude oil and
petroleum products in the Far East and U.S. West Coast and the biodiesel price is tied to the market prices of animal fat
feedstocks in the U.S. West Coast and U.S. Midwest. Based on the average price per barrel as of December 31, 2014, the
estimated cost of minimum purchases under the fuel supply contracts is $0.4 billion in 2015, $0.3 billion in 2016 and $6.4
million in 2017. The actual cost of purchases in 2015 and future years could vary substantially from this estimate as a result of
changes in market prices, quantities actually purchased and/or other factors. The Utilities purchased $1.1 billion, $1.1 billion
and $1.3 billion of fuel under contractual agreements in 2014, 2013 and 2012, respectively.
Hawaiian Electric and Chevron Products Company (Chevron), a division of Chevron USA, Inc., are parties to the Low
Sulfur Fuel Oil Supply Contract (LSFO Contract) for the purchase/sale of low sulfur fuel oil (LSFO), which terminates on
December 31, 2016 and may automatically renew for annual terms thereafter unless earlier terminated by either party. The PUC
approved the recovery of costs incurred under this contract on April 30, 2013.
On August 27, 2014, Chevron and Hawaiian Electric entered into a first amendment of the LSFO Contract. The
amendment reduces the price of fuel above certain volumes, allows for increases in the volume of fuel, and modifies the
specification of certain petroleum products supplied under the contract. In addition, Chevron agreed to supply a blend of LSFO
and diesel as soon as January 2016 (for supply through the end of the contract term, December 31, 2016) to help Hawaiian
Electric meet more stringent EPA air emission requirements known as Mercury and Air Toxics Standards. The amendment is
subject to approval of the PUC, and can be terminated if approval is not received by April 15, 2015.
Hawaiian Electric and Hawaii Independent Energy, LLC, (HIE) a wholly owned subsidiary of Par Petroleum Corporation
of Houston Texas, were parties to an amended LSFO supply contract (assigned to HIE pursuant to its purchase of the Hawaii
refinery and related assets of Tesoro Hawaii Corp), which ran through December 31, 2014, with a provision that it would
automatically renew for annual terms thereafter unless earlier terminated by either party. On August 28, 2014, Hawaiian
Electric provided notice to HIE that it would not renew the LSFO supply contract.
The Utilities are parties to amended contracts for the supply of industrial fuel oil and diesel fuels with Chevron and HIE,
respectively, which end December 31, 2015. Both agreements may be automatically renewed for annual terms thereafter unless
112
earlier terminated by either of the respective parties. In August 2014, Chevron and the Utilities entered into a third amendment
to the Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract, which amendment extended the term of the contract
through December 31, 2016 and provided for automatic renewal for annual terms thereafter unless earlier terminated by either
party. In February 2015, Hawaiian Electric executed a similar extension, through December 31, 2016, of the corresponding
Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract with HIE.
The energy charge for energy purchased from Kalaeloa Partners, L.P. (Kalaeloa) under Hawaiian Electric’s PPA with
Kalaeloa is based, in part, on the price Kalaeloa pays HIE for LSFO under a Facility Fuel Supply Contract (fuel contract)
between them (assigned to HIE upon its purchase of the assets of Tesoro Hawaii Corp. as described above). The term of the fuel
contract between Kalaeloa and HIE ends May 31, 2016 and may be extended for terms thereafter unless terminated by one of
the parties.
The costs incurred under the Utilities’ fuel contracts are included in their respective ECACs, to the extent such costs are not
recovered through the Utilities’ base rates.
Power purchase agreements. As of December 31, 2014, the Utilities had seven firm capacity PPAs for a total of 575
megawatts (MW) of firm capacity. Purchases from these seven independent power producers (IPPs) and all other IPPs totaled
$0.7 billion for each of 2014, 2013 and 2012. The PUC allows rate recovery for energy and firm capacity payments to IPPs
under these agreements. Assuming that each of the agreements remains in place for its current term (and as amended) and the
minimum availability criteria in the PPAs are met, aggregate minimum fixed capacity charges are expected to be approximately
$0.1 billion per year for 2015 through 2019 and a total of $0.5 billion in the period from 2020 through 2035.
In general, the Utilities base their payments under the PPAs upon available capacity and actually supplied energy and they
are generally not required to make payments for capacity if the contracted capacity is not available, and payments are reduced,
under certain conditions, if available capacity drops below contracted levels. In general, the payment rates for capacity have
been predetermined for the terms of the agreements. Energy payments will vary over the terms of the agreements. The Utilities
pass on changes in the fuel component of the energy charges to customers through the ECAC in their rate schedules. The
Utilities do not operate, or participate in the operation of, any of the facilities that provide power under the agreements. Title to
the facilities does not pass to Hawaiian Electric or its subsidiaries upon expiration of the agreements, and the agreements do not
contain bargain purchase options for the facilities.
Purchase power adjustment clause. The PUC has approved purchased power adjustment clauses (PPACs) for the
Utilities. Purchased power capacity, O&M and other non-energy costs previously recovered through base rates are now
recovered in the PPACs and, subject to approval by the PUC, such costs resulting from new purchased power agreements can
be added to the PPACs outside of a rate case. Purchased energy costs continue to be recovered through the ECAC to the extent
they are not recovered through base rates.
Hawaii Clean Energy Initiative. In January 2008, the State of Hawaii (State) and the U.S. Department of Energy signed a
memorandum of understanding establishing the Hawaii Clean Energy Initiative (HCEI). In October 2008, the Governor of the
State, the State Department of Business, Economic Development and Tourism (DBEDT), the Division of Consumer Advocacy
of the State Department of Commerce and Consumer Affairs and the Utilities (collectively, the parties), signed an agreement
setting forth goals and objectives under the HCEI and the related commitments of the parties (the Energy Agreement),
including pursuing a wide range of actions to decrease the State’s dependence on imported fossil fuels through substantial
increases in renewable energy and programs intended to secure greater energy efficiency and conservation. Many of the actions
and programs included in the Energy Agreement required approval of the PUC.
The parties to the Energy Agreement concluded that the agreements and policy directives in the Energy Agreement had
been advanced or superseded by subsequent events, as well as by decisions and orders issued by the PUC, and accordingly
ended the Energy Agreement on September 14, 2014. On September 15, 2014, the State of Hawaii and the U.S. Department of
Energy executed a MOU recognizing that Hawaii is embarking on the next phase of its clean energy future. The MOU provides
the framework for a comprehensive, sustained effort to better realize Hawaii's vast renewable energy potential and allow it to
push forward in three main areas: the power sector, transportation and energy efficiency. This next phase will focus on
stimulating deployment of clean energy infrastructure as a catalyst for economic growth, energy system innovation and test bed
investments.
Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies.
Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased
project costs or even cancellation of projects. Further, completion of projects is subject to various risks, such as problems or
disputes with vendors. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery
for all or part of a project, project costs may need to be written off in amounts that could result in significant reductions in
Hawaiian Electric’s consolidated net income.
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In May 2011, the PUC ordered independently conducted regulatory audits on the reasonableness of costs incurred for
Hawaiian Electric’s East Oahu Transmission Project (EOTP), Campbell Industrial Park (CIP) combustion turbine No. 1 (CT-1)
project, and Customer Information System (CIS) project. However, in March 2012, the PUC eliminated the requirement for a
regulatory audit for the EOTP Phase I in connection with an approved settlement of the EOTP Phase I project cost issues and,
in March 2013, the PUC eliminated the requirement for an audit of the CIP CT-1 and CIS project costs as described below.
On January 28, 2013, the Utilities and the Consumer Advocate signed a settlement agreement (2013 Agreement), subject to
PUC approval, to write off $40 million of costs in lieu of conducting the regulatory audits of the CIP CT-1 project and the CIS
project. Based on the 2013 Agreement, as of December 31, 2012, the Utilities recorded an after-tax charge to net income of
approximately $24 million — $17.1 million for Hawaiian Electric, $3.4 million for Hawaii Electric Light, and $3.2 million for
Maui Electric. The remaining recoverable costs for these projects of $52 million were included in rate base as of December 31,
2012.
As part of the 2013 Agreement, Hawaii Electric Light would withdraw its 2013 test year rate case, and delay filing a new
rate case until a 2016 test year. Additionally, Hawaiian Electric would delay the filing of its scheduled 2014 test year rate case
to no earlier than January 2, 2014. For both Utilities, the existing terms of the last rate case decisions would continue. Hawaiian
Electric would also be allowed to record Rate Adjustment Mechanism (RAM) revenues starting on January 1 of 2014, 2015 and
2016. The cash collection of RAM revenues would remain unchanged, starting June 1 of each year through May 31 of the
following year.
On March 19, 2013, the PUC issued a decision and order (2013 D&O) approving the 2013 Agreement, with the following
clarifications, none of which changed the financial impact of the settlement recorded as of December 31, 2012: (1) the PUC
reiterated its authority to examine and ascertain what post go-live CIS costs would be subject to regulatory review in future rate
cases; (2) the PUC discouraged requesting single issue cost deferral accounting and/or cost recovery mechanisms during the
period of rate case deferral by Hawaiian Electric and Hawaii Electric Light; (3) the PUC approved the agreed-upon recovery of
CIP CT-1 and CIS project costs through the RAM, as set forth in the 2013 Agreement, however not setting a precedent for
future projects; and (4) the PUC reaffirmed its right to rule on the substance of the Maui Electric 2012 test year rate case in its
ongoing rate case proceeding. On May 31, 2013, the PUC issued a final D&O in the Maui Electric 2012 test year rate case. See
“Maui Electric 2012 test year rate case” below.
In March 2012, the PUC approved a settlement agreement reached among Hawaiian Electric, the Consumer Advocate and
the Department of Defense, under which, in lieu of a regulatory audit, Hawaiian Electric would write off $9.5 million of EOTP
Phase 1 gross plant in service and associated adjustments. This resulted in an after-tax charge to net income in the fourth
quarter of 2011 of approximately $6 million and the elimination of the requirement for a Phase 1 regulatory audit. The PUC
also provided for an additional increase of approximately $5 million in Hawaiian Electric’s 2011 test year rate case for the
additional revenue requirements reflecting all remaining Phase 1 costs not previously included in rates or agreed to be written
off.
Renewable energy projects. The Utilities are committed to achieving or exceeding the State’s Renewable Portfolio
Standard (RPS) goal of 40% renewable energy by 2030 and to decreasing the State’s dependence on imported fossil fuels. The
Utilities continue to evaluate and pursue opportunities with developers of proposed projects to integrate power into its grid
from a variety of renewable energy sources, including solar, biomass, wind, ocean thermal energy conversion, wave,
geothermal and others.
In November 2013, Hawaiian Electric and Maui Electric filed an application for recovery of its actual deferred costs
totaling $405,000 (split evenly between Hawaiian Electric and Maui Electric) for outside contractor services for additional
studies to determine the value proposition of interconnecting the islands of Oahu and of Maui County (Maui, Lanai, and
Molokai) through the Renewable Energy Intrastructure Program (REIP) surcharge. The application is currently pending before
the PUC.
A revised draft Request for Proposals (RFP) for 200MW or more of renewable energy to be delivered to Oahu from any of
the Hawaiian Islands was posted on Hawaiian Electric's website prior to the issuance of a proposed final RFP. In
February 2012, the PUC granted Hawaiian Electric’s request for deferred accounting treatment for the inter-island project
support costs. The amount of the deferred costs was limited to $5.89 million. On July 11, 2013, the PUC issued orders related to
the 200 MW RFP, including an order initiating a proceeding to solicit information and evaluate whether an interisland grid
interconnection transmission system between the islands of Oahu and Maui is in the public interest, given the potential for
large-scale wind and solar projects on Maui.
In May 2012, the PUC instituted a proceeding for a competitive bidding process for up to 50 MW of firm renewable
geothermal dispatchable energy (Geothermal RFP) on the island of Hawaii, and in July 2012, Hawaii Electric Light filed an
application to defer 2012 costs related to the Geothermal RFP. In February 2013, Hawaii Electric Light issued the Final
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Geothermal RFP. Six bids were received, but Hawaii Electric Light notified bidders that none of the submitted bids sufficiently
met both the low-cost and technical requirements of the Geothermal RFP. In October 2014, Hawaii Electric Light issued
Addendum No. 1 (Best and Final Offer) and Attachment A (Best and Final Offer Bidder's Response Package) directly to five
eligible bidders. The submittals received in January 2015 will be considered for final selection of one project to proceed with
PPA negotiations.
In the fourth quarter of 2014, Hawaiian Electric filed applications requesting PUC approval of power purchase agreements
for renewable as-available energy for seven projects that were granted waivers from the Competitive Bidding Framework.
Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of
existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and
toxic substances. In recent years, legislative, regulatory and governmental activities related to the environment, including
proposals and rulemaking under the Clean Air Act (CAA) and Clean Water Act (CWA), have increased significantly and
management anticipates that such activity will continue.
On August 14, 2014, the Environmental Protection Agency (EPA) published in the Federal Register the final regulations
required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing
power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water
systems for the steam generating units at 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 the facility’s National Pollutant Discharge Elimination System permit. In the case of
Hawaiian Electric's power plants, there are a number of studies that have yet to be completed before Hawaiian Electric and the
Department of Health of the State of Hawaii (DOH) can determine what entrainment or impingement controls, if any, might be
appropriate.
On February 16, 2012, the Federal Register published the EPA’s final rule establishing the EPA’s National Emission
Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs). The final rule, known as
the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power plants. MATS establishes
the Maximum Achievable Control Technology standards for the control of hazardous air pollutants emissions from new and
existing EGUs. Based on a review of the final rule and the benefits and costs of alternative compliance strategies, Hawaiian
Electric has selected a MATS compliance strategy based on switching to lower emission fuels. The use of lower emission fuels
will provide for MATS compliance at lower overall costs and avoid the reduction in operational flexibility imposed by
emissions control equipment. Hawaiian Electric requested and received a one-year extension, resulting in a MATS compliance
date of April 16, 2016. Hawaiian Electric also has pending with the EPA a Petition for Reconsideration and Stay dated April 16,
2012, and a Request for Expedited Consideration dated August 14, 2013. The submittals ask the EPA to revise an emissions
standard for non-continental oil-fired EGUs on the grounds that the promulgated standard was incorrectly derived. The Petition
and Request submittals to the EPA included additional data to demonstrate that the existing standard is erroneous. Hawaiian
Electric has been in contact with the EPA regarding the status of its Petition, but has not been given a time frame for an EPA
decision or action. Due to the EPA’s delay in taking action on Hawaiian Electric’s Petition for Reconsideration submitted in
April 2012, Hawaiian Electric submitted to the EPA, on February 20, 2015, a Notice of Intent to Sue as a prerequisite to
bringing a civil action.
On February 6, 2013, the EPA issued a guidance document titled “Next Steps for Area Designations and Implementation of
the Sulfur Dioxide National Ambient Air Quality Standard,” which outlines a process that will provide the states additional
flexibility and time for their development of one-hour sulfur dioxide (SO2) National Ambient Air Quality Standard (NAAQS)
implementation plans. In May 2014, the EPA published a proposed data requirements rule for states to characterize their air
quality in relation to the one-hour SO2 NAAQS. Under the proposed rule, the EPA expects to designate areas as attaining, or
not attaining, the one-hour SO2 NAAQS in December 2017 or December 2020, depending on whether the area was
characterized through modeling or monitoring. Hawaiian Electric will work with the DOH in implementing the one-hour SO2
NAAQS and in developing cost-effective strategies for NAAQS compliance, if needed.
Depending upon the specific measures required for compliance with the CWA 316(b) regulations and MATS, and the rules
and guidance developed for compliance with the more stringent NAAQS, the Utilities may be required to incur material capital
expenditures and other compliance costs, but such amounts and their timing are not determinable at this time. Additionally, the
combined effects of these regulatory initiatives may result in a decision to retire or deactivate certain generating units earlier
than anticipated.
Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other
chemical releases into the environment associated with current or previous operations and report and take action on these
releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases
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identified to date will not have a material adverse effect, individually or in the aggregate, on Hawaiian Electric’s consolidated
results of operations, financial condition or liquidity.
Potential Clean Air Act Enforcement. On July 1, 2013, Hawaii Electric Light and Maui Electric received a letter from
the U.S. Department of Justice (DOJ) asserting potential violations of the Prevention of Significant Deterioration (PSD) and
Title V requirements of the Clean Air Act involving the Hill and Kahului Power Plants. The EPA referred the matter to the DOJ
for enforcement based on Hawaii Electric Light’s and Maui Electric’s responses to information requests in 2010 and 2012. The
letter expresses an interest in resolving the matter without the issuance of a notice of violation. The parties had preliminary
discussions in February 2014, and are continuing to negotiate toward a resolution of the DOJ’s claims. As part of the ongoing
negotiations, the DOJ proposed in November 2014 entering into a consent decree pursuant to which the Utilities would install
certain pollution controls and pay a penalty. The Utilities are currently reviewing the proposal, but are unable to estimate the
amount or effect of a consent decree, if any, at this time.
Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger Molokai Electric
Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site
under a lease until 1985. The EPA has since performed Brownfield assessments of the Site that identified environmental
impacts in the subsurface. Although Maui Electric never operated at the Site and operations there had stopped four years before
the merger, in discussions with the EPA and the DOH, Maui Electric agreed to undertake additional investigations at the Site
and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the
extent of impacts of subsurface contaminants. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel
identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation
with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel to determine the extent of
impacts of PCBs, residual fuel oils, and other subsurface contaminants. In March 2012, Maui Electric accrued an additional
$3.1 million (reserve balance of $3.6 million as of December 31, 2014) for the additional investigation and estimated cleanup
costs at the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued
investigation. Maui Electric received DOH and EPA comments on a draft site investigation plan for site characterization in the
fourth quarter of 2013. Management concluded that these comments did not require a change to the reserve balance. The site
investigation plan has been revised to address the EPA and DOH comments and the final site investigation plan was submitted
to the DOH and EPA in December 2014.
Pearl Harbor sediment study. The U.S. Navy is conducting a feasibility study for the remediation of contaminated
sediment in Pearl Harbor. In the course of its study, the Navy identified elevated levels of PCBs in the sediment offshore from
the Waiau Power Plant. The results of the Navy’s study to date, including sampling data and possible remediation approaches,
are undergoing further federal review. Hawaiian Electric submitted comments on the Navy’s study, including the further
investigation and analyses that are necessary to identify appropriate remedial options and actions.
In July 2014, the Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is responsible for
cleanup of the area offshore of the Waiau Power Plant. The Navy has also requested that Hawaiian Electric reimburse the costs
incurred by the Navy to date to investigate the area, and is asking Hawaiian Electric to engage in negotiations regarding the
financing and undertaking of future response actions. The extent of the contamination, the appropriate remedial measures to
address it, and Hawaiian Electric’s potential responsibility for any associated costs have not yet been determined. In December
2014, Hawaiian Electric recorded a reserve of $0.8 million for additional investigation of the PCBs in the sediment offshore
from the Waiau Power Plant; however, final costs of remediation will depend on the results of the additional investigation.
Global climate change and greenhouse gas emissions reduction. National and international concern about climate
change and the contribution of greenhouse gas (GHG) emissions (including carbon dioxide emissions from the combustion of
fossil fuels) to climate change have led to action by the State and to federal legislative and regulatory proposals to reduce GHG
emissions.
In July 2007, Act 234, which requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the
statewide GHG emission levels in 1990, became law in Hawaii. On June 20, 2014, the Governor signed the final regulations
required to implement Act 234 and the regulations went into effect on June 30, 2014. In general, the regulations will require
affected sources that have the potential to emit GHGs in excess of established thresholds to reduce GHG emissions by 16%
below 2010 emission levels by 2020. The regulations will also assess affected sources an annual fee based on tons per year of
GHG emissions commencing on the effective date of the regulations, estimated to be approximately $0.5 million annually for
the Utilities. The DOH GHG regulations also track the federal “Prevention of Significant Deterioration and Title V Greenhouse
Gas Tailoring Rule” (GHG Tailoring Rule, see below) and would create new thresholds for GHG emissions from new and
existing stationary source facilities.
Several approaches (e.g., “cap and trade”) to GHG emission reduction have been either introduced or discussed in the U.S.
Congress; however, no federal legislation has yet been enacted.
116
On September 22, 2009, the EPA issued its Final Mandatory Reporting of Greenhouse Gases Rule, which requires that
sources emitting GHGs above certain threshold levels monitor and report GHG emissions. The Utilities have submitted the
required reports for 2010 through 2013 to the EPA. In December 2009, the EPA made the finding that motor vehicle GHG
emissions endanger public health or welfare. Since then, the EPA has also issued rules that begin to address GHG emissions
from stationary sources, like the Utilities’ EGUs.
In June 2010, the EPA issued its GHG Tailoring Rule covering the permitting of new or modified stationary sources that
have the potential to emit GHGs in greater quantities than the thresholds set forth in the rule, under the Prevention of
Significant Deterioration program. On June 23, 2014, the U.S. Supreme Court issued a decision that invalidated the GHG
Tailoring Rule, to the extent it regulated sources based solely on their GHG emissions. It also invalidated the GHG emissions
threshold for regulation. On December 19, 2014, the EPA released two memorandums outlining the Agency’s plan for
addressing the U.S. Supreme Court’s decision. Hawaiian Electric, Hawaii Electric Light and Maui Electric are evaluating the
potential impacts of the Agency’s plan on utility operations and permitting. On January 8, 2014, the EPA published in the
Federal Register its new proposal for New Source Performance Standards for GHG from new generating units. The proposed
rule on GHG from new EGUs does not apply to oil- fired combustion turbines or diesel engine generators, and is not otherwise
expected to have significant impacts on the Utilities.
On June 18, 2014, the EPA published in the Federal Register its proposed rule for GHG emissions from existing power
plants. The rule sets interim and final state-wide, state-specific emission performance goals, expressed as lb CO2/MWh, that
would apply to the state’s affected sources. The interim goal would apply as an average over the period 2020 through 2029,
with the final goal to be met by 2030. On the same date, the EPA also published a separate rule for modified and reconstructed
power plants. The EPA’s plan is to issue the final rules by mid-summer 2015. Hawaiian Electric is still evaluating the proposed
rules for GHG emissions from existing, modified, and reconstructed sources, and how they might relate to the recently issued
State GHG rules. Hawaiian Electric will participate in the federal GHG rulemaking process, and in the implementation of the
State GHG rules, to try to reconcile federal GHG regulation, state GHG regulation, and any action the EPA may take as a result
of the recent U.S. Supreme Court opinion, to facilitate clear and cost-effective compliance. The Utilities will continue to
evaluate the impact of proposed GHG rules and regulations as they develop. Final regulations may impose significant
compliance costs, and may require reductions in fossil fuel use and the addition of renewable energy resources in excess of the
requirements of the RPS law.
The Utilities have taken, and continue to identify opportunities to take, direct action to reduce GHG emissions from their
operations, including, but not limited to, supporting DSM programs that foster energy efficiency, using renewable resources for
energy production and purchasing power from IPPs generated by renewable resources, burning renewable biodiesel in
Hawaiian Electric’s CIP CT-1, using biodiesel for startup and shutdown of selected Maui Electric generating units, and testing
biofuel blends in other Hawaiian Electric and Maui Electric generating units. The Utilities are also working with the State of
Hawaii and other entities to pursue the use of liquefied natural gas as a cleaner and lower cost fuel to replace, at least in part,
the petroleum oil that would otherwise be used. Management is unable to evaluate the ultimate impact on the Utilities’
operations of eventual comprehensive GHG regulation. However, management believes that the various initiatives it is
undertaking will provide a sound basis for managing the Utilities’ carbon footprint and meeting GHG reduction goals that will
ultimately emerge.
While the timing, extent and ultimate effects of climate change cannot be determined with any certainty, climate change is
predicted to result in sea level rise, which could potentially impact coastal and other low-lying areas (where much of the
Utilities’ electric infrastructure is sited), and could cause erosion of beaches, saltwater intrusion into aquifers and surface
ecosystems, higher water tables and increased flooding and storm damage due to heavy rainfall. The effects of climate change
on the weather (for example, floods or hurricanes), sea levels, and water availability and quality have the potential to materially
adversely affect the results of operations, financial condition and liquidity of the Utilities. For example, severe weather could
cause significant harm to the Utilities’ physical facilities.
Maui Electric 2012 test year rate case. On May 31, 2013, the PUC issued a final D&O in the Maui Electric 2012 test year
rate case. Final rates became effective August 1, 2013. The final D&O approved an increase in annual revenues of $5.3 million,
which is $7.8 million less than the interim increase in annual revenues that had been in effect since June 1, 2012. Reductions
from the interim D&O related primarily to:
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(in millions)
Lower ROACE
Customer Information System expenses
Pension and OPEB expense based on 3-year average
Integrated resource planning expenses
Operational and Renewable Energy Integration study costs
Total adjustment
$
$
4.0
0.3
1.5
0.9
1.1
7.8
According to the PUC, the reduction in the allowed ROACE from the stipulated 10% to the final approved 9% is
composed of 0.5% due to updated economic and financial market conditions manifested in lower interest rates in the 2012 test
year and 0.5% for system inefficiencies reflected in over curtailment of renewable energy produced by independent power
producers.
The reduction in the pension and OPEB expense is due to applying a 3-year average in the calculation of pension costs for
the purpose of the 2012 test year. This is not a PUC decision to change the pension and OPEB tracking mechanisms, although
the PUC emphasizes the need to evaluate alternatives to decrease or limit the growth in employee benefits costs.
The PUC also continued Maui Electric’s existing energy cost adjustment clause (ECAC) and power purchase adjustment
clause (PPAC) design. The PUC stated that it will consider the Utilities' future actions to reduce fuel costs and increase use of
renewable energy as it continues to review the design of the ECAC in the future.
Since the final rate increase was lower than the interim increase previously in effect, Maui Electric recorded a charge, net
of revenue taxes, of $7.6 million in the second quarter of 2013 and refunded to customers approximately $9.7 million (which
includes interest accrued since June 1, 2012) between September 2013 and early November 2013. As a result of the D&O, in
the second quarter of 2013 Maui Electric also recorded adjustments to reduce expenses by reducing employee benefits expenses
by $1.8 million for adjustments to pension and OPEB costs, and to reclassify $0.7 million of IRP costs to deferred accounts.
As required by the final D&O, Maui Electric filed in September 2013 a System Improvement and Curtailment Reduction
Plan (SICRP), which identified actions that Maui Electric had already implemented to increase the use of wind energy and
further actions that it is committed to implement to benefit customers.
Maui Electric 2015 test year rate case. On December 30, 2014, Maui Electric filed its 2015 test year rate case in
accordance with the three-year general rate case cycle established by the PUC in its Final D&O, issued on August 31, 2010, in
the decoupling proceeding. This was an abbreviated rate case filing in which Maui Electric intends to forego the opportunity to
seek a general rate increase in base rates, in recognition that its customers have been enduring a high bill environment. If Maui
Electric were to seek an increase in base rates, the requested increase in revenue, based on its revenue requirement for a
normalized 2015 test year, would have been $11.6 million, or 2.8%, over revenues at current effective rates with estimated 2015
rate adjustment mechanism (RAM) revenues. The normalized 2015 test year revenue requirement is based on an estimated cost
of common equity of 10.75%. Management cannot predict any actions by the PUC as a result of this filing.
Asset retirement obligations. AROs represent legal obligations associated with the retirement of certain tangible long-lived
assets, are measured as the present value of the projected costs for the future retirement of specific assets and are recognized in
the period in which the liability is incurred if a reasonable estimate of fair value can be made. The Utilities’ recognition of
AROs have no impact on their earnings. The cost of the AROs is recovered over the life of the asset through depreciation.
AROs recognized by the Utilities relate to obligations to retire plant and equipment, including removal of asbestos and other
hazardous materials.
Hawaiian Electric has recorded estimated AROs related to removing retired generating units at its Honolulu and Waiau
power plants. These removal projects are ongoing, with significant activity and expenditures occurring in 2014 in partial
settlement of these liabilities. Both removal projects are expected to continue through 2015.
Changes to the ARO liability included in “Other liabilities” on Hawaiian Electric’s balance sheet were as follows:
(in thousands)
Balance, January 1
Accretion expense
Liabilities incurred
Liabilities settled
Revisions in estimated cash flows
Balance, December 31
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2014
2013
$
43,106
$
890
—
(14,577)
—
$
29,419
$
48,431
1,263
—
(5,672)
(916)
43,106
Decoupling. In 2010, the PUC issued an order approving decoupling, which was implemented by Hawaiian Electric on
March 1, 2011, by Hawaii Electric Light on April 9, 2012 and by Maui Electric on May 4, 2012. Decoupling is a regulatory
model that is intended to facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an
aggressive renewable portfolio standard. The decoupling model implemented in Hawaii delinks revenues from sales and
includes annual rate adjustments for certain O&M expenses and rate base changes. The decoupling mechanism has three
components: (1) a sales decoupling component via a revenue balancing account (RBA), (2) a revenue escalation component via
a rate adjustment mechanism (RAM) and (3) an earnings sharing mechanism, which would provide for a reduction of revenues
between rate cases in the event the utility exceeds the ROACE allowed in its most recent rate case. Decoupling provides for
more timely cost recovery and earning on investments. The implementation of decoupling has resulted in an improvement in
the Utilities’ under-earning situation that has existed over the last several years.
On May 31, 2013, as provided for in its original order issued in 2010 approving decoupling and citing three years of
implementation experience for Hawaiian Electric, the PUC opened an investigative docket to review whether the decoupling
mechanisms are functioning as intended, are fair to the Utilities and their ratepayers, and are in the public interest. The PUC
affirmed its support for the continuation of the sales decoupling (RBA) mechanism and stated its interest in evaluating the
RAM to ensure it provides the appropriate balance of risks, costs, incentives and performance requirements, as well as
administrative efficiency, and whether the current interest rate applied to the outstanding RBA balance is reasonable. The
Utilities and the Consumer Advocate were named as parties to this proceeding and filed a joint statement of position that any
material changes to the current decoupling mechanism should be made prospectively after 2016, unless the Utilities and the
Consumer Advocate mutually agree to the change in this proceeding. The PUC granted several parties’ motions to intervene. In
October 2013, the PUC issued orders that bifurcated the proceeding (Schedule A and Schedule B) and identified issues and
procedural schedules for both Schedules.
Schedule A issues include:
•
•
for the RBA, the reasonableness of the interest rate related to the carrying charge of the outstanding RBA balance and
whether there should be a risk sharing adjustment to the RBA;
for the RAM, whether it is reasonable to true up all actual prior year baseline projects, which are those capital projects
less than $2.5 million, at year end or implement alternative methods to calculate the RAM rate base;
• whether a risk sharing mechanism should be incorporated into the RBA;
• whether performance metrics should be determined and reported; and
• whether other factors should be considered if potential changes to existing RBA and RAM provisions are required.
Schedule B issues include:
• whether performance metrics and incentives (rewards or penalties) should be implemented to control costs and
encourage the Utilities to make necessary or appropriate changes to strategic and action plans;
• whether the allocation of risk as a result of the decoupling mechanism is fairly reflected in the cost of capital allowed
in rates;
changes or alternatives to the existing RAM; and
changes to ratemaking procedures to improve efficiency and/or effectiveness.
•
•
Oral arguments on Schedule A issues were held in January 2014. On February 7, 2014, the PUC issued a D&O on the
Schedule A issues, which made certain modifications to the decoupling mechanism. Specifically, the D&O requires:
• An adjustment to the Rate Base RAM Adjustment to include 90% of the amount of the current RAM Period Rate Base
RAM Adjustment that exceeds the Rate Base RAM Adjustment from the prior year, to be effective with the Utilities’
2014 decoupling filing.
• Effective March 1, 2014, the interest rate to be applied on the outstanding RBA balances to be the short term debt rate
used in each Utilities last rate case (ranging from 1.25% to 3.25%), instead of the 6% that had been previously
approved.
The D&O required the Utilities to immediately investigate the possibility of deferring the payment of income taxes on the
accrued amounts of decoupling revenue, and to report the results with recommendations to the PUC. The PUC reserved the
right to determine in the next decoupling and rate case filings whether each Utilities’ allowed income taxes should be adjusted
for this change. The Utilities updated the PUC on their progress in investigating the tax treatment of the revenues included in
the RBA balances and provided information to the PUC concerning the application to the IRS for an accounting methods
change to recognize RBA revenues for tax purposes when amounts are billed. On April 28, 2014, the Utilities received approval
for this change from the IRS, effective January 1, 2014. This change will reduce the amount of interest to be accrued on the
RBA balance as proposed by the Consumer Advocate (see "Recent tax developments" above).
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As required, the Utilities developed websites to present certain Schedule A performance metrics and proposed additional
performance metrics. These metrics are all currently being reviewed by the PUC and, if approved, will be available to the
public.
The Schedule A issues on whether it is reasonable to automatically include all actual prior year capital expenditures on
baseline projects in the Rate Base RAM and whether a risk sharing mechanism should be incorporated into the RBA,
particularly with respect to the PUC’s concerns regarding maintaining and enhancing the Utilities' incentives to control costs
and appropriately allocating risk and compensation for risk, will be addressed in the Schedule B proceedings.
On May 20, 2014, the Utilities and other parties filed their respective initial statements of position for the Schedule B
issues in this proceeding. Specifically, the Utilities concluded that (1) the existing RAM provision can be modified to address
concerns stated by the PUC regarding the review of baseline capital projects and the growth in plant additions, and (2) targeted
incentives can be crafted to incentivize the activities identified by the PUC.
On September 15, 2014, the Utilities and other parties filed their respective reply statements of position for the Schedule B
issues in this proceeding. Specifically, the Utilities concluded that (1) the existing RAM provision can be modified to address
PUC concerns regarding the review of baseline capital projects, and to provide more incentives for the Utilities to control
capital expenditure costs while aggressively moving forward with their plans, (2) if the RAM is to be replaced, the Utilities can
support transition to a new appropriately designed incentive-based regulatory (IBR) model, (3) developing an IBR mechanism
and process consistent with the objectives in the Utilities’ approved plans will also take reasonable time; thus, it would be more
reasonable to target 2017 to begin implementation of any new IBR mechanism and decoupling should be retained in the
meantime and (4) the Utilities would support the development of performance metrics to be implemented as part of a new IBR
mechanism.
The Utilities and other parties participated in panel hearings on Schedule B issues in late October 2014.
In early December 2014, the PUC issued an order that amended the procedural schedule and issued information requests.
On December 22, 2014, the Utilities and other parties filed their respective responses to PUC information requests. The
proceeding is currently pending a PUC order instructing the parties regarding the issues and scope for limited briefs and reply
briefs.
Management cannot predict the outcome of the proceedings or the ultimate impact of the proceedings on the results of
operation of the Utilities.
April 2014 regulatory orders. In April 2014, the PUC issued four orders that collectively address certain key policy, resource
planning and operational issues for the Utilities. The four orders are as follows:
Integrated Resource Planning. The PUC did not accept the Utilities’ Integrated Resource Plan and Action Plans
submission, and, in lieu of an approved plan, has commenced other initiatives to enable resource planning. The PUC also
terminated the Utilities' integrated resource planning (IRP) cycle, including the filing of a mid-cycle evaluation report, and
formally concluded the IRP advisory group. The PUC directed each of Hawaiian Electric and Maui Electric to file within 120
days its respective Power Supply Improvement Plans (PSIPs), and the PSIPs were filed in August 2014. The PUC also provided
its inclinations on the future of Hawaii’s electric utilities in an exhibit to the order. The exhibit provides the PUC’s perspectives
on the vision, business strategies and regulatory policy changes required to align the Utilities' business model with customers’
interests and the state’s public policy goals.
Reliability Standards Working Group. The PUC ordered the Utilities (and in some cases the Kauai Island Utility
Cooperative (KIUC)) to take timely actions intended to lower energy costs, improve system reliability and address emerging
challenges to integrate additional renewable energy. In addition to the PSIPs mentioned above, the PUC ordered certain filing
requirements which include the following:
•
•
Distributed Generation Interconnection Plan to be filed within 120 days. The Utilities’ Plan was filed in August 2014.
Plan to implement an on-going distribution circuit monitoring program to measure real-time voltage and other power
quality parameters to be filed within 60 days. The plan shall achieve full implementation of the distribution circuit
monitoring program within 180 days. The Utilities' Plan was filed in June 2014.
• Action Plan for improving efficiencies in the interconnection requirements studies to be filed within 30 days. The
Utilities' Plan was filed in May 2014.
• The Utilities are to file monthly reports providing details about interconnection requirements studies.
•
Proposal to implement an integrated interconnection queue for each distribution circuit for each island grid to be filed
within 120 days. The Utilities’ integrated interconnection queue plan was filed in August 2014 and the integrated
interconnection queues were implemented in January 2015.
120
The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and
policy issues associated with distributed energy resources and (3) the Hawaii electricity reliability administrator, which is a
third party position which the legislature has authorized the PUC to create by contract to provide support for the PUC in
developing and periodically updating local grid reliability standards and procedures and interconnection requirements and
overseeing grid access and operation.
Policy Statement and Order Regarding Demand Response Programs. The PUC provided guidance concerning the
objectives and goals for demand response programs, and ordered the Utilities to develop within 90 days an integrated Demand
Response Portfolio Plan that will enhance system operations and reduce costs to customers. The Utilities’ Plan was filed in July
2014. In August 2014, the PUC invited public comment on the Utilities’ Plan. The Utilities submitted a status update in October
2014, and a second status update is planned to be filed with the PUC in March 2015.
Maui Electric Company 2012 Test Year Rate Case. The PUC acknowledged the extensive analyses provided by Maui
Electric in its System Improvement and Curtailment Reduction Plan (SICRP) filed in September 2013. The PUC stated that it is
encouraged by the changes in Maui Electric’s operations that have led to a significant reduction in the curtailment of
renewables, but stated that Maui Electric has not set forth a clearly defined path that addresses integration and curtailment of
additional renewables. The PUC directed Maui Electric to present a PSIP within 120 days to address present and future system
operations so as to not only reduce curtailment, but to optimize the operation of its system for its customers’ benefit. The Maui
Electric PSIP was filed in August 2014, and will be reviewed by the PUC in a new docket along with the Hawaiian Electric and
Hawaii Electric Light PSIPs. Maui Electric filed its first annual SICRP status update in September 2014.
Review of PSIPs. Collectively, the PUC's April 2014 resource planning orders confirm the energy policy and operational
priorities that will guide the Utilities' strategies and plans going forward.
PSIPs for Hawaiian Electric, Maui Electric and Hawaii Electric Light (updating its Power Supply Plan filed in April 2014)
were filed in August 2014. The PSIPs each include a tactical plan to transform how electric utility services will be offered to
meet customer needs and produce higher levels of renewable energy. Each plan contains a diversified mix of technologies,
including significant distributed and
renewable resources, that is expected to result, on a consolidated basis, in
over 65% of the Utilities’ energy being produced from renewable resources by 2030. Under these plans, the Utilities will
support sustainable growth of rooftop solar, expand use of energy storage systems, empower customers by developing smart
grids, offer new products and services to customers (e.g., community solar, microgrids and voluntary “demand response”
programs), switch from high-priced oil to lower cost liquefied natural gas, retire higher-cost, less efficient existing oil-based
steam generators, and lower full service residential customer bills in real dollars.
The PSIPs will be reviewed by the PUC in a new docket, and a number of parties have moved to intervene in the
proceeding. In September 2014, the PUC invited the public to comment on the PSIPs. In October 2014, the Utilities filed
responses to information requests on the PSIPs from the PUC.
Transitional Distributed Generation Tariff. Consistent with their Distributed Generation Interconnection Plan, on January
20, 2015, the Utilities filed a motion which requested the PUC in pertinent part to:
(1) Reinstitute a program capacity threshold for the Utilities' existing Net Energy Metering (NEM) program;
(2) Approve the Utilities’ proposal to address both existing NEM program participants and those customers presently
awaiting interconnection approval under the existing NEM program;
(3) Approve a new Transitional Distributed Generation (TDG) tariff to be available to customers seeking interconnection
after the NEM program capacity is reached, which tariff more fairly allocates fixed grid costs to DG customers and
credits customers for the value of the excess energy produced by their systems; and
(4) Approve a new standard form TDG contract to allow for the advanced technical capabilities required to integrate
higher levels of distributed generation.
Once the requests in the motion are approved, it is contemplated that the Utilities will be able to increase existing circuit
penetration limits based upon daytime minimum load, and identify strategic and cost effective investments to circuits and the
system to support increased levels of DG. Such investments would be made for the benefit of all customers rather than charging
costs only to those installing DG systems on the circuit.
The Utilities have requested approval of their motion within 60 days of filing or by March 20, 2015. On January 27, 2015,
the Consumer Advocate opposed the Utilities’ motion, contended that further analysis is required to determine whether the
Utilities’ requests are reasonable and in the public interest, and requested that the PUC hold the motion in abeyance until such
further review can be conducted.
121
Management cannot predict the outcome of the proceedings to review the Plans submitted in response to the PUC’s April
2014 resource planning orders, or the ultimate impact of the proceedings on the results of operations of the Utilities.
Liquefied natural gas. In August 2014, Hawaiian Electric entered into a 15-year agreement with Fortis BC Energy Inc.
(Fortis) for liquefaction capacity for liquefied natural gas (LNG) under tariffed rates approved by the British Columbia Utilities
Commission. The agreement, which is subject to Hawaii PUC approval, other regulatory approvals and permits, and other
conditions precedent before it becomes effective, provides for LNG liquefaction capacity purchases of 800,000 tonnes per year
for the first five years, 700,000 tonnes per year for the next five years, and 600,000 tonnes per year for the last five years. Fortis
must also obtain regulatory and other approvals for the agreement to become effective. The Fortis agreement is assignable and
can be assigned to the selected bidder in the Utilities’ request for proposal (RFP) for the supply of containerized LNG and will
help ensure that liquefaction capacity is available at pricing that management believes will lower customer bills.
Consolidating financial information (unaudited). Hawaiian Electric is not required to provide separate financial statements
or other disclosures concerning Hawaii Electric Light and Maui Electric to holders of the 2004 Debentures issued by Hawaii
Electric Light and Maui Electric to HECO Capital Trust III (Trust III) since all of their voting capital stock is owned, and their
obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by
Hawaiian Electric. Consolidating information is provided below for Hawaiian Electric and each of its subsidiaries for the
periods ended and as of the dates indicated.
Hawaiian Electric also unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State
of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii
Electric Light and Maui Electric, (b) under their respective private placement note agreements and the Hawaii Electric Light
notes and Maui Electric notes issued thereunder (see Hawaiian Electric and Subsidiaries' Consolidated Statements of
Capitalization) and (c) relating to the trust preferred securities of Trust III (see Note 6). Hawaiian Electric is also obligated,
after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on
Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.
122
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Consolidating statement of income
Year ended December 31, 2014
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Total expenses
Operating income
Allowance for equity funds used during
construction
Equity in earnings of subsidiaries
$
2,142,245
422,200
422,965
821,246
537,821
283,532
109,204
201,426
1,953,229
189,016
6,085
40,964
117,215
123,226
65,471
35,904
39,521
381,337
40,863
472
—
193,224
60,961
61,609
21,279
39,916
376,989
45,976
214
—
Interest expense and other charges, net
(44,041)
(11,030)
(9,773)
Allowance for borrowed funds used during
construction
Income before income taxes
Income taxes
Net income
Preferred stock dividends of subsidiaries
Net income attributable to Hawaiian Electric
Preferred stock dividends of Hawaiian Electric
2,306
194,330
55,609
138,721
—
138,721
1,080
182
30,487
11,264
19,223
534
91
36,508
13,852
22,656
381
18,689
22,275
—
—
Net income for common stock
$
137,641
18,689
22,275
Consolidating statement of comprehensive income
Year ended December 31, 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(87)
[1]
$
2,987,323
—
—
—
—
—
—
(87)
—
(40,964) [2]
1,131,685
722,008
410,612
166,387
280,863
2,711,555
275,768
6,771
—
87 [1]
(64,757)
—
(40,964)
—
(40,964)
—
(40,964)
—
2,579
220,361
80,725
139,636
915
138,721
1,080
(40,964)
$
137,641
(in thousands)
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income for common stock
$
137,641
18,689
22,275
—
(40,964)
$
137,641
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Net losses arising during the period, net of tax
benefits
Less: amortization of transition obligation, prior
service credit and net losses recognized
during the period in net periodic benefit cost,
net of tax benefits
Less: reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets, net of taxes
(218,608)
(28,725)
(29,352)
10,212
1,270
1,090
207,833
27,437
28,257
Other comprehensive loss, net of tax benefits
(563)
(18)
(5)
Comprehensive income attributable to common
shareholder
$
137,078
18,671
22,270
—
—
—
—
—
58,077 [1]
(218,608)
(2,360) [1]
10,212
(55,694) [1]
23
207,833
(563)
(40,941)
$
137,078
123
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Consolidating statement of income
Year ended December 31, 2013
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Impairment of utility assets
Total expenses
Operating income (loss)
Allowance for equity funds used
during construction
Equity in earnings of subsidiaries
$ 2,124,174
431,517
424,603
851,365
527,839
283,768
99,738
200,962
—
1,963,672
160,502
4,495
41,410
125,516
128,368
61,418
34,188
40,092
—
389,582
41,935
643
—
208,671
54,474
58,081
20,099
40,077
—
381,402
43,201
423
—
Interest expense and other charges, net
(39,107)
(11,341)
(8,953)
Allowance for borrowed funds used during
construction
Income (loss) before income taxes
Income taxes
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) attributable to Hawaiian
Electric
Preferred stock dividends of Hawaiian Electric
1,814
169,114
45,105
124,009
—
124,009
1,080
Net income (loss) for common stock
$
122,929
263
31,500
10,830
20,670
534
20,136
—
20,136
169
34,840
13,182
21,658
381
21,277
—
21,277
—
—
—
3
—
—
—
3
(3)
—
—
—
(3)
—
(3)
—
(3)
—
(3)
(122) [1]
$
2,980,172
—
—
—
—
—
—
—
(122)
—
(41,410) [2]
1,185,552
710,681
403,270
154,025
281,131
—
2,734,659
245,513
5,561
—
122 [1]
(59,279)
—
(41,410)
—
(41,410)
—
(41,410)
—
2,246
194,041
69,117
124,924
915
124,009
1,080
(41,410)
$
122,929
Consolidating statement of comprehensive income (loss)
Year ended December 31, 2013
(in thousands)
Hawaiian
Electric
Hawaii
Electric Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income (loss) for common stock
$
122,929
20,136
21,277
(3)
(41,410)
$
122,929
Other comprehensive income, net of taxes:
Retirement benefit plans:
Net gains arising during the period, net of taxes
203,479
30,542
27,820
Less: amortization of transition obligation, prior
service credit and net losses recognized during
the period in net periodic benefit cost, net of tax
benefits
Less: reclassification adjustment for impact of
D&Os of the PUC included in regulatory assets,
net of tax benefits
20,694
2,880
2,557
(222,595)
(33,277)
(30,254)
Other comprehensive income, net of tax benefits
1,578
145
123
—
—
—
—
(58,362) [1]
203,479
(5,437) [1]
20,694
63,531 [1]
(222,595)
(268)
1,578
Comprehensive income (loss) attributable to
common shareholder
$
124,507
20,281
21,400
(3)
(41,678)
$
124,507
124
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Consolidating statement of income
Year ended December 31, 2012
(in thousands)
Revenues
Expenses
Fuel oil
Purchased power
Other operation and maintenance
Depreciation
Taxes, other than income taxes
Impairment of utility assets
Total expenses
Operating income (loss)
Allowance for equity funds used
during construction
Equity in earnings of subsidiaries
$ 2,228,233
441,013
440,270
945,246
540,802
266,208
90,783
209,943
29,000
2,081,982
146,251
5,735
28,836
116,866
145,386
60,447
33,337
41,370
5,500
402,906
38,107
585
—
235,307
38,052
70,771
20,378
41,528
5,500
411,536
28,734
687
—
Interest expense and other charges, net
(40,842)
(12,066)
(9,224)
Allowance for borrowed funds used during
construction
Income (loss) before income taxes
Income taxes
Net income (loss)
Preferred stock dividends of subsidiaries
Net income (loss) attributable to Hawaiian
Electric
Preferred stock dividends of Hawaiian Electric
3,642
143,622
43,266
100,356
—
100,356
1,080
Net income (loss) for common stock
$
99,276
235
26,861
10,115
16,746
534
16,212
—
16,212
478
20,675
7,667
13,008
381
12,627
—
12,627
Consolidating statement of comprehensive income (loss)
Year ended December 31, 2012
—
—
—
3
—
—
—
3
(3)
—
—
—
—
(3)
—
(3)
—
(3)
—
(3)
(77) [1]
$
3,109,439
—
—
—
—
—
—
—
(77)
—
(28,836) [2]
1,297,419
724,240
397,429
144,498
292,841
40,000
2,896,427
213,012
7,007
—
77 [1]
(62,055)
—
(28,836)
—
(28,836)
—
(28,836)
—
(28,836)
$
4,355
162,319
61,048
101,271
915
100,356
1,080
99,276
(in thousands)
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income (loss) for common stock
$
99,276
16,212
12,627
(3)
(28,836)
$
99,276
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Net losses arising during the period, net of tax
benefits
Less: amortization of transition obligation, prior
service credit and net losses recognized during
the period in net periodic benefit cost, net of tax
benefits
Less: reclassification adjustment for impact of
D&Os of the PUC included in regulatory assets,
net of tax benefits
Other comprehensive loss, net of tax benefits
Comprehensive income (loss) attributable to common
(90,082)
(13,577)
(10,935)
13,673
2,101
1,771
75,471
(938)
11,442
(34)
9,093
(71)
—
—
—
—
24,512 [1]
(90,082)
(3,872) [1]
13,673
(20,535) [1]
105
75,471
(938)
shareholder
$
98,338
16,178
12,556
(3)
(28,731)
$
98,338
125
Consolidating balance sheet
December 31, 2014
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less
accumulated depreciation
Total property, plant and equipment, net
Investment in wholly-owned subsidiaries, at equity
Current assets
Cash and equivalents
Advances to affiliates
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization
Common stock equity
Cumulative preferred stock–not subject to
mandatory redemption
Long-term debt, net
Total capitalization
Current liabilities
Current portion of long-term debt
Short-term borrowings-affiliate
Accounts payable
Interest and preferred dividends payable
Taxes accrued
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other
postretirement benefit plans liability
Other
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
$
43,819
5,464
3,016
3,782,438
1,179,032
1,048,012
(1,253,866)
(473,933)
(447,711)
134,376
2,706,767
4,950
2,711,717
538,639
12,416
16,100
111,462
103,072
9,980
74,515
33,154
44,680
58,550
463,929
623,784
5,640
53,106
682,530
$ 4,396,815
12,421
722,984
82
723,066
—
612
—
24,222
15,926
981
13,800
6,664
8,611
6,745
77,561
107,454
1,438
15,366
124,258
924,885
11,819
615,136
1,531
616,667
—
633
—
22,800
18,376
2,246
17,731
17,432
13,567
6,126
98,911
102,788
1,245
13,366
117,399
832,977
$ 1,682,144
281,846
256,692
22,293
830,546
2,534,983
7,000
190,000
478,846
5,000
186,000
447,692
—
—
122,433
15,407
176,339
191
48,282
362,652
429,515
236,727
49,865
446,888
52,446
—
5,600
17,773
2,931
36,807
441
16,094
79,646
83,238
29,966
14,725
75,960
13,532
217,421
88,218
832,977
—
10,500
23,728
3,989
37,548
—
9,866
85,631
90,119
77,707
14,902
72,547
10,658
265,933
94,475
924,885
126
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
—
101
—
—
—
—
101
101
—
—
101
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
(538,639) [2]
—
(16,100) [1]
—
—
(8,924) [1]
—
—
(475) [3]
—
(25,499)
(183) [1]
—
—
(183)
$
52,299
6,009,482
(2,175,510)
158,616
4,044,887
6,563
4,051,450
0
13,762
—
158,484
137,374
4,283
106,046
57,250
66,383
71,421
615,003
833,843
8,323
81,838
924,004
(564,321)
$
5,590,457
(538,639) [2]
$
1,682,144
—
—
(538,639)
—
(16,100) [1]
—
(11) [1]
(292) [3]
—
(9,096) [1]
(25,499)
—
(183) [1]
—
—
—
(183)
—
(564,321)
$
34,293
1,206,546
2,922,983
—
—
163,934
22,316
250,402
632
65,146
502,430
602,872
344,217
79,492
595,395
76,636
1,698,612
466,432
5,590,457
Total deferred credits and other liabilities
Contributions in aid of construction
Total capitalization and liabilities
1,215,441
283,739
$ 4,396,815
Consolidating balance sheet
December 31, 2013
(in thousands)
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
Plant and equipment
Less accumulated depreciation
Construction in progress
Utility property, plant and equipment, net
Nonutility property, plant and equipment, less
accumulated depreciation
Total property, plant and equipment, net
Investment in wholly-owned subsidiaries, at equity
Current assets
Cash and equivalents
Advances to affiliates
Customer accounts receivable, net
Accrued unbilled revenues, net
Other accounts receivable, net
Fuel oil stock, at average cost
Materials and supplies, at average cost
Prepayments and other
Regulatory assets
Total current assets
Other long-term assets
Regulatory assets
Unamortized debt expense
Other
Total other long-term assets
Total assets
Capitalization and liabilities
Capitalization
Common stock equity
Cumulative preferred stock–not subject to
mandatory redemption
Long-term debt, net
Total capitalization
Current liabilities
Current portion of long-term debt
Short-term borrowings-affiliate
Accounts payable
Interest and preferred dividends payable
Taxes accrued
Regulatory liabilities
Other
Total current liabilities
Deferred credits and other liabilities
Deferred income taxes
Regulatory liabilities
Unamortized tax credits
Defined benefit pension and other
postretirement benefit plans liability
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total capitalization and liabilities
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
$
43,407
5,460
3,016
3,558,569
1,136,923
1,006,383
(1,222,129)
(453,721)
(435,379)
124,494
2,504,341
4,953
2,509,294
523,674
61,245
6,839
121,282
107,752
16,373
99,613
37,377
29,798
54,979
7,709
696,371
82
696,453
—
1,326
1,000
28,088
17,100
4,265
14,178
6,883
8,334
6,931
11,030
585,050
1,532
586,582
—
153
—
26,078
19,272
2,451
20,296
14,784
16,140
7,828
535,258
88,105
107,002
381,346
6,051
42,163
429,560
64,552
1,580
11,270
77,402
60,288
1,372
13,993
75,653
$ 3,997,786
861,960
769,237
$ 1,593,564
274,802
248,771
22,293
830,547
2,446,404
7,000
189,998
471,800
5,000
186,000
439,771
—
1,000
145,062
15,190
175,790
1,705
48,443
387,190
359,621
235,786
44,931
202,396
63,374
906,108
258,084
$ 3,997,786
—
6,839
20,114
2,585
37,171
211
15,424
82,344
67,593
35,122
14,363
31,339
13,658
162,075
85,047
769,237
11,400
—
24,383
3,885
37,899
—
9,033
86,600
79,947
76,475
14,245
28,427
14,703
213,797
89,763
861,960
127
—
—
—
—
—
—
—
—
101
—
—
—
—
—
—
—
—
101
—
—
—
—
101
101
—
—
101
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(523,674) [2]
—
(7,839) [1]
—
—
(9,027) [1]
—
—
(1,415) [3]
—
(18,281)
—
—
—
—
$
51,883
5,701,875
(2,111,229)
143,233
3,785,762
6,567
3,792,329
—
62,825
—
175,448
144,124
14,062
134,087
59,044
52,857
69,738
712,185
506,186
9,003
67,426
582,615
(541,955)
$
5,087,129
(523,674) [2]
$
1,593,564
—
—
(523,674)
—
(7,839) [1]
—
(8) [1]
(1,415) [3]
—
(9,019) [1]
(18,281)
—
—
—
—
—
—
34,293
1,206,545
2,834,402
11,400
—
189,559
21,652
249,445
1,916
63,881
537,853
507,161
347,383
73,539
262,162
91,735
1,281,980
432,894
5,087,129
—
101
—
(541,955)
$
Consolidating statements of changes in common stock equity
(in thousands)
Balance, December 31, 2011
Net income (loss) for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2012
Net income (loss) for common stock
Other comprehensive income, net of taxes
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2013
Net income for common stock
Other comprehensive loss, net of tax benefits
Issuance of common stock, net of expenses
Common stock dividends
Balance, December 31, 2014
(27,738)
(19,197)
Hawaii
Electric
Light
280,468
16,212
(34)
—
268,908
20,136
145
—
274,802
18,689
(18)
—
Hawaiian
Electric
$ 1,402,841
99,276
(938)
44,001
(73,044)
$ 1,472,136
122,929
1,578
78,499
$ 1,593,564
137,641
(563)
39,994
(88,492)
$ 1,682,144
(81,578)
(14,387)
235,568
12,627
(71)
—
228,927
21,277
123
12,461
(14,017)
248,771
22,275
(5)
—
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
107
(3)
—
—
—
104
(3)
—
—
—
101
—
—
—
—
101
(516,143) $
1,402,841
(28,836)
105
—
46,935
99,276
(938)
44,001
(73,044)
(497,939) $
1,472,136
(41,410)
(268)
(12,461)
28,404
122,929
1,578
78,499
(81,578)
(523,674) $
1,593,564
(40,964)
23
—
25,976
137,641
(563)
39,994
(88,492)
(538,639) $
1,682,144
(11,627)
281,846
(14,349)
256,692
128
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Consolidating statement of cash flows
Year ended December 31, 2014
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Increase in deferred income taxes
Change in tax credits, net
Allowance for equity funds used during
construction
Change in cash overdraft
Changes in assets and liabilities:
Decrease in accounts receivable
Decrease in accrued unbilled revenues
Decrease in fuel oil stock
Decrease (increase) in materials and supplies
Increase in regulatory assets
Decrease in accounts payable
Change in prepaid and accrued income taxes and
revenue taxes
Decrease in defined benefit pension and other
postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from affiliates
Other
Investment in consolidated subsidiary
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
$
138,721
19,223
22,656
(41,064)
26,076
109,204
1,749
56,901
4,998
(6,085)
—
16,213
4,680
25,098
4,223
(14,620)
(74,276)
—
—
35,904
2,596
12,083
680
(472)
—
7,150
1,174
378
219
(3,357)
(8,490)
—
—
21,279
3,746
13,963
384
(214)
(1,038)
3,483
896
2,565
(2,648)
977
(7,866)
(4,166)
(3,251)
3,381
(562)
(46,032)
201,058
—
(12,085)
51,752
(399)
(4,945)
56,220
(219,738)
(48,050)
(43,786)
30,021
(9,261)
—
—
7,695
1,000
—
—
4,090
—
—
—
(198,978)
(39,355)
(39,696)
(88,492)
(11,627)
(14,349)
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Net increase (decrease) in short-term borrowings from
non-affiliates and affiliate with original maturities
of three months or less
Other
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
$
(1,080)
40,000
—
—
(1,000)
(337)
(50,909)
(48,829)
61,245
12,416
(534)
(381)
—
—
(11,400)
—
—
—
10,500
(50)
(1,239)
(75)
(13,111)
(16,044)
(714)
1,326
612
480
153
633
129
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
101
(40,964) [2]
$
139,636
40,964 [2]
(100)
(25,976) [2]
—
—
—
—
—
—
(103) [1]
—
—
—
—
—
—
—
103 [1]
(25,976)
—
—
8,261 [1]
—
—
8,261
100
166,387
8,091
82,947
6,062
(6,771)
(1,038)
26,743
6,750
28,041
1,794
(17,000)
(90,632)
(4,036)
(961)
(62,959)
283,054
(311,574)
41,806
—
—
—
(269,768)
25,976 [2]
(88,492)
—
—
—
—
(8,261) [2]
—
17,715
—
—
—
$
(1,995)
40,000
—
(11,400)
—
(462)
(62,349)
(49,063)
62,825
13,762
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
$
124,009
20,670
21,658
(3)
(41,410) [2]
$
124,924
41,410 [2]
(100)
Consolidating statement of cash flows
Year ended December 31, 2013
(in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Equity in earnings
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Increase in deferred income taxes
Change in tax credits, net
Allowance for equity funds used during
construction
Change in cash overdraft
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
Decrease (increase) in accrued unbilled revenues
Decrease in fuel oil stock
Increase in materials and supplies
Increase in regulatory assets
Decrease in accounts payable
Change in prepaid and accrued income taxes and
revenue taxes
Increase (decrease) in defined benefit pension and
other postretirement benefit plans liability
Change in other assets and liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from affiliates
Other
Investment in consolidated subsidiary
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
(41,510)
28,505
99,738
554
41,409
5,152
(4,495)
—
49,974
(7,152)
23,563
(5,598)
(46,047)
(6,136)
—
—
34,188
1,979
10,569
818
(643)
—
(1,459)
(2,707)
1,307
(1,547)
(9,237)
(4,756)
—
—
20,099
2,544
12,529
1,047
(423)
1,038
1,178
33
2,462
(814)
(10,177)
(9,936)
4,632
(4,114)
(2,546)
2,325
(17,941)
250,982
(1)
(6,262)
38,805
(84)
(7,544)
31,064
(237,899)
(52,135)
(52,451)
21,686
2,561
—
(12,461)
7,590
17,050
(230)
—
2,884
—
—
—
(226,113)
(27,725)
(49,567)
(81,578)
(14,388)
(14,017)
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from the issuance of common stock
Proceeds from the issuance of long-term debt
Repayment of long-term debt
Net decrease in short-term borrowings from non-
affiliates and affiliate with original maturities of
three months or less
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
(1,080)
78,500
140,000
(90,000)
(17,050)
(681)
28,111
52,980
8,265
Cash and cash equivalents, December 31
$
61,245
(381)
12,461
40,000
(20,000)
(2,561)
(195)
15,307
(3,196)
3,349
153
(534)
—
56,000
(56,000)
—
(273)
(15,195)
(4,115)
5,441
1,326
130
(3)
(28,405)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3)
104
101
(28,405) [2]
—
—
—
—
—
—
(248) [1]
—
—
—
—
—
—
—
248 [1]
—
—
(19,611) [1]
—
12,461 [2]
(7,150)
100
154,025
5,077
64,507
7,017
(5,561)
1,038
49,445
(9,826)
27,332
(7,959)
(65,461)
(20,828)
(2,028)
2,240
(31,499)
292,443
(342,485)
32,160
—
(230)
—
(310,555)
28,405 [2]
(81,578)
—
(12,461) [2]
—
—
19,611 [1]
—
35,555
—
—
—
$
(1,995)
78,500
236,000
(166,000)
—
(1,149)
63,778
45,666
17,159
62,825
Consolidating statement of cash flows
Year ended December 31, 2012
(in thousands)
Cash flows from operating activities
Hawaiian
Electric
Hawaii
Electric
Light
Maui
Electric
Other
subsidiaries
Consolidating
adjustments
Hawaiian
Electric
Consolidated
Net income (loss)
$
100,356
16,746
13,008
(3)
(28,836) [2]
$
101,271
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Equity in earnings
Common stock dividends received from
subsidiaries
Depreciation of property, plant and equipment
Other amortization
Impairment of utility assets
Increase in deferred income taxes
Change in tax credits, net
Allowance for equity funds used during
construction
Changes in assets and liabilities:
Increase in accounts receivable
Decrease (increase) in accrued unbilled revenues
Decrease in fuel oil stock
Increase in materials and supplies
Increase in regulatory assets
Increase (decrease) in accounts payable
Change in prepaid and accrued income taxes and
revenue taxes
Decrease in defined benefit pension and other
postretirement benefits plans liability
Change in other assets and liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Capital expenditures
Contributions in aid of construction
Advances from (to) affiliates
Net cash used in investing activities
Cash flows from financing activities
Common stock dividends
Preferred stock dividends of Hawaiian Electric and
subsidiaries
Proceeds from the issuance of long-term debt
Proceeds from issuance of common stock
Repayment of long-term debt
Net increase (decrease) in short-term borrowings
from non-affiliates and affiliate with original
maturities of three months or less
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
$
(28,936)
47,035
90,783
1,508
29,000
66,968
5,006
—
—
33,337
3,252
5,500
7,457
522
—
—
20,378
2,238
5,500
12,453
547
(5,735)
(585)
(687)
(48,451)
2,728
4,861
(6,683)
(55,605)
(31,743)
(1,106)
4,106
3,732
(636)
(9,649)
(8,110)
(2,164)
(3,306)
1,536
(578)
(7,147)
940
19,871
1,935
3,433
(434)
(44,880)
145,649
(191)
(11,143)
45,167
(119)
(12,678)
33,354
(233,792)
(41,060)
(35,239)
32,285
(9,400)
(210,907)
8,184
28,100
(4,776)
5,513
18,500
(11,226)
(73,044)
(27,738)
(19,197)
(1,080)
367,000
44,000
(534)
31,000
—
(381)
59,000
—
(259,580)
(41,200)
(67,720)
(46,600)
(1,992)
28,704
(36,554)
44,819
8,265
—
139
9,400
(377)
(38,333)
(19,275)
2,058
3,383
5,441
2,853
496
3,349
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
(4)
—
—
—
—
—
—
—
—
—
—
—
—
(4)
108
104
28,836 [2]
(100)
(46,935) [2]
—
—
—
—
—
—
4,717 [1]
—
—
—
—
—
—
—
(4,717) [1]
(46,935)
—
—
(37,200) [1]
(37,200)
100
144,498
6,998
40,000
86,878
6,075
(7,007)
(47,004)
3,528
10,129
(7,897)
(72,401)
(38,913)
25,239
(744)
(73,419)
177,231
(310,091)
45,982
—
(264,109)
46,935 [2]
(73,044)
—
—
—
—
37,200 [1]
—
84,135
—
—
—
$
(1,995)
457,000
44,000
(368,500)
—
(2,230)
55,231
(31,647)
48,806
17,159
Explanation of consolidating adjustments on consolidating schedules:
[1] Eliminations of intercompany receivables and payables and other intercompany transactions.
[2] Elimination of investment in subsidiaries, carried at equity.
[3] Reclassification of accrued income taxes for financial statement presentation.
131
5 · Bank segment (HEI only)
Selected financial information
American Savings Bank, F.S.B.
Statements of Income Data
Years ended December 31
(in thousands)
Interest and dividend income
Interest and fees on loans
Interest and dividends on investment securities
Total interest and dividend income
Interest expense
Interest on deposit liabilities
Interest on other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Fees from other financial services
Fee income on deposit liabilities
Fee income on other financial products
Bank-owned life insurance
Mortgage banking income
Gains on sale of investment securities
Other income, net
Total noninterest income
Noninterest expense
Compensation and employee benefits
Occupancy
Data processing
Services
Equipment
Office supplies, printing and postage
Marketing
FDIC insurance
Other expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
2014
2013
2012
$
$
179,341
11,945
191,286
$
172,969
13,095
186,064
5,077
5,731
10,808
180,478
6,126
174,352
21,747
19,249
8,131
3,949
2,913
2,847
2,375
61,211
79,885
17,197
11,690
10,269
6,564
6,089
3,999
3,261
20,990
159,944
75,619
24,127
51,492
$
5,092
4,985
10,077
175,987
1,507
174,480
27,099
18,363
8,405
3,928
8,309
1,226
4,753
72,083
82,910
16,747
10,952
9,015
7,295
4,233
3,373
3,253
21,726
159,504
87,059
29,525
57,534
$
$
176,057
13,822
189,879
6,423
4,869
11,292
178,587
12,883
165,704
31,361
17,775
6,577
3,981
14,628
134
1,204
75,660
75,979
17,179
10,098
9,866
7,105
3,870
3,260
3,307
21,679
152,343
89,021
30,384
58,637
132
2014
2013
2012
$
51,492
$
57,534
$
58,637
5,840
(13,686)
(1,715)
(738)
956
(81)
(9,336)
15,826
(7,936)
850
(4,361)
47,131
$
1,797
3,199
60,733
$
1,036
(6,025)
52,612
$
2014
2013
$
107,233
54,230
550,394
69,302
4,434,651
(45,618)
4,389,033
8,424
304,435
82,190
$ 5,565,241
$ 1,342,794
3,280,621
290,656
116,527
5,030,598
1
338,411
212,789
(16,558)
534,643
$ 5,565,241
$
108,998
47,605
529,007
92,546
4,150,229
(40,116)
4,110,113
5,302
268,063
82,190
$ 5,243,824
$ 1,214,418
3,158,059
244,514
105,679
4,722,670
1
336,053
197,297
(12,197)
521,154
$ 5,243,824
$
(3,663)
(8,534)
$
462
(17,020)
Statements of Comprehensive Income
Years ended December 31
(in thousands)
Net income
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for sale investment securities:
Net unrealized gains (losses) on available-for sale investment securities arising
during the period, net of (taxes) benefits of $(3,856), $9,037 and ($631), for 2014,
2013 and 2012, respectively
Less: reclassification adjustment for net realized gains included in net income, net of
taxes of $1,132, $488 and $53 for 2014, 2013 and 2012, respectively
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of $6,164,
($10,450) and $5,240 for 2014, 2013 and 2012, respectively
Less: amortization of transition obligation, prior service credit and net losses
recognized during the period in net periodic benefit cost, net of tax benefits of
$561, $1,187 and $684 for 2014, 2013 and 2012, respectively
Other comprehensive income (loss), net of taxes
Comprehensive income
Balance Sheets Data
December 31
(in thousands)
Assets
Cash and due from banks
Interest-bearing deposits
Available-for-sale investment securities, at fair value
Stock in Federal Home Loan Bank of Seattle, at cost
Loans receivable held for investment
Allowance for loan losses
Net loans
Loans held for sale, at lower of cost or fair value
Other
Goodwill
Total assets
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing
Deposit liabilities–interest-bearing
Other borrowings
Other
Total liabilities
Commitments and contingencies (see “Litigation” below)
Common stock
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities
Retirement benefit plans
Total shareholder’s equity
Total liabilities and shareholder’s equity
133
December 31
(in thousands)
Other assets
Bank-owned life insurance
Premises and equipment, net
Prepaid expenses
Accrued interest receivable
Mortgage-servicing rights
Low-income housing equity investments
Real estate acquired in settlement of loans, net
Other
Other liabilities
Accrued expenses
Federal and state income taxes payable
Cashier’s checks
Advance payments by borrowers
Other
2014
2013
$
$
$
$
134,115
92,407
3,196
13,632
11,540
32,457
891
16,197
304,435
37,880
26,806
20,509
9,652
21,680
116,527
$
$
$
$
129,963
67,766
3,616
13,133
11,687
14,543
1,205
26,150
268,063
19,989
37,807
21,110
9,647
17,126
105,679
Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the
beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the
policies and insurance proceeds paid to ASB upon an insured’s death.
Available-for-sale investment securities. The major components of investment securities were as follows:
(dollars in thousands)
December 31, 2014
Available-for-sale
U.S. Treasury and federal
agency obligations
Mortgage-related
securities- FNMA,
FHLMC and GNMA
December 31, 2013
Available-for-sale
Federal agency
obligations
Mortgage-related
securities- FNMA,
FHLMC and GNMA
Municipal bonds
Gross
Gross
Estimated
Less than 12 months
12 months or longer
Amortized
cost
unrealized
gains
unrealized
losses
fair
value
Number
of issues
Fair value
Amount
Number
of issues
Fair value
Amount
Gross unrealized losses
$ 119,507
$
1,092
$
(1,039) $ 119,560
6
$ 41,970
$
(361)
5
$
29,168
$
(678)
430,120
5,653
(4,939)
430,834
$ 549,627
$
6,745
$
(5,978) $ 550,394
6
12
47,029
$ 88,999
$
(164)
(525)
29
34
172,623
(4,775)
$ 201,791
$
(5,453)
$
83,193
$
174
$
(2,394) $ 80,973
10
$ 70,799
$
(2,394)
—
$
— $
—
374,993
76,904
4,911
1,826
(10,460)
369,444
(140)
78,590
$ 535,090
$
6,911
$ (12,994) $ 529,007
36
3
49
228,543
14,478
(8,819)
(140)
$ 313,820
$ (11,353)
4
—
4
19,655
(1,641)
—
—
$
19,655
$
(1,641)
During 2014, ASB sold all of the municipal bonds held in its investment securities portfolio.
ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2014,
represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to rising interest rates
relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The
gross unrealized losses reported for mortgage-related securities are backed by the full faith and credit guaranty of the United
States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its
amortized cost basis. ASB did not recognize OTTI for 2014, 2013 and 2012.
U.S. Treasury and federal agency obligations have contractual terms to maturity. Mortgage-related securities have
contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ
from contractual maturities because borrowers have the right to prepay the underlying mortgages.
134
The contractual maturities of available-for-sale investment securities were as follows:
December 31, 2014
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-related securities-FNMA,FHLMC and GNMA
Total available-for-sale securities
Amortized
Cost
$
— $
34,953
47,131
37,423
119,507
430,120
Fair
value
—
35,007
47,885
36,668
119,560
430,834
$
549,627
$
550,394
The proceeds, gross gains and losses from sales of available-for-sale investment securities were as follows:
Years ended December 31
(in millions)
Proceeds
Gross gains
Gross losses
Interest income from taxable and non-taxable investment securities were as follows:
Years ended December 31
(in thousands)
Taxable
Non-taxable
2014
2013
2012
$
79.6
$
71.4
$
2.8
—
1.2
—
3.5
—
—
2014
2013
2012
$ 11,666
$ 11,474
$ 12,309
279
1,621
1,513
$ 11,945
$ 13,095
$ 13,822
ASB pledged securities with a market value of approximately $88.6 million and $87.1 million as of December 31, 2014
and 2013, respectively, as collateral for public funds deposits, automated clearinghouse transactions with Bank of Hawaii, and
deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2014 and 2013,
securities with a carrying value of $230.2 million and $187.1 million, respectively, were pledged as collateral for securities sold
under agreements to repurchase.
Stock in FHLB of Seattle. As of December 31, 2014 and 2013, ASB’s stock in FHLB of Seattle was carried at cost ($69.3
million and $92.5 million, respectively) because it can only be redeemed at par and it is a required investment based on
measurements of ASB’s capital, assets and borrowing levels. Periodically and as conditions warrant, ASB reviews its
investment in the stock of the FHLB of Seattle for impairment. ASB evaluated its investment in FHLB stock for OTTI as of
December 31, 2014, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2014 based on its evaluation
of the underlying investment, including:
•
•
•
•
•
•
the net income and growth in retained earnings recorded by the FHLB of Seattle in the first nine months of 2014;
compliance by the FHLB of Seattle with all of its regulatory capital requirements and being classified “adequately
capitalized” by the Federal Housing Finance Agency (Finance Agency);
being allowed by the Finance Agency to repurchase excess stock;
commitments by the FHLB of Seattle to make payments required by law or regulation and the level of such payments
in relation to the operating performance of the FHLB of Seattle;
the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB of
Seattle;
the liquidity position of the FHLB of Seattle; and
• ASB’s intent and assessment of whether it will more likely than not be required to sell the FHLB stock before recovery
of its par value.
Deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.
135
Loans receivable.
The components of loans receivable were summarized as follows:
December 31
(in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Total real estate
Commercial
Consumer
Total loans
Less: Deferred fees and discounts
Allowance for loan losses
Total loans, net
2014
2013
$
2,044,205
$
2,006,007
531,917
818,815
16,240
96,438
18,961
440,443
739,331
16,176
52,112
12,774
3,526,576
3,266,843
791,757
122,656
783,388
108,722
4,440,989
4,158,953
(6,338)
(45,618)
(8,724)
(40,116)
$
4,389,033
$
4,110,113
The Company’s policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the
property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential
properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. The
Company is subject to the risk that the insurance company cannot satisfy the Company’s claim on policies.
ASB services real estate loans for investors (principal balance of $1.4 billion, $1.4 billion and $1.3 billion as of
December 31, 2014, 2013 and 2012, respectively), which are not included in the accompanying consolidated balance sheets
data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and
charges loan servicing cost to expense as incurred.
As of December 31, 2014 and 2013, ASB had pledged loans with an amortized cost of approximately $1.9 billion and $1.7
billion, respectively, as collateral to secure advances from the FHLB of Seattle.
As of December 31, 2014 and 2013, the aggregate amount of loans to directors and executive officers of ASB and its
affiliates and any related interests (as defined in Federal Reserve Board (FRB) Regulation O) of such individuals, was $49.6
million and $45.8 million, respectively. The $3.8 million increase in such loans in 2014 was attributed to new commitments and
loans of $6.4 million to new and existing directors and executive officers, offset by closed lines of credits and repayments of
$2.6 million. As of December 31, 2014 and 2013, $46.2 million and $40.5 million of the loan balances, respectively, were to
related interests of individuals who are directors of ASB. All such loans were made at ASB’s normal credit terms. Management
believes these loans do not represent more than a normal risk of collection.
Allowance for loan losses. As discussed in Note 1, ASB must maintain an allowance for loan losses that is adequate to absorb
estimated probable credit losses associated with its loan portfolio.
136
The allowance for loan losses (balances and changes) and financing receivables were as follows:
Residential
1-4 family
Commercial
real estate
Home equity
line of credit
Residential
land
Commercial
construction
Residential
construction
Commercial
Consumer
Unallo-
cated
Total
(in thousands)
December 31, 2014
Allowance for loan losses:
Beginning balance
$
5,534
$
5,059
$
5,229
$
1,817
$
2,397
$
(987)
1,180
(1,065)
—
—
3,895
(196)
752
1,197
(81)
469
(330)
—
—
3,074
4,662
$
8,954
$
6,982
$
1,875
$
5,471
$
19
—
—
9
28
$
15,803
$
2,367
$
1,891
$
40,116
(1,872)
(2,414)
1,636
(1,550)
889
2,787
—
—
(1,891)
(5,550)
4,926
6,126
$
14,017
$
3,629
$
— $
45,618
951
$
1,845
$
46
$
1,057
$
— $
— $
760
$
6
$
4,665
Ending balance
$ 2,044,205
3,711
$
$
7,109
531,917
$
$
6,936
818,815
$
$
818
16,240
$
$
5,471
96,438
$
$
28
$
13,257
$
3,623
$
— $
40,953
18,961
$
791,757
$ 122,656
$ 4,440,989
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
December 31, 2013
Allowance for loan losses:
$
22,981
$
5,112
$
779
$
7,850
$
— $
— $
13,108
$
16
$
49,846
$ 2,021,224
$
526,805
$
818,036
$
8,390
$
96,438
$
18,961
$
778,649
$ 122,640
$ 4,391,143
Beginning balance
$
6,068
$
2,965
$
4,493
$
4,275
$
2,023
$
(1,162)
1,881
(1,253)
—
—
2,094
(782)
358
1,160
(485)
868
(2,841)
—
—
374
5,534
$
5,059
$
5,229
$
1,817
$
2,397
$
9
—
—
10
19
$
15,931
$
4,019
$
2,202
$
41,985
(3,056)
(2,717)
1,089
1,839
630
435
—
—
(311)
(8,202)
4,826
1,507
$
15,803
$
2,367
$
1,891
$
40,116
642
$
1,118
$
— $
1,332
$
— $
— $
2,246
$
—
$
5,338
Charge-offs
Recoveries
Provision
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Financing Receivables:
$
$
$
Charge-offs
Recoveries
Provision
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Financing Receivables:
$
$
$
Ending balance
$ 2,006,007
4,892
$
$
3,941
440,443
$
$
5,229
739,331
$
$
485
16,176
$
$
2,397
52,112
$
$
19
$
13,557
$
2,367
$
1,891
$
34,778
12,774
$
783,388
$ 108,722
$ 4,158,953
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
$
20,317
$
4,604
$
1,179
$
10,577
$
— $
— $
21,225
$
19
$
57,921
$ 1,985,690
$
435,839
$
738,152
$
5,599
$
52,112
$
12,774
$
762,163
$ 108,703
$ 4,101,032
Changes in the allowance for loan losses were as follows:
(dollars in thousands)
Allowance for loan losses, January 1
Provision for loan losses
Charge-offs, net of recoveries
Real estate loans
Other loans
Net charge-offs
Allowance for loan losses, December 31
Ratio of net charge-offs to average total loans
2014
2013
2012
$
40,116
$
41,985
$
37,906
6,126
1,507
12,883
(1,137)
1,761
624
(678)
4,054
3,376
3,828
4,976
8,804
$
45,618
$
40,116
$
41,985
0.01%
0.09%
0.24%
Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management
with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The
objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so
that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include
commercial, commercial real estate and commercial construction loans.
137
Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that
loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The
AQR is a function of the PD Model rating, the LGD, and possible non-model factors which impact the ultimate collectability of
the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens, and major changes
in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity
of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left
uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified
Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The credit risk profile by internally assigned grade for loans was as follows:
December 31
(in thousands)
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
2014
2013
Commercial
real estate
Commercial
construction
Commercial
Commercial
real estate
Commercial
construction
Commercial
$
493,105
$
79,312
$
743,334
$
375,217
$
52,112
$
703,053
5,209
33,603
—
—
—
17,126
—
—
16,095
31,665
663
—
33,436
28,020
3,770
—
—
—
—
—
17,634
59,663
3,038
—
$
531,917
$
96,438
$
791,757
$
440,443
$
52,112
$
783,388
The credit risk profile based on payment activity for loans was as follows:
(in thousands)
December 31, 2014
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total loans
December 31, 2013
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total loans
30-59
days
past due
60-89
days
past due
Greater
than
90 days
Total
past due
Current
Total
financing
receivables
Recorded
Investment>
90 days and
accruing
$
6,124
$
1,732
$
12,632
$
20,488
$ 2,023,717
$
2,044,205
$
$
$
—
1,341
—
—
—
699
829
—
501
—
—
—
145
333
—
194
—
—
—
569
403
—
2,036
—
—
—
1,413
1,565
531,917
816,779
16,240
96,438
18,961
790,344
121,091
531,917
818,815
16,240
96,438
18,961
791,757
122,656
8,993
$
2,711
$
13,798
$
25,502
$ 4,415,487
$
4,440,989
$
2,728
$
622
$
15,411
$
18,761
$ 1,987,246
$
2,006,007
$
—
765
184
—
—
1,668
436
—
312
48
—
—
612
158
3,770
960
2,756
—
—
3,026
304
3,770
2,037
2,988
—
—
5,306
898
436,673
737,294
13,188
52,112
12,774
778,082
107,824
440,443
739,331
16,176
52,112
12,774
783,388
108,722
$
5,781
$
1,752
$
26,227
$
33,760
$ 4,125,193
$
4,158,953
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
138
The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due, and TDR loans was as follows:
December 31
(in thousands)
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total nonaccrual loans
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total accruing loans 90 days or more past due
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total troubled debt restructured loans not included above
2014
2013
$
$
$
$
$
$
19,253
$
5,112
1,087
720
—
—
10,053
661
36,886
$
— $
—
—
—
—
—
—
—
— $
13,525
$
—
480
7,130
—
—
2,972
—
24,107
$
19,679
4,439
2,060
3,161
—
—
18,781
401
48,521
—
—
—
—
—
—
—
—
—
9,744
—
171
7,476
—
—
1,649
—
19,040
139
The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
December 31
(in thousands)
Recorded
investment
Unpaid
principal
balance
2014
Related
Allow-
ance
Average
recorded
investment
Interest
income
recognized*
Recorded
investment
Unpaid
principal
balance
2013
Related
allow-
ance
Average
recorded
investment
Interest
income
recognized*
With no related allowance
recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
With an allowance recorded
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
Total
Real estate:
$
11,654
$ 12,987
$ — $
9,056
$
227
$
9,708
$ 12,144
$ — $ 11,674
$
386
571
363
626
606
2,344
3,200
—
—
—
—
8,235
11,471
—
—
23,167
28,890
11,327
11,347
4,541
416
5,506
—
—
4,873
16
4,541
420
5,584
—
—
5,211
16
—
—
—
—
—
—
—
—
951
1,845
46
1,057
—
—
760
6
194
402
2,728
—
—
5,204
8
17,592
8,822
3,415
132
6,415
—
—
12,089
9
—
5
172
—
—
38
—
—
672
2,622
—
—
3,466
19
—
1,227
3,612
—
—
4,715
19
442
16,487
21,717
—
—
—
—
—
—
—
—
419
478
6
484
—
—
438
—
6,216
4,604
—
7,452
—
—
6,236
4,686
—
642
1,118
—
7,623
1,332
—
—
—
—
17,759
20,640
2,246
15,635
—
—
—
—
802
623
6,675
—
—
4,837
20
24,631
6,455
5,745
—
6,844
—
—
—
2
482
—
—
12
—
882
372
152
—
409
—
—
139
—
26,679
27,119
4,665
30,882
1,825
36,031
39,185
5,338
34,679
1,072
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
22,981
24,334
5,112
779
7,850
—
—
5,167
1,026
8,784
—
—
13,108
16,682
16
16
951
1,845
46
1,057
—
—
760
6
17,878
3,609
534
9,143
—
—
17,293
17
646
478
11
656
—
—
476
—
15,924
18,380
4,604
672
4,686
1,227
642
1,118
—
18,129
6,547
623
10,074
11,235
1,332
13,519
—
—
—
—
—
—
—
—
21,225
25,355
2,246
20,472
19
19
—
20
758
152
2
891
—
—
151
—
$
49,846
$ 56,009
$ 4,665
$ 48,474
$
2,267
$
52,518
$ 60,902
$ 5,338
$ 59,310
$
1,954
* Since loan was classified as impaired.
Troubled debt restructurings. A loan modification is deemed to be a TDR when ASB grants a concession it would not
otherwise consider were it not for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails to
make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the
loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed
borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated
both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or
liquidation with the goal of minimizing losses to ASB and maximizing recovery.
ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended
amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants
principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction,
extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance.
Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment
due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the
payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan
modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral of
140
principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally,
additional collateral and/or guaranties are obtained.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the
allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash
flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell, or (3) observable
market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the
modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses),
these amounts are charged off against the allowance for loan losses.
Loan modifications that occurred during 2014 and 2013 were as follows:
Years ended December 31
(dollars in thousands)
Troubled debt restructurings
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
2014
Outstanding recorded
investment
Pre-
modification
Post-
modification
Number
of
contracts
Net
increase in
ALLL (as
of period
end)
Number
of
contracts
2013
Outstanding recorded
investment
Pre-
modification
Post-
modification
Net
increase in
ALLL (as
of period
end)
38
—
8
18
—
—
7
—
71
$
10,680
$
10,737
$
163
—
502
4,304
—
—
3,827
—
—
502
4,304
—
—
3,827
—
—
42
242
—
—
13
—
$
19,313
$
19,370
$
460
34
—
5
20
—
—
7
—
66
$
8,876
$
8,957
$
297
—
637
6,215
—
—
4,646
—
—
390
6,206
—
—
4,646
—
—
—
131
—
—
94
—
$
20,374
$
20,199
$
522
Loans modified in TDRs that experienced a payment default of 90 days or more in 2014 and 2013, and for which the
payment default occurred within one year of the modification, were as follows:
Years ended December 31
(dollars in thousands)
Troubled debt restructurings that subsequently defaulted
2014
2013
Number of
contracts
Recorded
investment
Number of
contracts
Recorded
investment
Real estate:
Residential 1-4 family
Commercial real estate
Home equity line of credit
Residential land
Commercial construction
Residential construction
Commercial
Consumer
1
—
—
—
—
—
1
—
2
$
390
— $
—
—
—
—
—
14
—
$
404
—
1
—
—
—
2
—
3
$
—
—
67
—
—
—
660
—
727
If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation,
adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the
carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been impaired or
modified in TDRs totaled $0.5 million at December 31, 2014.
Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-
sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests
in these sales, but may retain the servicing rights of the loans sold.
ASB received $155.0 million, $273.8 million, and $513.0 million of proceeds from the sale of residential mortgages in
2014, 2013, and 2012, respectively, and recognized gains on such loans of $2.9 million, $8.3 million, and $14.6 million in
141
2014, 2013, and 2012, respectively. Repurchased mortgage loans in 2014, 2013, and 2012 were $0.5 million, $1.9 million and
$0.4 million, respectively.
Mortgage servicing fees, a component of other income, net, were $3.5 million, $3.3 million, and $2.8 million for the years
ended December 31, 2014, 2013 and 2012, respectively.
Changes in carrying value of mortgage servicing rights were as follows:
(in thousands)
December 31, 2014
December 31, 2013
Gross
carrying amount
Accumulated
amortization
Valuation allowance
Net
carrying amount
$
$
27,185
25,644
$
$
(15,436) $
(13,706) $
(209) $
(251) $
11,540
11,687
Changes related to mortgage servicing rights were as follows:
(in thousands)
Mortgage servicing rights
Balance, January 1
Amount capitalized
Amortization
Other-than-temporary impairment
Carrying amount before valuation allowance, December 31
Valuation allowance for mortgage servicing rights
Balance, January 1
Provision (recovery)
Other-than-temporary impairment
Balance, December 31
Net carrying value of mortgage servicing rights
2014
2013
2012
$
$ 11,938
1,637
(1,731)
(95)
11,749
$ 11,316
2,611
(1,802)
(187)
11,938
8,402
4,845
(1,750)
(181)
11,316
251
53
(95)
209
$ 11,540
498
(60)
(187)
251
$ 11,687
175
504
(181)
498
$ 10,818
The estimated aggregate amortization expenses of mortgage servicing rights for 2015, 2016, 2017, 2018 and 2019 are $1.7
million, $1.5 million, $1.3 million, $1.1 million and $1.0 million, respectively.
ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale
with servicing rights retained. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising
interest rates typically result in slower prepayment speeds in the loans being serviced for others which increases the value of
mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value
of mortgage servicing rights and increase the amortization of the mortgage servicing rights.
Key assumptions used in estimating the fair value of ASB’s mortgage servicing rights were as follows:
December 31
(dollars in thousands)
Unpaid principal balance
Weighted average note rate
Weighted average discount rate
Weighted average prepayment speed
2014
2013
$
1,391,030
$
1,357,003
4.07%
9.6%
9.5%
4.07%
9.8%
8.6%
142
The sensitivity analysis of fair value of MSR to hypothetical adverse changes of 25 and 50 basis points in certain key
assumptions was as follows:
December 31
(in thousands)
Prepayment rate:
25 basis points adverse rate change
50 basis points adverse change
Discount rate:
25 basis points adverse rate change
50 basis points adverse change
2014
2013
$
(757) $
(1,524)
(140)
(278)
(732)
(1,492)
(154)
(306)
The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This
analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair
value of MSRs typically is not linear.
Deposit liabilities. The summarized components of deposit liabilities were as follows:
December 31
(dollars in thousands)
Savings
Checking
Interest-bearing
Noninterest-bearing
Commercial checking
Money market
Term certificates
2014
Weighted-
average
stated rate
Amount
2013
Weighted-
average
stated rate
Amount
0.06% $
1,923,062
0.06% $
1,826,907
0.02
—
—
0.12
0.83
768,787
665,005
677,789
158,010
430,762
0.02
—
—
0.13
0.80
721,700
643,628
570,790
182,546
426,906
0.11% $
4,623,415
0.11% $
4,372,477
As of December 31, 2014 and 2013, term certificates of $100,000 or more totaled $120 million and $102 million,
respectively.
The approximate scheduled maturities of term certificates outstanding at December 31, 2014 were as follows:
(in thousands)
2015
2016
2017
2018
2019
Thereafter
Interest expense on deposit liabilities by type of deposit was as follows:
Years ended December 31
(in thousands)
Term certificates
Savings
Money market
Interest-bearing checking
143
$
$
255,896
55,614
44,315
16,949
54,979
3,009
430,762
2014
2013
2012
$
3,603
$
3,702
$
1,134
214
126
1,052
232
106
4,865
1,128
319
111
$
5,077
$
5,092
$
6,423
Other borrowings.
Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are accounted for as
financing transactions and the obligations to repurchase these securities are recorded as liabilities in the balance sheet. All such
agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either
party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The
following tables present information about the securities sold under agreements to repurchase, including the related collateral
received from or pledged to counterparties:
(in millions)
Repurchase agreements
December 31, 2014
December 31, 2013
(in millions)
December 31, 2014
Financial institution
Government entities
Commercial account holders
Total
December 31, 2013
Financial institution
Commercial account holders
Total
Gross amount of
recognized liabilities
Gross amount
offset in the
Balance Sheet
Net amount of
liabilities presented
in the Balance Sheet
$
$
191
145
— $
—
191
145
Gross amount not offset in the Balance Sheet
Net amount of
liabilities presented
in the Balance Sheet
Financial
instruments
Cash
collateral
pledged
Net amount
$
$
$
$
$
50
56
85
50
56
85
$
— $
—
—
191
$
191
$
— $
$
51
94
145
$
$
51
94
145
$
— $
—
— $
—
—
—
—
—
—
—
The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry
into the counterparties’ accounts and segregated safekeeping accounts at the FHLB of Seattle. Securities sold under agreements
to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as
liabilities in the consolidated balance sheets. The securities underlying the agreements to repurchase continue to be reflected in
ASB’s asset accounts.
Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical
securities, was as follows:
(dollars in millions)
Amount outstanding as of December 31
Average amount outstanding during the year
Maximum amount outstanding as of any month-end
Weighted-average interest rate as of December 31
Weighted-average interest rate during the year
Weighted-average remaining days to maturity as of December 31
$
$
$
$
$
$
2014
191
155
195
1.45%
1.67%
343
2013
2012
145
147
151
1.75%
1.74%
367
$
$
$
146
173
189
1.74%
1.56%
489
144
As of December 31, 2014, securities sold under agreements to repurchase were summarized as follows:
Maturity
(dollars in thousands)
Overnight
1 to 29 days
30 to 90 days
Over 90 days
Repurchase
liability
Weighted-
average
interest rate
Collateralized by
mortgage-related
securities and federal
agency obligations at
fair value plus
accrued interest
$
84,758
0.15% $
114,883
—
—
1
105,898
190,656
$
—
—
2.50
1.45% $
—
—
115,842
230,725
1
$50.3 million callable quarterly at par until maturity in 2016.
Advances from Federal Home Loan Bank.
FHLB advances are fixed rate for a specific term and consist of the following:
December 31, 2014
(dollars in thousands)
Due in
2015
2016
2017
2018
2019
Thereafter
Weighted-average
stated rate
Amount
—% $
—
—
4.28
1.95
—
—
—
50,000 1
50,000
—
—
3.12% $ 100,000
1 Callable quarterly at par until maturity in 2017.
ASB and the FHLB of Seattle are parties to an Advances, Security and Deposit Agreement (Advances Agreement), which
applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the
FHLB of Seattle makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the
FHLB of Seattle’s credit policies, and makes certain warranties and representations to the FHLB of Seattle. Upon the
occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or
principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other
credit arrangements between the parties), the FHLB of Seattle may, at its option, declare all indebtedness and accrued interest
thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB of Seattle are
collateralized by loans and stock in the FHLB of Seattle. As of December 31, 2014 and 2013, ASB’s available FHLB of Seattle
borrowing capacity was $1.2 billion and $1.1 billion, respectively. ASB is required to obtain and hold a specific number of
shares of capital stock of the FHLB of Seattle. ASB was in compliance with all Advances Agreement requirements as of
December 31, 2014 and 2013.
Common stock equity. In 1988, HEI agreed with the OTS predecessor regulatory agency at the time, to contribute additional
capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital Maintenance Agreement). As of
December 31, 2014, as a result of capital contributions in prior years, HEI’s maximum obligation to contribute additional
capital under the Capital Maintenance Agreement has been reduced to approximately $28.3 million. As of December 31, 2014,
ASB was in compliance with the minimum capital requirements under OCC regulations.
In 2014, ASB paid cash dividends of $36 million to HEI, compared to cash dividends of $40 million in 2013. The FRB and
OCC approved the dividends.
Related-party transactions. HEI charged ASB $2.3 million, $2.3 million and $1.9 million for general management and
administrative services in 2014, 2013 and 2012, respectively. The amounts charged by HEI for services performed by HEI
employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services.
145
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward
commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest
rate and pricing risk associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a
specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be
held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose
ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage
interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are
carried at fair value with changes recorded in mortgage banking income.
ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and
closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed
securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory
delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is
utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with
changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair
value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will
fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
December 31
(in thousands)
Interest rate lock commitments
Forward commitments
2014
2013
Notional amount
Fair value
Notional amount
Fair value
$
29,330
$
32,833
390
$
(106)
25,070
$
26,018
464
139
ASB’s derivative financial instruments, their fair values, and balance sheet location were as follows:
Derivative Financial Instruments Not Designated
as Hedging Instruments 1
December 31
(in thousands)
Interest rate lock commitments
Forward commitments
2014
2013
Asset
derivatives
Liability
derivatives
Asset
derivatives
Liability
derivatives
$
$
393
5
398
$
$
3
111
114
$
$
488
141
629
$
$
24
2
26
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.
The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses
recognized in the statements of income:
Derivative Financial Instruments Not Designated
as Hedging Instruments
Location of net gains
(losses) recognized in
Years ended December 31
(in thousands)
Interest rate lock commitments
Forward commitments
the Statements of Income
2014
2013
2012
Mortgage banking income
Mortgage banking income
$
$
(74) $
(245)
(319) $
464
139
603
$
$
—
—
—
There were no significant gains or losses on derivatives in 2012.
Commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the commitments. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company minimizes its exposure to loss under
these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if
146
any, is based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and
property, plant and equipment.
Letters of credit are conditional commitments issued by the Company to guarantee payment and performance of a customer
to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary.
The following is a summary of outstanding off-balance sheet arrangements:
December 31
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit
Commercial and commercial real estate
Consumer
Residential 1-4 family
Commercial and financial standby letters of credit
Total
2014
2013
$
$
1,089,633
526,133
56,312
20,524
20,082
1,712,684
$
$
1,011,334
527,987
58,080
14,241
15,747
1,627,389
Guarantees. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of
Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part
of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial
responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving
Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa
over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade
organizations filed a notice of appeal shortly after the approval was issued. As of December 31, 2014, ASB had accrued a
reserve of $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely
upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.
Contingencies. In March 2011, a purported class action lawsuit was filed in the First Circuit Court of the state of Hawaii by a
customer who claimed that ASB had improperly charged overdraft fees on debit card transactions. ASB filed a motion to
dismiss the lawsuit on the basis that ASB’s overdraft practices are governed by federal regulations established for federal
savings banks which preempt the customer’s state law claims. In July 2011, the Circuit Court denied ASB's motion without
prejudice and ASB appealed that decision. ASB's appeal is pending before the Hawaii Supreme Court. However, in December
2014, through a voluntary mediation process, ASB reached a tentative settlement of the claims. The tentative settlement, which
remains subject to final court approval, provides for a payment of $2.0 million into a class settlement fund, the proceeds of
which will be used to refund class members and pay attorneys’ fees and administrative and other costs, in exchange for a
complete release of all claims asserted against ASB. As of December 2014, the $2.0 million tentative settlement amount was
fully reserved by ASB.
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.
Federal Deposit Insurance Corporation assessment. In February 2011, the Federal Deposit Insurance Corporation (FDIC)
finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity,
as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were
reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category.
Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was
effective April 1, 2011. For the years ended December 31, 2014 and 2013, ASB’s FDIC insurance assessments were $3.0
million and $2.9 million, respectively. The FDIC may impose special assessments in the future if it is deemed necessary to
ensure the Deposit Insurance Fund ratio does not decline to a level that is close to zero or that could otherwise undermine
public confidence in federal deposit insurance.
147
6 · Unconsolidated variable interest entities
HECO Capital Trust III. Trust III was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000
6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate
liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian
Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal
amount of $31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million,
(iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto.
The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034,
which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without
premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian
Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric
under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the
Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense
agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of
amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric.
Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not absorb the majority of the variability of
Trust III, Hawaiian Electric is not the primary beneficiary and does not consolidate Trust III in accordance with accounting
rules on the consolidation of VIEs. Trust III’s balance sheet as of December 31, 2014 consisted of $51.5 million of 2004
Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income
statement for 2014 consisted of $3.4 million of interest income received from the 2004 Debentures; $3.3 million of
distributions to holders of the Trust Preferred Securities; and $0.1 million of common dividends on the trust common securities
to Hawaiian Electric. So long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive
any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common
securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or
under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004
Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of
dividends on its common stock.
Power purchase agreements. As of December 31, 2014, the Utilities had seven PPAs for firm capacity and other PPAs with
smaller IPPs and Schedule Q providers (i.e., customers with cogeneration and/or small power production facilities with a
capacity of 100 kilowatts (kWs) or less who buy power from or sell power to the Utilities), none of which are currently
required to be consolidated as VIEs. Approximately 90% of the firm capacity is purchased from AES Hawaii, Inc. (AES
Hawaii), Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (HEP) and HPOWER. Purchases from all IPPs
were as follows:
Years ended December 31
(in millions)
AES Hawaii
Kalaeloa
HEP
HPOWER
Other IPPs
Total IPPs
2014
2013
2012
$
$
145
279
51
66
181
722
$
$
134
301
51
61
164
711
$
$
146
310
65
65
138
724
Some of the IPPs provided sufficient information for Hawaiian Electric to determine that the IPP was not a VIE, or was
either a “business” or “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Other
IPPs, including the three largest, declined to provide the information necessary for Hawaiian Electric to determine the
applicability of accounting standards for VIEs.
Since 2004, Hawaiian Electric has continued its efforts to obtain from the IPPs the information necessary to make the
determinations required under accounting standards for VIEs. In each year from 2005 to 2014, the Utilities sent letters to the
identified IPPs requesting the required information. All of these IPPs declined to provide the necessary information, except that
Kalaeloa later agreed to provide the information pursuant to the amendments to its PPA (see below) and an entity owning a
wind farm provided information as required under its PPA. Management has concluded that the consolidation of two entities
owning wind farms was not required as Hawaii Electric Light and Maui Electric do not have variable interests in the entities
because the PPAs do not require them to absorb any variability of the entities.
148
If the requested information is ultimately received from the remaining IPPs, a possible outcome of future analyses of such
information is the consolidation of one or more of such IPPs in the Consolidated Financial Statements. The consolidation of
any significant IPP could have a material effect on the Consolidated Financial Statements, including the recognition of a
significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity,
the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of
such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs.
Kalaeloa Partners, L.P. In October 1988, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved by
the PUC, which provided that Hawaiian Electric would purchase 180 MW of firm capacity for a period of 25 years beginning
in May 1991. In October 2004, Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently approved by
the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that Hawaiian
Electric makes to Kalaeloa include: (1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil,
(2) a fuel additives cost component, and (3) a non-fuel component, with an adjustment based on changes in the Gross National
Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to Kalaeloa are fixed in accordance with
the PPA. Kalaeloa also has a steam delivery cogeneration contract with another customer, the term of which coincides with the
PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public
Utility Regulatory Policies Act of 1978.
Pursuant to the current accounting standards for VIEs, Hawaiian Electric is deemed to have a variable interest in Kalaeloa
by reason of the provisions of Hawaiian Electric’s PPA with Kalaeloa. However, management has concluded that Hawaiian
Electric is not the primary beneficiary of Kalaeloa because Hawaiian Electric does not have the power to direct the activities
that most significantly impact Kalaeloa’s economic performance nor the obligation to absorb Kalaeloa’s expected losses, if any,
that could potentially be significant to Kalaeloa. Thus, Hawaiian Electric has not consolidated Kalaeloa in its consolidated
financial statements. A significant factor affecting the level of expected losses Hawaiian Electric could potentially absorb is the
fact that Hawaiian Electric’s exposure to fuel price variability is limited to the remaining term of the PPA as compared to the
facility’s remaining useful life. Although Hawaiian Electric absorbs fuel price variability for the remaining term of the PPA, the
PPA does not currently expose Hawaiian Electric to losses as the fuel and fuel related energy payments under the PPA have
been approved by the PUC for recovery from customers through base electric rates and through Hawaiian Electric’s ECAC to
the extent the fuel and fuel related energy payments are not included in base energy rates. As of December 31, 2014, Hawaiian
Electric’s accounts payable to Kalaeloa amounted to $13 million.
149
7 · Short-term borrowings
As of December 31, 2014 and 2013, HEI had $119 million and $105 million of outstanding commercial paper,
respectively, with a weighted-average interest rate of 0.7% and 0.7%, respectively, and Hawaiian Electric had no commercial
paper outstanding.
As of December 31, 2014, HEI and Hawaiian Electric each maintained a syndicated credit facility of $150 million and
$200 million, respectively. Both HEI and Hawaiian Electric had no borrowings under its facility during 2014 and 2013. None
of the facilities are collateralized.
Credit agreements.
HEI. On April 2, 2014, HEI and a syndicate of nine financial institutions entered into an amended and restated revolving
non-collateralized credit agreement (HEI Facility). The HEI Facility increased HEI’s line of credit to $150 million from $125
million, extended the term of the facility to April 2, 2019, and provided improved pricing compared to HEI’s prior facility.
Under the HEI Facility, draws would generally bear interest, based on HEI’s current long-term credit ratings, at the “Adjusted
LIBO Rate,” as defined in the agreement, plus 137.5 basis points and annual fees on undrawn commitments of 20 basis points.
The HEI Facility contains updated provisions for pricing adjustments in the event of a long-term ratings change based on the
HEI Facility’s ratings-based pricing grid. Certain modifications were made to incorporate some updated terms and conditions
customary for facilities of this type. In addition, the HEI Consolidated Net Worth covenant, as defined in the original facility,
was removed from the HEI Facility, leaving only one financial covenant (relating to HEI’s ratio of funded debt to total
capitalization, each on a non-consolidated basis). Under the credit agreement, it is an event of default if HEI fails to maintain
an unconsolidated “Capitalization Ratio” (funded debt) of 50% or less (actual ratio of 19% as of December 31, 2014, as
calculated under the agreement) or if HEI no longer owns Hawaiian Electric. The HEI Facility does not contain clauses that
would affect access to the facility by reason of a ratings downgrade, nor does it have broad “material adverse change” clauses,
but it continues to contain customary conditions which must be met in order to draw on it, including compliance with covenants
(such as covenants preventing HEI’s subsidiaries from entering into agreements that restrict the ability of the subsidiaries to
pay dividends to, or to repay borrowings from, HEI).
The facility will be maintained to support the issuance of commercial paper, but also may be drawn to repay HEI’s short-
term and long-term indebtedness, to make investments in or loans to subsidiaries and for HEI’s working capital and general
corporate purposes.
Hawaiian Electric. On April 2, 2014, Hawaiian Electric and a syndicate of nine financial institutions entered into an
amended and restated revolving non-collateralized credit agreement (Hawaiian Electric Facility). The Hawaiian Electric
Facility increased Hawaiian Electric’s line of credit to $200 million from $175 million. In January 2015, the PUC approved
Hawaiian Electric’s request to extend the term of the credit facility to April 2, 2019. The Hawaiian Electric Facility provided
improved pricing compared to its prior facility. Under the Hawaiian Electric Facility, draws would generally bear interest,
based on Hawaiian Electric’s current long-term credit ratings, at the “Adjusted LIBO Rate,” as defined in the agreement, plus
125 basis points and annual fees on undrawn commitments of 17.5 basis points. The Hawaiian Electric Facility contains
updated provisions for pricing adjustments in the event of a long-term ratings change based on the Hawaiian Electric Facility’s
ratings-based pricing grid. Certain modifications were made to incorporate some updated terms and conditions customary for
facilities of this type. The Hawaiian Electric Facility does not contain clauses that would affect access to the facility by reason
of a ratings downgrade, nor does it have broad “material adverse change” clauses, but it continues to contain customary
conditions which must be met in order to draw on it, including compliance with several covenants (such as covenants
preventing its subsidiaries from entering into agreements that restrict the ability of the subsidiaries to pay dividends to, or to
repay borrowings from, Hawaiian Electric, and restricting its ability as well as the ability of any of its subsidiaries to guarantee
additional indebtedness of the subsidiaries if such additional debt would cause the subsidiary’s “Consolidated Subsidiary
Funded Debt to Capitalization Ratio” to exceed 65% (ratio of 41% for Hawaii Electric Light and 42% for Maui Electric as of
December 31, 2014, as calculated under the agreement)). In addition to customary defaults, Hawaiian Electric’s failure to
maintain its financial ratios, as defined in its credit agreement, or meet other requirements may result in an event of default. For
example, under the credit agreement, it is an event of default if Hawaiian Electric fails to maintain a “Consolidated
Capitalization Ratio” (equity) of at least 35% (ratio of 58% as of December 31, 2014, as calculated under the credit agreement),
or if Hawaiian Electric is no longer owned by HEI. Under the proposed Merger Agreement, Hawaiian Electric will become a
wholly-owned subsidiary of NextEra. The terms of the Hawaiian Electric Facility are such that the proposed Merger would
constitute a “Change in Control.” Hawaiian Electric has requested, and the financial institutions providing the Hawaiian
Electric Facility have consented and agreed, that the proposed Merger shall not constitute a “Change in Control,” as defined in
the credit agreement, provided that (i) the Merger is consummated and (ii) Hawaiian Electric becomes and remains a wholly-
owned subsidiary of NextEra.
150
The credit facility will be maintained to support the issuance of commercial paper, but also may be drawn to repay
Hawaiian Electric’s short-term indebtedness, to make loans to subsidiaries and for Hawaiian Electric’s capital expenditures,
working capital and general corporate purposes.
8 · Long-term debt
December 31
(dollars in thousands)
Long-term debt of Utilities 1
HEI term loan LIBOR + .90%, due 2016
HEI medium-term note 6.51%, paid 2014
HEI senior note 4.41%, due 2016
HEI senior note 5.67%, due 2021
HEI senior note 3.99%, due 2023
2014
2013
$
1,206,546
$
1,217,945
125,000
—
75,000
50,000
50,000
—
100,000
75,000
50,000
50,000
$
1,506,546
$
1,492,945
1 See components of “Total long-term debt” and unamortized discount in Hawaiian Electric and subsidiaries’ Consolidated
Statements of Capitalization.
As of December 31, 2014, the aggregate principal payments required on the Company’s long-term debt for 2015 through
2019 are nil in 2015, $200 million in 2016, nil in 2017, $50 million in 2018 and nil in 2019. As of December 31, 2014, the
aggregate payments of principal required on the Utilities' long-term debt for 2015 through 2019 are nil in 2015, 2016, 2017,
$50 million in 2018 and nil in 2019.
The HEI medium-term notes and senior notes contain customary representation and warranties, affirmative and negative
covenants, and events of default (the occurrence of which may result in some or all of the notes then outstanding becoming
immediately due and payable). The HEI senior notes also contain provisions requiring the maintenance by HEI of certain
financial ratios generally consistent with those in HEI’s revolving noncollateralized credit agreement, expiring on April 2,
2019. Upon a change of control or certain dispositions of assets (as defined in the Master Note Purchase Agreement dated
March 24, 2011), HEI is required to offer to prepay the senior notes.
The Utilities’ senior notes contain customary representations and warranties, affirmative and negative covenants, and
events of default (the occurrence of which may result in some or all of the notes of each and all of the utilities then outstanding
becoming immediately due and payable) and provisions requiring the maintenance by Hawaiian Electric, and each of Hawaii
Electric Light and Maui Electric, of certain financial ratios generally consistent with those in Hawaiian Electric’s existing
amended revolving noncollateralized credit agreement, expiring on April 2, 2019 (See Note 7 of the Consolidated Financial
Statements).
May 2014 loan. On May 2, 2014, HEI entered into a loan agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd., Royal
Bank of Canada and U.S. Bank, National Association, which agreement includes substantially the same financial covenant and
customary conditions as the HEI credit agreement described above. On May 2, 2014, HEI drew a $125 million Eurodollar term
loan for a term of two years and at a resetting interest rate ranging from 1.12% to 1.14% through December 31, 2014. The
proceeds from the term loan were used to pay-off $100 million of 6.51% medium term notes at maturity on May 5, 2014, pay
down maturing commercial paper and for general corporate purposes.
9 · Shareholders’ equity
Reserved shares. As of December 31, 2014, HEI had reserved (a) a total of 18,372,187 shares of common stock for future
issuance under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), the Hawaiian Electric Industries Retirement
Savings Plan (HEIRSP), the 1987 Stock Option and Incentive Plan, the HEI 2011 Nonemployee Director Stock Plan, the ASB
401(k) Plan and the 2010 Executive Incentive Plan and (b) a total of 4.7 million shares of common stock for future issuance in
connection with the equity forward transaction described below.
Equity forward transaction. On March 19, 2013, HEI entered into an equity forward transaction in connection with a
public offering on that date of 6.1 million shares of HEI common stock at $26.75 per share. On March 19, 2013, HEI common
stock closed at $27.01 per share. On March 20, 2013, the underwriters exercised their over-allotment option in full and HEI
entered into an equity forward transaction in connection with the resulting additional 0.9 million shares of HEI common stock.
151
The use of an equity forward transaction substantially eliminates future equity market price risk by fixing a common equity
offering sales price under the then existing market conditions, while mitigating immediate share dilution resulting from the
offering by postponing the actual issuance of common stock until funds are needed in accordance with the Company’s capital
investment plans. Pursuant to the terms of these transactions, a forward counterparty borrowed 7 million shares of HEI’s
common stock from third parties and sold them to a group of underwriters for $26.75 per share, less an underwriting discount
equal to $1.00312 per share. Under the terms of the equity forward transactions, to the extent that the transactions are
physically settled, HEI would be required to issue and deliver shares of HEI common stock to the forward counterparty at the
then applicable forward sale price. The forward sale price was initially determined to be $25.74688 per share at the time the
equity forward transactions were entered into, and the amount of cash to be received by HEI upon physical settlement of the
equity forward is subject to certain adjustments in accordance with the terms of the equity forward transactions. Initially, the
equity forward transactions had to be settled fully by March 25, 2015, but an amendment extended this date to December 31,
2015. Except in specified circumstances or events that would require physical settlement, HEI is able to elect to settle the
equity forward transactions by means of physical, cash or net share settlement, in whole or in part, at any time on or prior to
December 31, 2015.
The equity forward transactions had no initial fair value since they were entered into at the then market price of the
common stock. HEI receives proceeds from the sale of common stock when the equity forward transactions are settled and
records the proceeds at that time in equity. HEI concluded that the equity forward transactions were equity instruments based
on the accounting guidance in ASC Topic 480, "Distinguishing Liabilities from Equity," and ASC Topic 815, "Derivatives and
Hedging," and that they qualified for an exception from derivative accounting under ASC Topic 815 because the forward sale
transactions were indexed to its own stock. On December 19, 2013, HEI settled 1.3 million shares under the equity forward for
proceeds of $32.1 million (net of the underwriting discount of $1.3 million), which funds were ultimately used to purchase
Hawaiian Electric shares. On July 14, 2014, HEI settled 1.0 million shares for proceeds of $23.9 million (net of underwriting
discount of $1.0 million), which funds were ultimately used to purchase Hawaiian Electric shares.
At December 31, 2014, the equity forward transactions could have been settled with delivery to the forward counterparty
of (a) 4.7 million shares in exchange for cash of $106 million, (b) cash of approximately $51 million (which amount includes
$5 million of underwriting discount), or (c) approximately 1.5 million shares.
Prior to their settlement, the shares remaining under the equity forward transactions will be reflected in HEI’s diluted EPS
calculations using the treasury stock method. Under this method, the number of shares of HEI’s common stock used in
calculating diluted EPS for a reporting period would be increased by the number of shares, if any, that would be issued upon
physical settlement of the equity forward transactions less the number of shares that could be purchased by HEI in the market
(based on the average market price during that reporting period) using the proceeds receivable upon settlement of the equity
forward transactions (based on the adjusted forward sale price of $22.63 as of December 31, 2014). The excess number of
shares is weighted for the portion of the reporting period in which the equity forward transactions are outstanding.
Accordingly, before physical or net share settlement of the equity forward transactions, and subject to the occurrence of
certain events, HEI anticipates that the forward sale agreement and additional forward sale agreement will have a dilutive effect
on HEI’s EPS only during periods when the applicable average market price per share of HEI’s common stock is above the per
share adjusted forward sale price, as described above. However, if HEI decides to physically or net share settle the forward sale
agreement and additional forward sale agreement, any delivery by HEI of shares upon settlement could result in dilution to
HEI’s EPS.
For 2014 and 2013, the equity forward transactions did not have a material dilutive effect on HEI’s EPS.
Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other
comprehensive income/(loss) (AOCI) were as follows:
152
(in thousands)
HEI Consolidated
Hawaiian Electric
Consolidated
Net unrealized
gains (losses) on
securities
Unrealized
losses on
derivatives
Retirement
benefit plans
AOCI
AOCI -retirement
benefit plans
Balance, December 31, 2011
$
9,886
$
(996) $
(28,027) $ (19,137) $
Current period other comprehensive income (loss)
Balance, December 31, 2012
Current period other comprehensive income (loss)
Balance, December 31, 2013
Current period other comprehensive income (loss)
875
10,761
(14,424)
(3,663)
4,125
236
(760)
235
(525)
236
(8,397)
(7,286)
(36,424)
(26,423)
23,862
(12,562)
(14,989)
9,673
(16,750)
(10,628)
Balance, December 31, 2014
$
462
$
(289) $
(27,551) $ (27,378) $
(32)
(938)
(970)
1,578
608
(563)
45
Reclassifications out of AOCI were as follows:
Amount reclassified from AOCI
Years ended December 31
2014
2013
2012
Affected line item in the Statement of Income
(in thousands)
HEI consolidated
Net realized gains on securities
$
(1,715) $
(738) $
(81) Revenues-bank (net gains on sales of securities)
Derivatives qualified as cash flow hedges
Interest rate contracts (settled in 2011)
236
235
236
Interest expense
Retirement benefit plan items
Amortization of transition obligation, prior
service credit and net losses recognized during
the period in net periodic benefit cost
Less: reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets
11,344
23,280
15,291 See Note 10 for additional details
207,833
(222,595)
75,471 See Note 10 for additional details
Total reclassifications
$ 217,698
$(199,818) $ 90,917
Hawaiian Electric consolidated
Retirement benefit plan items
Amortization of transition obligation, prior
service credit and net losses recognized during
the period in net periodic benefit cost
Less: reclassification adjustment for impact of
D&Os of the PUC included in regulatory
assets
$ 10,212
$ 20,694
$ 13,673 See Note 10 for additional details
207,833
(222,595)
75,471 See Note 10 for additional details
Total reclassifications
$ 218,045
$(201,901) $ 89,144
153
10 · Retirement benefits
Defined benefit plans. Substantially all of the employees of HEI and the Utilities participate in the Retirement Plan for
Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI Pension Plan). Substantially all of the
employees of ASB and its subsidiaries participated in the American Savings Bank Retirement Plan (ASB Pension Plan) until it
was frozen on December 31, 2007. The HEI Pension Plan and the ASB Pension Plan (collectively, the Plans) are qualified,
noncontributory defined benefit pension plans and include, in the case of the HEI Pension Plan, benefits for utility union
employees determined in accordance with the terms of the collective bargaining agreements between the Utilities and the
union. The Plans are subject to the provisions of ERISA. In addition, some current and former executives and directors of HEI
and its subsidiaries participate in noncontributory, nonqualified plans (collectively, Supplemental Plans). In general, benefits
are based on the employees’ or directors’ years of service and compensation.
The continuation of the Plans and the Supplemental Plans and the payment of any contribution thereunder are not assumed
as contractual obligations by the participating employers. The Supplemental Plan for directors has been frozen since 1996. The
ASB Pension Plan was frozen as of December 31, 2007. The HEI Supplemental Executive Retirement Plan and ASB
Supplemental Executive Retirement, Disability, and Death Benefit Plan (noncontributory, nonqualified, defined benefit plans)
were frozen as of December 31, 2008. No participants have accrued any benefits under these plans after the respective plan’s
freeze and the plans will be terminated at the time all remaining benefits have been paid.
Each participating employer reserves the right to terminate its participation in the applicable plans at any time, and HEI
and ASB reserve the right to terminate their respective plans at any time. If a participating employer terminates its participation
in the Plans, the interest of each affected participant would become 100% vested to the extent funded. Upon the termination of
the Plans, assets would be distributed to affected participants in accordance with the applicable allocation provisions of ERISA
and any excess assets that exist would be paid to the participating employers. Participants’ benefits in the Plans are covered up
to certain limits under insurance provided by the Pension Benefit Guaranty Corporation.
To determine pension costs for HEI and its subsidiaries under the Plans and the Supplemental Plans, it is necessary to make
complex calculations and estimates based on numerous assumptions, including the assumptions identified under “Defined
benefit pension and other postretirement benefit plans information” below.
Postretirement benefits other than pensions. HEI and the Utilities provide eligible employees health and life insurance
benefits upon retirement under the Postretirement Welfare Benefits Plan for Employees of Hawaiian Electric Company, Inc.
and participating employers (Hawaiian Electric Benefits Plan). Eligibility of employees and dependents are based on eligibility
to retire at termination, the retirement date and the date of hire. The plan was amended in 2011, changing eligibility for certain
bargaining unit employees hired prior to May 1, 2011, based on new minimum age and service requirements effective
January 1, 2012, per the collective bargaining agreement, and certain management employees hired prior to May 1, 2011 based
on new eligibility minimum age and service requirements effective January 1, 2012. The minimum age and service
requirements for management and bargaining unit employees hired May 1, 2011 and thereafter have increased and their
dependents are not eligible to receive postretirement benefits. Employees may be eligible to receive benefits from the HEI
Pension Plan but may not be eligible for postretirement welfare benefits if the different eligibility requirements are not met.
The executive death benefit plan was frozen on September 10, 2009 to participants and benefit levels as of that date. The
electric discount was eliminated for management employees and retirees of Hawaiian Electric in August 2009, Hawaii Electric
Light in November 2010, and Maui Electric in August 2010, and for bargaining unit employees and retirees on January 31,
2011 per the collective bargaining agreement.
The Company’s and Utilities' cost for OPEB has been adjusted to reflect the plan amendments, which reduced benefits and
created prior service credits to be amortized over average future service of affected participants. The amortization of the prior
service credit will reduce benefit costs over the next few years until the various credit bases are fully recognized. Each
participating employer reserves the right to terminate its participation in the Hawaiian Electric Benefits Plan at any time.
Balance sheet recognition of the funded status of retirement plans. Employers must recognize on their balance sheets the
funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity
(using the projected benefit obligation (PBO), to calculate the funded status).
The PUC allowed the Utilities to adopt pension and OPEB tracking mechanisms in previous rate cases. The amount of the
net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in
each rate case. Under the Utilities’ tracking mechanisms, any actual costs determined in accordance with GAAP that are over/
under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility
will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit
154
expenses (except for executive life and nonqualified pension plan expenses, which amounted to $1.2 million in 2014 and 2013)
determined in accordance with GAAP will be recovered.
Under the tracking mechanisms, amounts that would otherwise be recorded in AOCI (excluding amounts for executive life
and nonqualified pension plans), which amounts include the prepaid pension asset, net of taxes, as well as other pension and
OPEB charges, are allowed to be reclassified as a regulatory asset, as those costs will be recovered in rates through the NPPC
and NPBC in the future. The Utilities have reclassified to a regulatory asset/(liability) charges for retirement benefits that would
otherwise be recorded in AOCI (amounting to the elimination of a potential charge to AOCI of $340 million pretax and $(364)
million pretax for 2014 and 2013, respectively).
In 2007, the PUC allowed Hawaii Electric Light to record a regulatory asset in the amount of $12.8 million (representing
Hawaii Electric Light’s prepaid pension asset and reflecting the accumulated pension contributions to its pension fund in excess
of accumulated NPPC), which is included in rate base, and allowed recovery of that asset over a period of five years. Hawaii
Electric Light is required to make contributions to the pension trust in the amount of the actuarially calculated NPPC that
would be allowed without penalty by the tax laws.
In 2007, the PUC declined to allow Hawaiian Electric and Maui Electric to include their pension assets (representing the
accumulated contributions to their pension fund in excess of accumulated NPPC), in their rate bases. However, under the
tracking mechanisms, Hawaiian Electric and Maui Electric are required to fund only the minimum level required under the law
until their pension assets are reduced to zero, at which time Hawaiian Electric and Maui Electric will make contributions to the
pension trust in the amount of the actuarially calculated NPPC, except when limited by the ERISA minimum contribution
requirements or the maximum contribution limitations on deductible contributions imposed by the Internal Revenue Code.
The PUC’s exclusion of Hawaiian Electric’s and Maui Electric’s pension assets from rate base does not allow Hawaiian
Electric and Maui Electric to earn a return on the pension asset, but this exclusion does not result in the exclusion of any
pension benefit costs from their rates. The pension asset is to be (and has been, in the case of Maui Electric) recovered in rates
(as NPPC is recorded in excess of contributions). As of December 31, 2014, Hawaiian Electric’s pension asset had been
reduced to nil.
The OPEB tracking mechanisms generally require the Utilities to make contributions to the OPEB trust in the amount of
the actuarially calculated NPBC, except when limited by material, adverse consequences imposed by federal regulations.
Retirement benefits expense for the Utilities for 2014, 2013 and 2012 was $32 million, $30 million and $32 million,
respectively.
155
Defined benefit pension and other postretirement benefit plans information. The changes in the obligations and assets of
the Company’s and Utilities' retirement benefit plans and the changes in AOCI (gross) for 2014 and 2013 and the funded status
of these plans and amounts related to these plans reflected in the Company’s and Utilities' consolidated balance sheet as of
December 31, 2014 and 2013 were as follows:
(in thousands)
HEI consolidated
Benefit obligation, January 1
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid and expenses
Benefit obligation, December 31
Fair value of plan assets, January 1
Actual return on plan assets
Employer contributions
Benefits paid and expenses
Fair value of plan assets, December 31
Accrued benefit asset (liability), December 31
Other assets
Defined benefit pension and other postretirement benefit plans
liability
Accrued benefit asset (liability), December 31
AOCI debit/(credit), January 1 (excluding impact of PUC D&Os)
Recognized during year – net recognized transition obligation
Recognized during year – prior service credit (cost)
Recognized during year – net actuarial losses
Occurring during year – net actuarial losses (gains)
AOCI debit/(credit) before cumulative impact of PUC D&Os,
December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Net actuarial loss (gain)
Prior service gain
AOCI debit/(credit) before cumulative impact of PUC D&Os,
December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Income taxes (benefits)
$
$
$
$
$
$
2014
2013
Pension
benefits
Other
benefits
Pension
benefits
Other
benefits
$
1,446,291
$
176,099
$
1,590,304
$
194,135
49,264
72,202
342,446
(62,975)
1,847,228
1,186,669
81,123
60,103
(61,835)
3,490
8,550
39,098
(8,028)
219,209
179,330
9,149
(257)
(7,890)
56,405
64,788
(203,302)
(61,904)
1,446,291
971,314
194,130
82,083
(60,858)
1,266,060
180,332
1,186,669
(581,168) $
(38,877) $
(259,622) $
12,800
$
— $
24,948
$
(593,968)
(38,877)
(284,570)
(581,168) $
(38,877) $
(259,622) $
317,544
$
(21,722) $
680,781
$
—
(88)
(20,304)
342,679
—
1,793
11
40,851
639,831
(592,291)
47,540
640,015
$
$
20,933
(22,975)
(2,042) $
35,022
$
—
97
(38,438)
(324,896)
317,544
(294,266)
23,278
317,639
$
$
(184)
(14,089)
(95)
639,831
(592,291)
47,540
(18,742)
20,933
(22,975)
(2,042)
795
317,544
(294,266)
23,278
(9,180)
4,306
7,569
(21,743)
(8,168)
176,099
156,731
29,164
954
(7,519)
179,330
3,231
7,200
(3,969)
3,231
18,846
—
1,793
(1,602)
(40,759)
(21,722)
19,206
(2,516)
(5,840)
(15,882)
(21,722)
19,206
(2,516)
980
AOCI debit/(credit), net of taxes (benefits), December 31
$
28,798
$
(1,247) $
14,098
$
(1,536)
156
(in thousands)
Hawaiian Electric consolidated
Benefit obligation, January 1
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid and expenses
Benefit obligation, December 31
Fair value of plan assets, January 1
Actual return on plan assets
Employer contributions
Benefits paid and expenses
Fair value of plan assets, December 31
Accrued benefit asset (liability), December 31
Other assets
Other liabilities (short-term)
Defined benefit pension and other postretirement benefit plans
liability
Accrued benefit asset (liability), December 31
AOCI debit/(credit), January 1 (excluding impact of PUC D&Os)
Recognized during year – net recognized transition asset
Recognized during year – prior service credit (cost)
Recognized during year – net actuarial losses
Occurring during year – net actuarial losses (gains)
AOCI debit/(credit) before cumulative impact of PUC D&Os,
December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Net actuarial loss (gain)
Prior service cost (gain)
AOCI debit/(credit) before cumulative impact of PUC D&Os,
December 31
Cumulative impact of PUC D&Os
AOCI debit/(credit), December 31
Income taxes (benefits)
$
$
$
$
$
$
2014
2013
Pension
benefits
Other
benefits
Pension
benefits
Other
benefits
$
1,320,810
$
169,579
$
1,449,445
$
187,110
47,597
65,979
314,210
(57,819)
1,690,777
1,058,260
69,242
58,948
(57,445)
3,392
8,234
38,488
(7,933)
211,760
176,291
9,036
(274)
(7,797)
54,482
59,119
(185,185)
(57,051)
1,320,810
861,778
172,822
80,325
(56,665)
1,129,005
177,256
1,058,260
(561,772) $
(34,504) $
(262,550) $
— $
(421)
— $
(460)
— $
(388)
(561,351)
(34,044)
(262,162)
(561,772) $
(34,504) $
(262,550) $
295,973
$
(21,907) $
623,588
$
—
(62)
(18,459)
317,651
—
1,804
—
40,193
595,103
(592,291)
2,812
595,017
$
$
20,090
(22,975)
(2,885) $
34,192
$
—
464
(34,597)
(293,482)
295,973
(294,266)
1,707
295,825
$
$
86
(14,102)
148
595,103
(592,291)
2,812
(1,094)
20,090
(22,975)
(2,885)
1,122
295,973
(294,266)
1,707
(664)
4,163
7,288
(20,900)
(8,082)
169,579
154,186
28,700
839
(7,434)
176,291
6,712
7,200
(488)
—
6,712
17,432
—
1,803
(1,544)
(39,598)
(21,907)
19,206
(2,701)
(6,001)
(15,906)
(21,907)
19,206
(2,701)
1,050
(1,651)
AOCI debit/(credit), net of taxes (benefits), December 31
$
1,718
$
(1,763) $
1,043
$
The dates used to determine retirement benefit measurements for the defined benefit plans were December 31 of 2014,
2013 and 2012.
On August 8, 2014 and July 6, 2012, President Obama signed the Highway and Transportation Funding Act of 2014
(HATFA) and the Moving Ahead for Progress in the 21st Century Act (MAP-21), respectively, which included provisions
related to the funding and administration of pension plans with no impact to the Company’s or the Utilities' accounting for
pension benefits; therefore, the net periodic benefit costs disclosed for the plans were not affected. The Company elected to not
apply HATFA to the 2013 plan year. The Company elected to apply MAP-21 for 2012, which improved the plans’ Adjusted
Funding Target Attainment Percentage for funding and benefit distribution purposes and thereby reduced the 2012 minimum
funding requirement and lifted the restrictions on accelerated distribution options (which restrictions were in effect from
April 1, 2011 to September 30, 2012) for HEI and the Utilities. MAP-21 caused the minimum required funding under the
Employee Retirement Income Security Act of 1974, as amended (ERISA) to be less than the net periodic cost for 2013 and
2014. Similarly, HATFA caused the minimum required funding under ERISA to be less than the net periodic cost for 2014;
therefore, to satisfy the requirements of the Utilities pension and OPEB tracking mechanisms, the Utilities contributed the net
periodic cost in 2014.
157
The Pension Protection Act provides that if a pension plan’s funded status falls below certain levels, more conservative
assumptions must be used to value obligations under the pension plan. The HEI Retirement Plan met the threshold
requirements in each of 2012 and 2013 so that the more conservative assumptions did not apply for either the 2013 or 2014
valuation of plan liabilities for purposes of calculating the minimum required contribution. Other factors could cause changes
to the required contribution levels.
The Company and the Utilities have determined the market-related value of retirement benefit plan assets by calculating
the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the
difference over future years – 0% in the first year and 25% in each of years two through five – and finally adding or subtracting
the unamortized differences for the past four years from fair value. The method includes a 15% range around the fair value of
such assets (i.e., 85% to 115% of fair value). If the market-related value is outside the 15% range, then the amount outside the
range will be recognized immediately in the calculation of annual NPBC.
A primary goal of the plans is to achieve long-term asset growth sufficient to pay future benefit obligations at a reasonable
level of risk. The investment policy target for defined benefit pension and OPEB plans reflects the philosophy that long-term
growth can best be achieved by prudent investments in equity securities while balancing overall fund volatility by an
appropriate allocation to fixed income securities. In order to reduce the level of portfolio risk and volatility in returns, efforts
have been made to diversify the plans’ investments by asset class, geographic region, market capitalization and investment
style.
The asset allocation of defined benefit retirement plans to equity and fixed income securities managers and related
investment policy targets and ranges were as follows:
December 31
Assets held by category
Equity securities managers
Fixed income securities managers
Pension benefits1
Other benefits2
Investment policy
Investment policy
2014
2013
Target
Range
2014
2013
Target
Range
73%
27
100%
73%
27
100%
70%
30
100%
65-75
25-35
72%
28
100%
74%
26
100%
70%
30
100%
65-75
25-35
1 Asset allocation for 2014 is applicable to HEI and the Utilities. In 2014, ASB revised its defined benefit pension plan asset allocation to a
liability driven investment strategy and as of December 31, 2014, all of its pension assets were invested in fixed income securities. In 2013,
ASB’s assets were invested using an allocation consistent with that of HEI and the Utilities.
2 Asset allocation for 2014 and 2013 is applicable to only HEI and the Utilities. ASB does not fund its other benefits.
See Note 16 for additional disclosures about the fair value of the retirement benefit plans’ assets.
The following weighted-average assumptions were used in the accounting for the plans:
December 31
Benefit obligation
Discount rate
Rate of compensation increase
Net periodic benefit cost (years ended)
Discount rate
Expected return on plan assets
Rate of compensation increase
NA Not applicable
Pension benefits
Other benefits
2014
2013
2012
2014
2013
2012
4.22%
5.09%
3.5
3.5
4.13%
3.5
4.17%
5.03%
4.07%
NA
NA
NA
5.09
7.75
3.5
4.13
7.75
3.5
5.19
7.75
3.5
5.03
7.75
4.07
7.75
4.90
7.75
NA
NA
NA
The Company and the Utilities based their selection of an assumed discount rate for 2015 NPBC and December 31, 2014
disclosure on a cash flow matching analysis that utilized bond information provided by Bloomberg for all non-callable, high
quality bonds (i.e., rated AA- or better) as of December 31, 2014. In selecting the expected rate of return on plan assets for
2015 NPBC: a) HEI and the Utilities considered economic forecasts for the types of investments held by the plans (primarily
equity and fixed income investments), the Plans’ asset allocations, industry and corporate surveys and the past performance of
the plans’ assets in selecting 7.75% and b) ASB considered its revised asset allocation in 2014 to a liability driven investment
strategy in selecting 4.22%, which is consistent with the assumed discount rate for 2015.
158
The Company and the Utilities adopted updated mortality tables published by the Society of Actuaries as its mortality
assumptions as of December 31, 2014. The use of the RP-2014 Tables and the Mortality Improvement Scale MP-2014 had a
significant effect on the Company’s and the Utilities’ benefit obligations.
As of December 31, 2014, the assumed health care trend rates for 2015 and future years were as follows: medical, 7.25%,
grading down to 5% for 2024 and thereafter; dental, 5%; and vision, 4%. As of December 31, 2013, the assumed health care
trend rates for 2014 and future years were as follows: medical, 7.5%, grading down to 5% for 2024 and thereafter; dental, 5%;
and vision, 4%. Medicare Advantage reimbursements are expected to phase out by 2016; therefore, post age 65 medical trends
are adjusted to reflect anticipated increases above the ordinary medical trend rates. For post age 65, the medical trend is 4%
higher than pre-65 for 2014 and 3% higher in 2015.
The components of NPBC were as follows:
(in thousands)
HEI consolidated
Service cost
Interest cost
Expected return on plan assets
Amortization of net transition obligation
Amortization of net prior service (gain) cost
Amortization of net actuarial loss (gains)
Net periodic benefit cost
Impact of PUC D&Os
Net periodic benefit cost (adjusted for impact of
PUC D&Os)
Hawaiian Electric consolidated
Service cost
Interest cost
Expected return on plan assets
Amortization of net transition obligation
Amortization of net prior service (gain) cost
Amortization of net actuarial loss
Net periodic benefit cost
Impact of PUC D&Os
Net periodic benefit cost (adjusted for impact of
PUC D&Os)
Pension benefits
Other benefits
2014
2013
2012
2014
2013
2012
$
49,264
$
56,405
$
43,221
$
3,490
$
4,306
$
72,202
(81,355)
—
88
20,304
60,503
64,788
(72,537)
—
(97)
38,438
86,997
67,480
(71,183)
1
(325)
25,675
64,869
(13,324)
(38,104)
(15,754)
4,211
9,009
8,550
7,569
(10,902)
(10,147)
(10,336)
—
(1,793)
(11)
(666)
1,976
—
—
(1,793)
(1,793)
1,602
1,537
1,498
2,589
(1,458)
(2,227)
47,179
48,893
49,115
1,310
79
362
$
47,597
$
54,482
$
41,603
$
3,392
$
4,163
$
65,979
(72,661)
—
62
18,459
59,436
59,119
(64,551)
—
(464)
34,597
83,183
61,453
(64,004)
—
(689)
23,428
61,791
(13,324)
(38,104)
(15,754)
4,014
8,703
8,234
7,288
(10,739)
(10,002)
(10,195)
—
(1,804)
—
(917)
1,976
—
(9)
(1,803)
(1,803)
1,544
1,190
1,455
2,165
(1,458)
(2,227)
$
46,112
$
45,079
$
46,037
$
1,059
$
(268) $
(62)
The estimated prior service credit, net actuarial loss and net transition obligation for defined benefit plans that will be
amortized from AOCI or regulatory assets into net periodic benefit cost during 2015 is as follows:
(in millions)
Estimated prior service cost (credit)
Net actuarial loss
Net transition obligation
HEI consolidated
Hawaiian Electric consolidated
Pension benefits
Other benefits
Pension benefits
Other benefits
$
— $
35.8
—
(1.8) $
1.7
—
— $
32.4
—
(1.8)
1.7
—
The Company recorded pension expense of $32 million, $34 million and $35 million and OPEB expense of $1.2 million,
$0.4 million and $1.0 million in 2014, 2013 and 2012, respectively, and charged the remaining amounts primarily to electric
utility plant. The Utilities recorded pension expense of $31 million, $30 million and $32 million and OPEB expense of $1.0
million, nil and $0.4 million in 2014, 2013 and 2012, respectively, and charged the remaining amounts primarily to electric
utility plant.
The health care cost trend rate assumptions can have a significant effect on the amounts reported for other benefits. As of
December 31, 2014, for the Company, a one-percentage-point increase in the assumed health care cost trend rates would have
increased the total service and interest cost by $0.2 million and the accumulated postretirement benefit obligation (APBO) by
$3.8 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.3 million and the
159
APBO by $4.6 million. As of December 31, 2014, for the Utilities, a one-percentage-point increase in the assumed health care
cost trend rates would have increased the total service and interest cost by $0.2 million and the APBO by $3.7 million, and a
one-percentage-point decrease would have reduced the total service and interest cost by $0.3 million and the APBO by $4.5
million.
HEI consolidated. The defined benefit pension plans with accumulated benefit obligations (ABOs), which do not
consider projected pay increases (unlike the PBOs shown in the table above), in excess of plan assets as of December 31,
2014 and 2013, had aggregate ABOs of $1.5 billion and $1.2 billion, respectively, and plan assets of $1.2 billion and $1.1
billion, respectively. The defined benefit pension plans with PBOs in excess of plan assets as of December 31, 2014, had
aggregate PBOs of $1.7 billion and plan assets of $1.2 billion. The defined benefit pension plans with PBOs in excess of plan
assets as of December 31, 2013, had aggregate PBOs of $1.4 billion and plan assets of $1.1 billion. As of December 31,
2014, the other postretirement benefit plans shown in the table above had ABOs in excess of plan assets. As of December 31,
2013, the other postretirement benefit plans with ABOs in excess of plan assets had aggregate ABOs of $0.4 million and plan
assets of nil.
The Company estimates that the cash funding for the qualified defined benefit pension plans in 2015 will be $85 million,
which should fully satisfy the minimum required contributions to those plans, including requirements of the Utilities’ pension
tracking mechanisms and the Plan’s funding policy. The Company's current estimate of contributions to its other postretirement
benefit plans in 2015 is $0.5 million.
As of December 31, 2014, the benefits expected to be paid under all retirement benefit plans in 2015, 2016, 2017, 2018,
2019 and 2020 through 2024 amounted to $76 million, $79 million, $83 million, $87 million, $91 million and $520 million,
respectively.
Hawaiian Electric consolidated. The defined benefit pension plans with ABOs in excess of plan assets as of December 31,
2014 and 2013, had aggregate ABOs of $1.5 billion and $1.2 billion, respectively, and plan assets of $1.1 billion and $1.1
billion, respectively. All the defined benefit pension plans shown in the table above had PBOs in excess of plan assets as of
December 31, 2014 and 2013. As of December 31, 2014, the other postretirement benefit plan shown in the table above had an
ABO in excess of plan assets. As of December 31, 2013, the other postretirement benefit plan shown in the table above had
plan assets in excess of ABO.
The Utilities estimate that the cash funding for the qualified defined benefit pension plan in 2015 will be $83 million,
which should fully satisfy the minimum required contributions to that Plan, including requirements of the pension tracking
mechanisms and the Plan’s funding policy. The Utilities' current estimate of contributions to its other postretirement benefit
plans in 2015 is $0.5 million.
As of December 31, 2014, the benefits expected to be paid under all retirement benefit plans in 2015, 2016, 2017, 2018,
2019 and 2020 through 2024 amounted to $70 million, $73 million, $76 million, $79 million, $83 million and $476 million,
respectively.
Defined contribution plans information. The ASB 401(k) Plan is a defined contribution plan, which includes a discretionary
employer profit sharing contribution by ASB (AmeriShare) and a matching contribution by ASB on the first 4% of employee
deferrals (AmeriMatch).
Changes to retirement benefits for HEI and utility employees commencing employment after April 30, 2011 include a
reduction of benefits provided through the defined benefit plan and the addition of a 50% match by the applicable employer on
the first 6% of employee deferrals through the defined contribution plan (under the Hawaiian Electric Industries Retirement
Savings Plan).
For 2014, 2013 and 2012, the Company’s expense for its defined contribution pension plans under the HEIRSP and the
ASB 401(k) Plan was $5 million, $5 million and $4 million, respectively, and cash contributions were $5 million, $4 million
and $4 million, respectively. The Utilities’ expense for its defined contribution pension plan under the HEIRSP Plan for 2014
and 2013 was $0.9 million and $0.6 million, respectively, and 2012 was de minimis.
11 · Share-based compensation
Under the 2010 Equity and Incentive Plan, HEI can issue shares of common stock as incentive compensation to selected
employees in the form of stock options, stock appreciation rights (SARs), restricted shares, restricted stock units, performance
shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan was amended and restated (EIP)
effective March 1, 2014 and an additional 1.5 million shares was added to the shares available for issuance under these
programs.
160
As of December 31, 2014, approximately 3.6 million shares were remaining available for future issuance under the terms
of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including
an estimated 0.9 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement
of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are
achieved at maximum levels).
Under the 1987 Stock Option and Incentive Plan, as amended (SOIP), there are possible future issuances of an estimated
17,000 shares upon the exercise of outstanding SARs based on the market price of shares on December 31, 2014. As of
May 11, 2010 (when the 2010 Equity and Incentive Plan became effective), no new awards may be granted under the SOIP.
After the shares of common stock for the outstanding SOIP grants and awards are issued or such grants and awards expire, the
remaining shares registered under the SOIP will be deregistered and delisted.
For the SARs outstanding under the SOIP, the exercise price of each SAR generally equaled the fair market value of HEI’s
stock on or near the date of grant. SARs and related dividend equivalents issued in the form of stock awards generally became
exercisable in installments of 25% each year for four years, and expire if not exercised ten years from the date of the grant.
SARs compensation expense has been recognized in accordance with the fair value-based measurement method of accounting.
The estimated fair value of each SAR grant was calculated on the date of grant using a Binomial Option Pricing Model.
The restricted shares that have been issued under the 2010 Equity and Incentive Plan become unrestricted in four equal
annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become unrestricted for
terminations of employment during the vesting period, except accelerated vesting is provided for terminations by reason of
death, disability and termination without cause. Restricted shares compensation expense has been recognized in accordance
with the fair-value-based measurement method of accounting. Dividends on restricted shares are paid quarterly in cash. There
were no outstanding restricted shares as of December 31, 2014.
Restricted stock units awarded under the 2010 Equity and Incentive Plan in 2014, 2013, 2012 and 2011 will vest and be
issued in unrestricted stock in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent
they have not become vested for terminations of employment during the vesting period, except that pro-rata vesting is provided
for terminations due to death, disability and retirement. Restricted stock units awarded under the SOIP and 2010 Equity and
Incentive Plan in 2010 and prior years generally vest and will be issued as unrestricted stock four years after the date of the
grant and are forfeited for terminations of employment during the vesting period, except that pro-rata vesting is provided for
terminations due to death, disability and retirement. Restricted stock units expense has been recognized in accordance with the
fair-value-based measurement method of accounting. Dividend equivalent rights are accrued quarterly and are paid at the end
of the restriction period when the associated restricted stock units vest.
Stock performance awards granted under the2012-2014, 2013-2015 and 2014-2016 LTIPs entitle the grantee to shares of
common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of
the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period,
except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed
months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock
performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of
accounting for performance shares.
Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as
compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. As of December 31, 2014, there were 169,290
shares remaining available for future issuance under the 2011 Director Plan.
The Company’s share-based compensation expense and related income tax benefit were as follows:
(in millions)
HEI consolidated
Share-based compensation expense1
Income tax benefit
Hawaiian Electric consolidated
Share-based compensation expense1
Income tax benefit
2014
2013
2012
$
$
9.3
3.4
3.1
1.2
$
7.8
2.8
2.3
0.9
6.7
2.4
1.8
0.7
1
$0.16 million, $0.11 million and $0.08 million of this share-based compensation expense was capitalized in 2014, 2013 and 2012,
respectively.
161
Stock awards. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011
Director Plan as follows:
(dollars in millions)
Shares granted
Fair value
Income tax benefit
2014
33,170
$
0.8
0.3
2013
33,184
$
0.8
0.3
2012
29,448
0.8
0.3
$
The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the
closing price of HEI Common Stock on grant date.
Nonqualified stock options. Information about HEI’s NQSOs was as follows:
Outstanding, January 1
Granted
Exercised
Forfeited
Expired
Outstanding, December 31
Exercisable, December 31
2013
2012
Shares
(1)
Shares
(1)
14,000
$
20.49
55,500
$
20.92
—
(14,000)
—
20.49
—
(41,500)
—
—
— $
— $
—
—
—
—
—
—
14,000
14,000
$
$
—
21.06
—
—
20.49
20.49
(1) Weighted-average exercise price
As of December 31, 2014, there were no NQSOs outstanding.
NQSO activity and statistics were as follows:
(in thousands)
Cash received from exercise
Intrinsic value of shares exercised 1
Tax benefit realized for the deduction of exercises
$
$
2013
287
128
50
2012
874
354
138
1
Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents
exceeds the exercise price of the option.
Stock appreciation rights. Information about HEI’s SARs is summarized as follows:
Outstanding, January 1
164,000
$
26.12
164,000
$
26.12
282,000
$
26.14
2014
2013
2012
Shares
(1)
Shares
(1)
Shares
(1)
Granted
Exercised
Forfeited
Expired
Outstanding, December 31
Exercisable, December 31
(1) Weighted-average exercise price
—
(22,000)
(62,000)
—
80,000
80,000
$
$
—
26.18
26.02
—
26.18
26.18
—
—
—
—
—
—
—
—
—
(114,000)
—
(4,000)
164,000
164,000
$
$
26.12
26.12
164,000
164,000
$
$
—
26.17
—
26.18
26.12
26.12
December 31, 2014
Outstanding & Exercisable (Vested)
Year of
Grant
2005
Number of shares
underlying SARs
Weighted-average
remaining contractual life
Weighted-average
exercise price
80,000
0.3
$
26.18
162
As of December 31, 2014, all SARs outstanding were exercisable and had an aggregate intrinsic value (including dividend
equivalents) of $0.6 million.
SARs activity and statistics were as follows:
(in thousands)
Intrinsic value of shares exercised 1
Tax benefit realized for the deduction of exercises
2014
2013
$
$
29
11
— $
—
2012
197
77
1
Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents
exceeds the exercise price of the right.
Restricted shares and restricted stock awards. Information about HEI’s grants of restricted shares and restricted stock
awards was as follows:
2014
2013
2012
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, January 1
4,503
$
22.21
9,005
$
22.21
46,807
$
24.45
Granted
Vested
Forfeited
Outstanding, December 31
—
(4,503)
—
— $
—
22.21
—
—
—
(4,502)
—
—
22.21
—
—
(37,802)
—
—
24.99
—
4,503
$
22.21
9,005
$
22.21
(1) Weighted-average grant-date fair value per share based on the closing or average price of HEI common stock on the date of
grant.
For 2014, 2013 and 2012, total restricted stock vested had a grant-date fair value of $0.1 million, $0.1 million and $0.9
million, respectively, and the tax benefits realized for the tax deductions related to restricted stock awards were nil for 2014, nil
for 2013 and $0.2 million for 2012.
Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:
2014
2013
2012
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, January 1
Granted
Vested
Forfeited
288,151
$
117,786
(144,702)
—
25.17
25.17
24.09
—
315,094
$
111,231
(118,885)
(19,289)
Outstanding, December 31
261,235
$
25.77
288,151
$
22.82
26.88
20.48
25.62
25.17
247,286
$
98,446
(25,728)
(4,910)
315,094
$
21.80
25.99
24.68
24.92
22.82
Total weighted-average grant-date fair value of
shares granted ($ millions)
$
3.0
$
3.0
$
2.6
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For 2014, 2013 and 2012 total restricted stock units and related dividends that vested had a fair value of $4.1 million, $3.7
million and $0.7 million, respectively, and the related tax benefits were $1.2 million, $0.9 million and $0.2 million,
respectively.
As of December 31, 2014, there was $4.4 million of total unrecognized compensation cost related to the nonvested
restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.5 years.
Long-term incentive plan payable in stock. The 2012-2014 long-term incentive plan (LTIP), 2013-2015 LTIP and 2014-2016
LTIP provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance
goals considered to be a market condition and service conditions. The number of shares of HEI common stock that may be
awarded is fixed on the date the grants are made subject to the achievement of specified performance levels. The potential
payout varies from 0% to 200% of the number of target shares depending on achievement of the goals. The LTIP performance
goals for the LTIP periods include awards with a market goal based on total return to shareholders (TRS) of HEI stock as a
percentile to the Edison Electric Institute Index over the applicable three-year period. In addition, the 2012-2014 LTIP,
2013-2015 LTIP and 2014-2016 LTIP have performance goals related to levels of HEI consolidated net income, HEI
consolidated return on average common equity (ROACE), Hawaiian Electric consolidated net income, Hawaiian Electric
163
consolidated ROACE, ASB net income and ASB return on assets – all based on the applicable three-year averages, and ASB
return on assets relative to performance peers.
LTIP linked to TRS. Information about HEI’s LTIP grants linked to TRS was as follows:
Outstanding, January 1
Granted
Vested (settled or lapsed)
Forfeited
Outstanding, December 31
2014
2013
2012
Shares
(1)
Shares
(1)
Shares
(1)
232,127
$
97,524
(70,189)
(1,506)
257,956
$
32.88
22.95
35.46
28.32
28.45
239,256
$
91,038
(87,753)
(10,414)
232,127
$
29.12
32.69
22.45
32.72
32.88
197,385
$
81,223
(35,397)
(3,955)
239,256
$
25.94
30.71
14.85
30.82
29.12
Total weighted-average grant-date fair value of shares
granted ($ millions)
$
2.2
$
3.0
$
2.5
(1) Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.
The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information
for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and
estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The
expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the
annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same
three-year historical period.
The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TRS and the
resulting fair value of LTIP awards granted:
Risk-free interest rate
Expected life in years
Expected volatility
Range of expected volatility for Peer Group
Grant date fair value (per share)
2014
0.66%
3
17.8%
12.4% to 23.3%
22.95
$
2013
0.38%
3
19.4%
12.4% to 25.3%
32.69
$
2012
0.33%
3
25.3%
15.5% to 34.5%
30.71
$
For 2014, 2013 and 2012, total vested LTIP awards linked to TRS and related dividends had a fair value of nil, $2.2 million
and $0.6 million, respectively, and the related tax benefits were nil, $0.9 million and $0.2 million, respectively. For 2014, all of
the shares vested (which were granted at target level based on the satisfaction of TRS performance) for the 2011-2013 LTIP
lapsed. Of the 87,753 shares vested and granted (at target level based on the satisfaction of TRS performance) for the
2010-2012 LTIP, the HEI Compensation Committee approved settlement of 70,205 shares of HEI common stock in February
2013 (17,548 of the vested shares lapsed).
As of December 31, 2014, there was $2.2 million of total unrecognized compensation cost related to the nonvested
performance awards payable in shares linked to TRS. The cost is expected to be recognized over a weighted-average period of
1.5 years.
LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to
other performance conditions was as follows:
Outstanding, January 1
Granted
Vested and settled
Increase above target (cancelled)
Forfeited
Outstanding, December 31
2014
2013
2012
Shares
(1)
Shares
(1)
Shares
(1)
296,843
$
129,603
(65,089)
4,949
(1,575)
364,731
$
26.14
25.18
24.95
26.70
26.07
26.01
247,175
$
120,399
(18,280)
(41,599)
(10,852)
296,843
$
25.04
26.89
18.95
24.97
26.20
26.14
182,498
$
125,157
—
(50,786)
(9,694)
247,175
$
22.63
26.05
—
18.95
24.44
25.04
Total weighted-average grant-date fair value of shares
granted (at target performance levels) ($ millions)
$
3.3
$
3.2
$
3.3
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
164
For 2014 and 2013, total vested LTIP awards linked to other performance conditions and related dividends had a fair value
of $1.9 million and $0.6 million, respectively, and the related tax benefits were $0.8 million and $0.2 million, respectively.
As of December 31, 2014, there was $3.4 million of total unrecognized compensation cost related to the nonvested shares
linked to performance conditions other than TRS. The cost is expected to be recognized over a weighted-average period of 1.5
years.
12 · Income taxes
The components of income taxes attributable to net income for common stock were as follows:
Years ended December 31
(in thousands)
Federal
Current
Deferred
Deferred tax credits, net
State
Current
Deferred
Deferred tax credits, net
Total
HEI consolidated
Hawaiian Electric consolidated
2014
2013
2012
2014
2013
2012
$ 33,762
$
(1,520) $ (15,411) $
1,108
$
1,313
$ (26,965)
46,427
73,680
82,138
68,775
58,024
79,437
—
224
187
—
224
186
80,189
72,384
66,914
69,883
59,561
52,658
(7,339)
(1,555)
(4,654)
(9,436)
(3,720)
(4,940)
12,756
6,106
11,523
6,719
6,793
11,957
8,710
5,889
9,945
14,172
6,106
10,842
6,483
6,793
9,556
7,441
5,889
8,390
$ 91,712
$ 84,341
$ 76,859
$ 80,725
$ 69,117
$ 61,048
A reconciliation of the amount of income taxes computed at the federal statutory rate of 35% to the amount provided in the
consolidated statements of income was as follows:
Years ended December 31
(in thousands)
HEI consolidated
Hawaiian Electric consolidated
2014
2013
2012
2014
2013
2012
Amount at the federal statutory income tax rate
$ 91,672
$ 86,711
$ 76,092
$ 77,126
$ 67,914
$ 56,812
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit
Other, net
Total
Effective income tax rate
7,490
7,772
(7,450)
(10,142)
6,464
(5,697)
7,047
(3,448)
6,211
(5,008)
5,453
(1,217)
$ 91,712
$ 84,341
$ 76,859
$ 80,725
$ 69,117
$ 61,048
35.0%
34.0%
35.4%
36.6%
35.6%
37.6%
The Company's effective tax rate increased in 2014 compared to 2013 primarily due to the nondeductibility of merger
costs, partly offset by increased tax credits in 2014 and the $2.7 million out-of-period income tax benefits in 2013 (see “Out-of-
period income tax benefit”). The Utilities' effective tax rate increased in 2014 compared to 2013 primarily due to the out-of-
period income tax benefits.
The Company’s and the Utilities' effective tax rate decreased in 2013 compared to 2012 primarily due to $3.5 million
lower deferred taxes related to the tax gross-up of AFUDC-equity and a $3.1 million (including $2.7 million related to the
Utilities) out-of-period income tax benefit (see “Out-of-period income tax benefit”).
165
The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:
December 31
(in thousands)
Deferred tax assets
Net operating loss
Other
Total deferred tax assets
Deferred tax liabilities
Property, plant and equipment related
Repairs deduction
Regulatory assets, excluding amounts attributable to property,
plant and equipment
Deferred RAM and RBA revenues
Retirement benefits
Other
Total deferred tax liabilities
Net deferred income tax liability
Prepayments and other (Current assets-debit)
Other (Current liabilities-credit)
Deferred income taxes (credit)
Net deferred income tax liability
HEI consolidated
Hawaiian Electric consolidated
2014
2013
2014
2013
$
— $
58,352
58,352
448,723
86,408
33,795
32,889
25,336
62,935
690,086
—
57,239
57,239
378,280
75,127
33,251
—
29,280
70,561
586,499
631,734
$
529,260
$
— $
—
— $
—
631,734
529,260
$
$
$
51,936
17,663
69,599
446,259
86,408
33,795
32,889
28,758
14,929
643,038
573,439
32,915
3,482
602,872
$
$
631,734
$
529,260
$
573,439
$
19,848
17,295
37,143
375,771
75,127
33,251
—
23,851
15,602
523,602
486,459
20,702
—
507,161
486,459
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable
income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the
benefits of the deferred tax assets. As of December 31, 2014, the valuation allowance for deferred tax benefits is not significant.
In 2014, the net deferred income tax liability continued to increase primarily as a result of accelerated tax deductions taken for
bonus depreciation resulting from the Tax Increase Prevention Act of 2014 and the IRS approval of an accounting method that
defers the recognition of Revenue Balance Account income. The Utilities are included in the consolidated federal and Hawaii
income tax returns of HEI and are subject to the provisions of HEI’s tax sharing agreement, which determines each subsidiary’s
(or subgroup's) income tax return liabilities and refunds on a standalone basis as if it filed a separate return (or subgroup
consolidated return). Consequently, although HEI consolidated does not expect any unutilized net operating loss (NOL) as of
December 31, 2014, standalone Hawaiian Electric consolidated expects an unutilized NOL for federal tax purposes in
accordance with the HEI tax sharing agreement. The deferred tax asset associated with this NOL is $52 million and is included
in “Prepayments and other.”
HEI consolidated. In 2014, 2013 and 2012, credit adjustments to interest expense on income taxes was reflected in
“Interest expense – other than on deposit liabilities and other bank borrowings” in the amount of $1.7 million, $0.3 million and
$1.4 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the
Internal Revenue Service (IRS). As of December 31, 2014 and 2013, the total amount of accrued interest related to uncertain
tax positions and recognized on the balance sheet in “Interest and dividends payable” was nil and $0.4 million, respectively.
As of December 31, 2014, the total amount of liability for uncertain tax positions was nil.
Hawaiian Electric consolidated. In 2014, 2013 and 2012, credit adjustments to interest expense on income taxes was
reflected in “Interest and other charges” in the amount of $0.7 million, $0.3 million and $0.5 million, respectively. The credit
adjustments to interest expense were primarily due to the resolution of tax issues with the IRS. As of December 31, 2014 and
2013, the total amount of accrued interest related to uncertain tax positions was nil.
As of December 31, 2014, the total amount of liability for uncertain tax positions was nil.
166
The changes in total unrecognized tax benefits were as follows:
(in millions)
HEI consolidated
Hawaiian Electric consolidated
2014
2013
2012
2014
2013
2012
Unrecognized tax benefits, January 1
$
0.9
$
0.8
$
Additions based on tax positions taken during the year
Reductions based on tax positions taken during the year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses of statute of limitations
—
—
0.1
—
(1.0)
—
—
—
0.5
(0.4)
—
—
5.7
0.3
—
—
(4.1)
—
(1.1)
$
0.5
$
—
—
0.1
—
(0.6)
—
Unrecognized tax benefits, December 31
$
— $
0.9
$
0.8
$
— $
0.5
$
0.4
—
—
0.5
3.7
0.3
—
—
(0.4)
(3.6)
—
—
—
—
0.4
The 2012 reduction in unrecognized tax benefits was primarily due to the IRS’s acceptance of the deductibility of costs of
repairs to utility generation property for tax years 2007-2009.
In 2014, the IRS completed its examination of the Company’s federal income tax returns for tax years 2010 and 2011. The
Company and the IRS reached an agreement on all adjustments, primarily related to depreciation, and the Congressional Joint
Committee on Taxation approved the resulting tax adjustments in October 2014. The income statement impact of the agreement
was not material. Tax years 2007, 2009, and 2010 to 2013 remain subject to examination by the Department of Taxation of the
State of Hawaii.
As of December 31, 2014, the disclosures above present the Company’s and the Utilities' accruals for potential tax
liabilities and related interest. Based on information currently available, the Company and the Utilities believe these accruals
have adequately provided for potential income tax issues with federal and state tax authorities and related interest, and that the
ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations,
financial condition or liquidity.
Out-of-period income tax benefit. During 2013, the Company recorded a $3.1 million (including $2.7 million related to the
Utilities) out-of-period income tax benefit, resulting primarily from the reversal of deferred tax liabilities due to errors in the
amount of book over tax basis differences in plant and equipment. Management concluded that this out-of-period adjustment
was not material to either the current or any prior period financial statements.
Recent tax developments. In September 2013, the IRS issued final regulations addressing the acquisition, production and
improvement of tangible property, which are effective January 1, 2014. Management evaluated the impact of these new
regulations, and does not expect a material impact on the Utilities since specific guidance on network (i.e., transmission and
distribution) assets and generation property has already been received and accounted for in its tax computations. The IRS also
proposed regulations addressing the disposition of property.
The Utilities adopted the safe harbor guidelines with respect to network assets in 2011 and in June 2013, the IRS released a
revenue procedure relating to deductions for repairs of generation property, which provides some guidance (that is elective) for
taxpayers that own steam or electric generation property. This guidance defines the relevant components of generation property
to be used in determining whether such component expenditures should be deducted as repairs or capitalized and depreciated
by taxpayers. The revenue procedure also provides an extrapolation methodology that could be used by taxpayers in
determining deductions for prior years’ repairs without going back to the specific documentation of those years. The guidance
does not provide specific methods for determining the repairs amount. Management intends to adopt a method consistent with
this guidance in its 2014 tax return.
167
13 · Cash flows
Years ended December 31
(in millions)
Supplemental disclosures of cash flow information
HEI consolidated
Interest paid to non-affiliates
Income taxes paid
Income taxes refunded
Hawaiian Electric consolidated
Interest paid to non-affiliates
Income taxes paid
Income taxes refunded
Supplemental disclosures of noncash activities
HEI consolidated
Property, plant and equipment-unpaid invoices and other
Common stock dividends reinvested in HEI common stock 1
Increases in common stock related to director and officer compensatory plans
Loans transferred from held for investment to held for sale
Real estate acquired in settlement of loans
Obligations to fund low income housing investments, net
Hawaiian Electric consolidated
Electric utility property, plant and equipment
AFUDC-equity
Estimated fair value of noncash contributions in aid of construction
Unpaid invoices and other
$
2014
2013
2012
$
84
47
24
61
6
8
68
—
6
—
3
14
7
3
65
$
85
18
4
59
6
32
24
24
5
25
4
1
6
5
24
84
17
31
57
6
9
37
24
6
—
11
—
7
10
37
1
The amounts shown represents common stock dividends reinvested in HEI common stock under the HEI DRIP in noncash transactions.
14 · Regulatory restrictions on net assets
As of December 31, 2014, the Utilities could not transfer approximately $668 million of net assets to HEI in the form of
dividends, loans or advances without PUC approval.
ASB is required to notify the FRB and OCC prior to making any capital distribution (including dividends) to HEI (through
ASB Hawaii). Generally, the FRB and OCC may disapprove or deny ASB’s request to make a capital distribution if the
proposed distribution will cause ASB to become undercapitalized, or the proposed distribution raises safety and soundness
concerns, or the proposed distribution violates a prohibition contained in any statute, regulation, or agreement between ASB
and the OCC. As of December 31, 2014, ASB could transfer approximately $103 million of net assets to HEI in the form of
dividends and still maintain its “well-capitalized” position.
HEI management expects that the regulatory restrictions will not materially affect the operations of the Company nor HEI’s
ability to pay common stock dividends.
15 · Significant group concentrations of credit risk
Most of the Company’s business activity is with customers located in the State of Hawaii.
The Utilities are regulated operating electric public utilities engaged in the generation, purchase, transmission, distribution
and sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of Hawaii. The Utilities provide the
only electric public utility service on the islands they serve. The Utilities grant credit to customers, all of whom reside or
conduct business in the State of Hawaii.
168
Most of ASB’s financial instruments are based in the State of Hawaii, except for the investment securities it owns.
Substantially all real estate loans receivable are collateralized by real estate in Hawaii. ASB’s policy is to require mortgage
insurance on all real estate loans with a loan to appraisal ratio in excess of 80% at origination.
16 · Fair value measurements
Fair value estimates are estimates of the price that would be received to sell an asset, or paid upon the transfer of a liability,
in an orderly transaction between market participants at the measurement date. The fair value estimates are generally
determined based on assumptions that market participants would use in pricing the asset or liability and are based on market
data obtained from independent sources. However, in certain cases, the Company and the Utilities use their own assumptions
about market participant assumptions based on the best information available in the circumstances. These valuations are
estimates at a specific point in time, based on relevant market information, information about the financial instrument and
judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments
and other factors. These estimates do not reflect any premium or discount that could result if the Company or the Utilities were
to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion
of the Company’s and the Utilities' financial instruments, fair value estimates cannot be determined with precision. Changes in
the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the
estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant
effect on fair value estimates, but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to
measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs
to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are
not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by
observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the
asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data,
there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more
significant due to the lack of observable market data.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes.
Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan
impairments for certain loans, goodwill and AROs. The fair value of Hawaiian Electric’s ARO (Level 3) was determined by
discounting the expected future cash flows using market-observable risk-free rates as adjusted by Hawaiian Electric’s credit
spread (also see Note 4).
Fair value measurement and disclosure valuation methodology. Following are descriptions of the valuation methodologies
used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair
value:
Short-term borrowings—other than bank. The carrying amount approximated fair value because of the short maturity of
these instruments.
Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from
independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent
and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors the
Company uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in
place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of
securities that fall under Level 2 of the Company’s fair value measurement hierarchy. Among the considerations are quoted
169
prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral
characteristics, historic and generic prepayment speeds, and other observable market factors.
To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s
price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard
vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge
to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable
characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing
vendor or non-affiliated broker and not by ASB.
Loans held for sale. Residential mortgage loans carried at the lower of cost or market are valued using market observable
pricing inputs, which are derived from third party loan sales and securitizations and, therefore, are classified within Level 2 of
the valuation hierarchy.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which
includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes
product type, maturity dates, and the underlying interest rate of the portfolio. This information is input into the valuation
models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate.
These assumptions are derived from internal and third party sources. Noting the valuation is derived from model-based
techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.
Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is
determined primarily by using an income, cost, or market approach and is normally provided through appraisals. Impaired
loans carried at fair value generally receive specific allocations within the allowance for loan losses. For collateral-dependent
loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or
a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the
appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate
collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted
or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.
Generally, impaired loans are evaluated quarterly for additional impairment and adjusted accordingly.
Other real estate owned. Foreclosed assets are carried at fair value (less estimated costs to sell) and is generally based
upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned.
Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair
value of collateral-dependent loans and real estate owned using the sales comparison approach.
Mortgage servicing rights. Mortgage servicing rights (MSR) are capitalized at fair value based on market data at the time
of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing rights are
evaluated for impairment at each reporting date. ASB's MSR is stratified based on predominant risk characteristics of the
underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net
income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated
based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing
residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the
carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in
"Other income, net" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the
valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSR to an estimated value calculated by
an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and
their own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its
own estimate.
Tax credit investments. The estimated fair value of tax credit investments was determined in relation to the yield an aquirer
of these investments would expect in relation to yields experienced on current new issues or secondary market transactions.
Time deposits. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows
using the rates currently offered for deposits of similar remaining maturities.
Other borrowings. For fixed-rate advances and repurchase agreements, fair value is estimated using quantitative
discounted cash flow models that require the use of interest rate inputs that are currently offered for fixed-rate advances and
repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated
through external sources, including brokers, market transactions and third party pricing services. For hybrid advances, fair
170
value is obtained from an FHLB proprietary model mathematical approximation of the market value of the underlying hedge.
The terms of the hedge are similar to the advances and therefore classified as Level 2 within the valuation hierarchy.
Long-term debt. Fair value was obtained from third-party financial services providers based on the current rates offered
for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered
for debt of the same or similar remaining maturities.
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans
for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as
Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market
prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are
determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s
financial instruments. For stock in Federal Home Loan Bank of Seattle, the carrying amount is a reasonable estimate of fair
value. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings and money market
deposits, the carrying amount is a reasonable estimate of fair value as these liabilities have no stated maturity.
(in thousands)
December 31, 2014
Financial assets
Money market funds
Available-for-sale investment securities
Stock in Federal Home Loan Bank of Seattle
Loans receivable, net
Derivative assets
Financial liabilities
Deposit liabilities
Short-term borrowings—other than bank
Other bank borrowings
Long-term debt, net—other than bank
The Utilities' long-term debt, net (included in
amount above)
Derivative liabilities
December 31, 2013
Financial assets
Money market funds
Estimated fair value
Carrying or
notional
amount
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
Observable
inputs
(Level 2)
Significant
Unobservable
inputs
(Level 3)
Total
$
10
$
— $
10
$
— $
10
550,394
69,302
4,397,457
30,120
4,623,415
118,972
290,656
1,506,546
1,206,546
32,043
—
—
—
—
—
—
—
—
—
71
550,394
69,302
—
398
4,623,773
118,972
298,837
1,622,736
1,313,893
43
—
—
550,394
69,302
4,578,822
4,578,822
—
—
—
—
—
—
—
398
4,623,773
118,972
298,837
1,622,736
1,313,893
114
$
10
$
— $
10
$
— $
10
Available-for-sale investment securities
Stock in Federal Home Loan Bank of Seattle
Loans receivable, net
Derivative assets
Financial liabilities
Deposit liabilities
Short-term borrowings—other than bank
Other bank borrowings
Long-term debt, net—other than bank
The Utilities' long-term debt, net (included in
amount above)
Derivative liabilities
529,007
92,546
4,115,415
46,356
4,372,477
105,482
244,514
1,492,945
1,217,945
4,732
—
—
—
98
—
—
—
—
—
—
529,007
92,546
—
531
4,374,377
105,482
256,029
1,508,425
1,228,966
26
—
—
529,007
92,546
4,211,290
4,211,290
—
—
—
—
—
—
—
629
4,374,377
105,482
256,029
1,508,425
1,228,966
26
171
As of December 31, 2014 and 2013, loans serviced by ASB for others had notional amounts of $1.4 billion and $1.4
billion, respectively, and the estimated fair value of the mortgage servicing rights for such loans was $14.5 million and $15.7
million, respectively.
Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as
follows:
December 31
(in thousands)
Money market funds (“other” segment)
Available-for-sale investment securities (bank segment)
Mortgage-related securities-FNMA, FHLMC and GNMA
U.S. Treasury and federal agency obligations
Municipal bonds
Derivative assets 1
Interest rate lock commitments
Forward commitments
Derivative liabilities 1
Interest rate lock commitments
Forward commitments
2014
2013
Fair value measurements using
Fair value measurements using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
$
— $
10
— $ 430,834
— 119,560
—
—
— $
— $
10
— $
— $ 369,444
—
—
—
—
80,973
78,590
$
$
— $ 550,394
$
— $
— $ 529,007
$
— $
—
— $
— $
71
71
$
393
5
398
3
40
43
$
$
$
$
— $
— $
—
— $
98
98
$
— $
— $
—
—
— $
— $
488
43
531
24
2
26
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
1 Derivatives are carried at fair value with changes in value reflected in the balance sheet in other assets or other liabilities and included in
mortgage banking income.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the
years ended December 31, 2014 and 2013.
Fair value measurements on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring
basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of
cost or fair value or from impairment of individual assets. Assets measured at fair value on a nonrecurring basis were as
follows:
(in millions)
December 31, 2014
Loans
Tax credit investments
Real estate acquired in settlement of loans
December 31, 2013
Loans
Real estate acquired in settlement of loans
Fair value measurements using
Balance
Level 1
Level 2
Level 3
$
2
9
—
4
—
$
— $
— $
—
—
—
—
—
—
—
—
2
9
—
4
—
For 2014 and 2013, there were no adjustments to fair value for ASB’s loans held for sale.
172
The following table presents quantitative information about Level 3 fair value measurements for financial instruments
measured at fair value on a nonrecurring basis:
7%
100%
87%
50%
19%
58%
4.5%
(dollars in
thousands)
December 31, 2014
Residential loans
Home equity lines of
credit
Commercial loans
Total loans
Tax credit
investments
Real estate acquired
in settlement of loans
December 31, 2013
Residential loans
Home equity lines of
credit
Commercial loans
$
$
$
$
Fair value
Valuation technique
Significant unobservable
input
Significant unobservable
input value 1
Range
Weighted
Average
$
2,297 Fair value of property or
collateral
3 Fair value of property or
collateral
Appraised value less 7% selling
cost
Appraised value less 7% selling
cost
39-99%
145 Fair value of property or
Fair value of business assets
83%
7%
91%
collateral
2,445
8,975 Discounted cash flow
Present value of expected future
cash flows
5-93%
88%
288 Fair value of property or
collateral
Appraised value less 7% selling
cost
100%
Discount rate
2,361 Fair value of property or
collateral
170 Fair value of property or
collateral
Appraised value less 7% selling
cost
Appraised value less 7% selling
cost
44-96%
45-50%
217 Fair value of property or
Fair value of business assets
collateral
Commercial loans
1,668 Discounted cash flow
Total loans
$
4,416
1 Represent percent of outstanding principal balance.
Present value of expected future
cash flows
Discount rate
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value
measurements.
Retirement benefit plans
Assets held in various trusts for the retirement benefit plans are measured at fair value on a recurring basis and were as
follows:
173
(in millions)
2014
Equity securities
Equity index funds
Fixed income securities
Pooled and mutual funds and other
Total
Cash, receivables and payables, net
Fair value of plan assets
2013
Equity securities
Equity index funds
Fixed income securities
Pooled and mutual funds and other
$
$
$
$
Pension benefits
Other benefits
Fair value measurements using
Fair value measurements using
December 31
Level 1
Level 2
Level 3
December 31
Level 1
Level 2
Level 3
$
649
132
428
82
649
132
121
1
$
— $
— $
—
307
81
—
—
—
$
99
19
49
14
99
19
43
3
$
— $
—
6
11
17
$
1,291
$
903
$
388
$
— $
181
$
164
$
(25)
1,266
$
672
127
350
84
672
127
122
—
(1)
180
$
$
— $
— $
102
$
102
$
— $
—
228
83
—
—
1
1
19
46
13
19
40
—
180
$
161
$
—
6
13
19
$
—
—
—
—
—
—
—
—
—
—
Total
1,233
$
921
$
311
$
Cash, receivables and payables, net
(46)
Fair value of plan assets
$
1,187
(1)
179
$
The fair values of the financial instruments shown in the table above represent the Company’s best estimates of the
amounts that would be received upon sale of those assets or that would be paid to transfer those liabilities in an orderly
transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs.
However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair
value measurement reflects the Company’s judgments about the assumptions that market participants would use in pricing the
asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.
In connection with the adoption of the fair value measurement standards, the Company adopted the provisions of ASU No.
2009-12, “Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent),” which allows for the
estimation of the fair value of investments in investment companies for which the investment does not have a readily
determinable fair value, using net asset value per share or its equivalent as a practical expedient.
The Company used the following valuation methodologies for assets measured at fair value. There have been no changes
in the methodologies used at December 31, 2014 and 2013.
Equity securities, equity index funds, U.S. Treasury fixed income securities and public mutual funds (Level 1). Equity
securities, equity index funds, U.S. Treasury fixed income securities and public mutual funds are valued at the closing price
reported on the active market on which the individual securities or funds are traded.
Fixed income securities and pooled and mutual funds and other (Level 2). Fixed income securities, other than those issued
by the U.S. Treasury, are valued based on yields currently available on comparable securities of issuers with similar credit
ratings. Pooled and mutual funds include commingled equity funds and other closed funds, respectively, that are not open to
public investment and are valued at the net asset value per share. Certain other investments are valued based on discounted cash
flow analyses, using observable inputs.
Other (Level 3). Venture capital interest is valued at historical cost, modified by revaluation of financial assets and
financial liabilities at fair value through profit or loss.
For 2014 and 2013, the changes in Level 3 assets were as follows:
(in thousands)
Balance, January 1
Realized and unrealized losses
Purchases and settlements, net
Balance, December 31
2014
Pension
benefits
Other
benefits
Pension
benefits
$
$
580
(203)
(282)
95
$
$
174
18
(6)
(8)
4
$
$
2013
581
(1)
—
580
$
$
Other
benefits
18
—
—
18
17 · Quarterly information (unaudited)
Selected quarterly information was as follows:
(in thousands, except per share amounts)
March 31
June 30
Sept. 30
Dec. 31
December 31
Quarters ended
Years ended
HEI consolidated
2014
Revenues
Operating income
Net income
Net income for common stock
Basic earnings per common share 1
Diluted earnings per common share 2
Dividends per common share
Market price per common share 3
High
Low
2013
Revenues
Operating income
Net income
Net income for common stock
Basic earnings per common share 1
Diluted earnings per common share 2
Dividends per common share
Market price per common share 3
High
Low
Hawaiian Electric consolidated
2014
Revenues
Operating income
Net income
Net income for common stock
2013
Revenues
Operating income
Net income
Net income for common stock
$
783,749
$
798,657
$
867,096
$
790,040
$
3,239,542
88,306
46,400
45,927
0.45
0.45
0.31
26.80
24.39
82,275
41,894
41,421
0.41
0.41
0.31
25.65
23.04
91,102
48,286
47,815
0.47
0.46
0.31
26.89
22.71
67,241
33,630
33,157
0.32
0.32
0.31
35.00
26.04
328,924
170,210
168,320
1.65
1.64
1.24
35.00
22.71
$
782,232
$
794,567
$
829,168
$
832,503
$
3,238,470
68,825
34,152
33,679
0.34
0.34
0.31
27.92
25.50
80,207
41,061
40,588
0.41
0.41
0.31
28.30
23.84
88,038
48,707
48,236
0.49
0.48
0.31
27.24
24.12
78,349
39,486
39,013
0.39
0.39
0.31
27.15
24.51
315,419
163,406
161,516
1.63
1.62
1.24
28.30
23.84
$
720,062
$
738,429
$
803,565
$
725,267
$
2,987,323
70,666
35,919
35,420
70,068
34,729
34,230
76,156
39,377
38,879
58,878
29,611
29,112
275,768
139,636
137,641
717,441
728,525
764,054
770,152
2,980,172
51,121
24,928
24,429
58,975
29,192
28,693
69,853
38,315
37,817
65,564
32,489
31,990
245,513
124,924
122,929
Note: HEI owns all of Hawaiian Electric's common stock, therefore per share data for Hawaiian Electric is not meaningful.
1
2
The quarterly basic earnings per common share are based upon the weighted-average number of shares of common stock outstanding in
each quarter.
The quarterly diluted earnings per common share are based upon the weighted-average number of shares of common stock outstanding
in each quarter plus the dilutive incremental shares at quarter end.
3 Market prices of HEI common stock (symbol HE) shown are as reported on the NYSE Composite Tape.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
HEI and Hawaiian Electric: None
175
ITEM 9A.
CONTROLS AND PROCEDURES
HEI:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Constance H. Lau, HEI Chief Executive Officer, and James A. Ajello, HEI Chief Financial Officer, have evaluated the
disclosure controls and procedures of HEI as of December 31, 2014. Based on their evaluations, as of December 31, 2014, they
have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were effective in ensuring that information required to be disclosed by HEI in reports HEI
files or submits under the Securities Exchange Act of 1934:
(1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and
(2) is accumulated and communicated to HEI management, including HEI’s principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Annual Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The
Company’s internal control over financial reporting was designed to provide reasonable assurance to management and the
Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2014 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2014.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page
83.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2014 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Hawaiian Electric:
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Alan M. Oshima, Hawaiian Electric Chief Executive Officer, and Tayne S. Y. Sekimura, Hawaiian Electric Chief Financial
Officer, have evaluated the disclosure controls and procedures of Hawaiian Electric as of December 31, 2014. Based on their
evaluations, as of December 31, 2014, they have concluded that the disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that
information required to be disclosed by Hawaiian Electric in reports Hawaiian Electric files or submits under the Securities
Exchange Act of 1934:
(1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and
(2) is accumulated and communicated to Hawaiian Electric management, including Hawaiian Electric’s principal
executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Annual Report of Management on Internal Control Over Financial Reporting
176
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended.
Hawaiian Electric’s internal control over financial reporting was designed to provide reasonable assurance to management and
the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of Hawaiian Electric’s internal control over financial reporting
as of December 31, 2014 based on on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective
as of December 31, 2014.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended December 31, 2014 that
have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
HEI and Hawaiian Electric: None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
HEI:
DIRECTORS OF THE REGISTRANT
The directors of HEI are listed below. The HEI Board is composed of nine directors, divided equally into three classes with
staggered terms. Each year, one class of directors is nominated by the HEI Board to serve for a term of three years and is
submitted to the Company's shareholders for election at the annual meeting of shareholders. Below is information regarding the
business experience and certain other directorships for each HEI director, together with a description of the experience,
qualifications, attributes and skills that led to the HEI Board's conclusion at the time of this Form 10-K that each of the
directors should serve on the HEI Board in light of HEI's current business and structure.
Class I Directors (Terms expire at the 2015 Annual Meeting)
Constance H. Lau
Director 2001-04 and since 2006
Age 62
Executive Committee Member
As HEI's President and CEO since 2006, Ms. Lau has extensive senior management experience and thorough knowledge
of the Company's operations. Prior to becoming CEO, Ms. Lau served in various leadership capacities that have spanned
several functions across HEI and its subsidiaries, including the legal, financial and executive management functions. Over her
more than 30 years of service to HEI and its subsidiaries, Ms. Lau acquired significant experience and expertise with respect to
the utility and banking industries. Further, having been exposed to virtually all aspects of HEI's operations at the holding
company and at both operating subsidiaries, Ms. Lau brings a unique and comprehensive perspective to the Board. Ms. Lau's
expertise and leadership stature have been recognized nationally, leading her to be named by President Obama to the National
Infrastructure Advisory Council, which she chairs, and to the boards of leading national utility industry organizations. As a
result, Ms. Lau brings to the Board a national perspective, as well as valuable insights regarding physical and cyber
infrastructure security.
Current and prior positions with the Company
•
President and CEO and Director, HEI, since 2006
177
• Chairman of the Board, Hawaiian Electric (HEI subsidiary), since 2006
• Director, ASB Hawaii (HEI subsidiary), since 2006
• Chairman of the Board, ASB (HEI subsidiary), since 2006 and Risk Committee Member since 2012
• Chairman of the Board and CEO, ASB, 2008-10
• Chairman of the Board, President and CEO, ASB, 2006-08
•
•
• Treasurer, HEI, 1989-99
•
• Treasurer, Hawaiian Electric, and Assistant Treasurer, HEI, 1987-89
• Assistant Corporate Counsel, Hawaiian Electric, 1984-87
President and CEO and Director, ASB, 2001-06
Senior Executive Vice President and Chief Operating Officer and Director, ASB, 1999-2001
Financial Vice President and Treasurer, HEI Power Corp. (former HEI subsidiary), 1997-99
Other public company directorships since 2010
• Director, Audit Committee Chair and Nominating and Corporate Governance Committee Member, Matson, Inc., since
2012
• Director and Audit Committee Member, Alexander & Baldwin, Inc., 2004-12
Skills and qualifications for HEI Board service
•
•
Intimate understanding of the Company from serving in various chief executive, chief operating and other executive,
finance and legal positions at HEI and its subsidiaries for more than 30 years.
Familiarity with current management and corporate governance practices from her current service as director, Audit
Committee Chair and Nominating and Corporate Governance member for Matson, Inc. and as a director of AEGIS
Insurance Services, Inc.
• Experience with financial oversight and expansive knowledge of the Hawaii business community and the local
communities that comprise the Company's customer bases from serving as a director for various local industry,
business development, educational and nonprofit organizations.
• Utility and banking industry knowledge from her current or prior service as a director or task force member of the
Hawaii Bankers Association, the American Bankers Association, the Edison Electric Institute and the Electric Power
Research Institute and as a member of the federal Electricity Subsector Coordinating Council.
• Nationally recognized leader in the fields of infrastructure, banking and energy, demonstrated by her appointment by
President Obama to the National Infrastructure Advisory Council, which she chairs, membership on the federal
Electricity Subsector Coordinating Council, prior service on the Federal Reserve Board of San Francisco's 12th
District Community Depository Institutions Advisory Council, receipt of the 2011 Woman of the Year award from the
Women's Council on Energy and the Environment and naming as a C3E Clean Energy Ambassador by the U.S.
Department of Energy.
A. Maurice Myers
Director since 1991
Age 74
Compensation Committee Member
Mr. Myers brings a wealth of knowledge and leadership skills to the Board. His extensive experience leading successful
companies as chief executive officer, both in Hawaii and on the mainland, including several large public companies, provides
the Board with significant management expertise. Having served on the Board for 24 years, Mr. Myers has gained in-depth
knowledge of HEI and its operations. With this breadth and depth of experience, Mr. Myers is a valuable resource to
management and other Board members and contributes substantially to the Board's capabilities in overseeing HEI's operations.
Business experience and other public company and HEI affiliate directorships since 2010
• CEO and Owner, Myers Equipment Leasing LLC (equipment leasing company), since 2010
• CEO and Director, POS Hawaii LLC (provider of point of sale business systems for restaurants and retailers), since
2009
• CEO and Director, Wine Country Kitchens LLC (manufacturer of gourmet food products), since 2007
• Chairman, CEO and President, Waste Management, Inc. (waste and environmental services provider), 1999-2004
• Director, ASB Hawaii (HEI subsidiary), since 2014
• Director since 2011 and Risk Committee Member since 2012, ASB (HEI subsidiary)
• Director, Hawaiian Electric (HEI subsidiary), 2004-06 and 2009-11
178
Skills and qualifications for HEI Board service
•
•
20 years of public company executive and board leadership experience as Chairman, CEO and President of Waste
Management, Inc., Chairman, CEO and President of Yellow Corporation, President of America West Airlines and CEO
and President of Aloha Airgroup, Inc.
Practiced skills in risk assessment, strategic planning, financial oversight, customer and public relations and marketing
exercised in leading successful restructuring efforts at Waste Management, Yellow Corporation and America West
Airlines.
• Diverse business experience and public and private company board experience, including from his prior service as a
director and Compensation Committee chair for Tesoro Corporation and as a director for BIS Industries Limited and
Cheap Tickets.
James K. Scott, Ed.D.
Director since 1995
Age 63
Nominating and Corporate Governance Committee Member
Dr. Scott has considerable management experience as an executive leader in Hawaii. While Dr. Scott has earned the
reputation of being one of the nation's leading education administrators, his unique value to the Company derives from his
extensive knowledge, contacts and relationships within Hawaii's business community, nonprofit community and local
governmental agencies. Dr. Scott's participation on the Board has contributed significantly to the Board's understanding of
Hawaii's unique cultural and business environment. With the success under his leadership of one of the country's most
prominent college preparatory schools, and because of his commitment to a wide array of charitable and civic causes, Dr. Scott
is a well-respected leader in the state of Hawaii.
Business experience and other public company and HEI affiliate directorships since 2010
President, Punahou School (K-12 independent school), since 1994
•
• Director, ASB (HEI subsidiary), since 2008
Skills and qualifications for HEI Board service
• Recognized leadership and executive management skills as President of Punahou School.
• Three decades of experience developing and executing strategic plans as the chief executive at two independent
schools, including overseeing fundraising programs and admissions/marketing and finance functions.
• Governance and board leadership experience from his current positions as director and former Chair of the Hawaii
Association of Independent Schools, member of the Advisory Board of the Klingenstein Center of Teachers College at
Columbia University and trustee of the National Association of Independent Schools.
Class II Directors (Terms expire at the 2016 Annual Meeting)
Thomas B. Fargo
Director since 2005
Age 66
Compensation Committee Chair
Nominating and Corporate Governance Committee Member
Admiral Fargo brings invaluable leadership skills to the Board. Admiral Fargo's experience leading complex organizations,
both in Hawaii and on the mainland, provides the Board with significant management expertise. Admiral Fargo has extensive
knowledge of the U.S. military (a major customer of HEI's utility subsidiary and key driver of Hawaii's economy) having
served as Commander of the U.S. Pacific Command from 2002-05. Admiral Fargo's leadership, strategic planning and risk
assessment skills have proven to be a valuable resource to management and other Board members.
Business experience and other public company and HEI affiliate directorships since 2010
• Chairman of the Board and Compensation and Governance Committee Member, Huntington Ingalls Industries
(military shipbuilder), since 2011
• Owner, Fargo Associates, LLC (defense and homeland/national security consultancy), since 2005
• CEO, Hawaii Superferry, Inc. (interisland ferry), 2008-09
179
President, Trex Enterprises Corporation (defense research and development firm), 2005-08
•
• Commander, U.S. Pacific Command, 2002-05
• Director and Audit Committee Member, Matson, Inc., since 2012
• Director, Alexander & Baldwin, Inc., 2011-12
• Director, Northrop Grumman Corporation, 2008-11
• Director, Hawaiian Holdings, Inc., 2005-08
• Director, Hawaiian Electric (HEI subsidiary), since 2005
Skills and qualifications for HEI Board service
• Extensive knowledge of the U.S. military, a major customer of HEI's electric utility subsidiary and key driver of
Hawaii's economy.
• Leadership, strategic planning and financial and nonfinancial risk assessment skills developed over 39 years of leading
9 organizations ranging in size from 130 to 300,000 people and managing budgets up to $8 billion.
• Experience with corporate governance, including audit, compensation and governance committees, from service on
several public and private company boards.
Kelvin H. Taketa
Director since 1993
Age 60
Nominating and Corporate Governance Committee Chair
Mr. Taketa has considerable management experience as an executive leader in Hawaii. Mr. Taketa is one of Hawaii's
leading nonprofit administrators and has extensive relationships within Hawaii's business and nonprofit communities. Having
served on the Board for over twenty years, Mr. Taketa has contributed significantly to the Board's understanding of Hawaii's
distinctive cultural and business environment. Additionally, Mr. Taketa brings the unique ability to build bridges and connect
people and organizations, which has made Mr. Taketa a well-respected leader throughout the state of Hawaii.
Business experience and other public company and HEI affiliate directorships since 2010
President and CEO, Hawaii Community Foundation (statewide charitable foundation), since 1998
•
• Director, Hawaiian Electric (HEI subsidiary), since 2004
Skills and qualifications for HEI Board service
• Executive management experience with responsibility for overseeing more than $500 million in charitable assets as
•
President and CEO of the Hawaii Community Foundation.
Proficiency in risk assessment, strategic planning and organizational leadership as well as marketing and public
relations from his current position at the Hawaii Community Foundation and his prior experience as Vice President
and Executive Director of the Asia/Pacific Region for The Nature Conservancy and as Founder, Managing Partner and
Director of Sunrise Capital Inc.
• Knowledge of corporate and nonprofit governance issues gained from his prior service as a director for Grove Farm
Company, Inc., his current service on the boards of the Independent Sector and the Stupski Foundation, and through
publishing articles and lecturing on governance of tax-exempt organizations.
Jeffrey N. Watanabe
Director since 1987
Age 72
Chairman of the Board since 2006
Executive Committee Chair
Compensation Committee Member
Mr. Watanabe has been one of the most influential figures in Hawaii's business community over the past four decades. His
strategic counsel is widely sought by Hawaii's business, political and nonprofit leaders, as well as by global businesses seeking
to do business in Hawaii. Having served on the Board for over twenty-five years, Mr. Watanabe's in-depth knowledge of HEI
significantly contributes to the Board's ability to oversee HEI's operations. As Chairman since 2006, Mr. Watanabe has
successfully led HEI through his strategic vision, willingness to make tough decisions, strong consensus-building skills, and
communication ability.
180
Business experience and other public company and HEI affiliate directorships since 2010
• Managing Partner, Watanabe Ing & Komeiji LLP, 1972-2007 (now retired)
• Lead Independent Director, Alexander & Baldwin, Inc. (A&B), since 2012, director since 2003 and Nominating &
Corporate Governance Committee Member
• Director, Nominating and Corporate Governance Committee Chair and Compensation Committee Member, Matson,
Inc., since 2012
• Director since 1988 and Executive Committee Member, ASB (HEI subsidiary)
• Director, Hawaiian Electric (HEI subsidiary), 1999-2006 and 2008-11
Skills and qualifications for HEI Board service
• Broad business, legal, corporate governance and leadership experience from serving as Managing Partner of the law
firm he helped found, advising clients on a variety of business and legal matters for 35 years and from serving on more
than a dozen public and private company and nonprofit boards and committees, including his current service on the
A&B Nominating and Corporate Governance Committee and the Matson Nominating and Corporate Governance and
Compensation Committees.
Specific experience with strategic planning from providing strategic counsel to local business clients and prospective
investors from the continental United States and the Asia Pacific region for 25 years of his law practice.
•
• Recognized by a number of organizations for his accomplishments, including by the Financial Times-Outstanding
Directors Exchange, which selected him as a 2013 Outstanding Director.
Class III Directors (Terms expire at the 2017 Annual Meeting)
Peggy Y. Fowler
Director since 2011
Age 63
Audit Committee Member
Ms. Fowler brings a unique combination of utility and banking knowledge and experience to HEI. Ms. Fowler's prior
position as chief executive officer of a NYSE-listed public utility company imparts significant leadership and management
expertise to the Board. Additionally, Ms. Fowler's more recent experience of serving on the board of a publicly traded bank
holding company strengthens the Board's capabilities in overseeing the subsidiary bank operations.
Business experience and other public company and HEI affiliate directorships since 2010
President and CEO, PGE, 2000-08
• Co-CEO, Portland General Electric Company (PGE), 2009
•
• Director, PGE, 1998-2012
• Chairman of the Board and of the Risk and Governance and Executive Committees since 2012 and director since
2009, Umpqua Holdings Corp. (publicly traded bank holding company)
• Director and Audit Committee Member, Hawaiian Electric (HEI subsidiary), since 2009
Skills and qualifications for HEI Board service
•
35 years of executive leadership, financial oversight and utility operations experience from serving at PGE in senior
officer positions, including Chief Operating Officer, President and CEO.
• Environmental and renewable energy expertise from managing PGE's environmental department, overseeing
initiatives that improved fish passage on multiple Oregon rivers, supervising the construction and integration into
PGE's grid of wind and solar projects, and leading PGE to be ranked #1 by the National Renewable Energy Laboratory
for selling more renewable power to residential customers than any other utility in the U.S. for several years during
her tenure as PGE's CEO.
Proven management, leadership and analytical skills, including crisis management, risk assessment, strategic planning
and public relations skills.
•
• Expertise in financial oversight, regulatory compliance and corporate governance gained from serving as President
(1997-2000), CEO (2000-08) and Chair (2001-04) of PGE, as a past director for the Portland Branch of the Federal
Reserve Bank of San Francisco and as a director and committee member for several private and public companies,
including Umpqua Holdings Corporation.
181
Keith P. Russell
Director since 2011
Age 69
Audit Committee Member
Mr. Russell has extensive senior management experience in the banking industry. Mr. Russell's many years of executive
leadership experience in managing and overseeing bank operations contributes invaluable expertise to the Board. In addition,
his prior service as chief risk officer of a large financial institution significantly strengthens the Board's capabilities in
overseeing and managing risk within the organization. Mr. Russell also has extensive knowledge and experience from his prior
service as an officer of a lender to the electric utility industry.
Business experience and other public company and HEI affiliate directorships since 2010
President, Russell Financial, Inc. (strategic and financial consulting firm), since 2001
•
• Vice Chair/Chief Risk Officer, Mellon Financial Corp., then Chairman, Mellon West, 1991-2001
•
Senior Executive Vice President, then Director, President and Chief Operating Officer, GLENFED/Glendale Federal
Bank, 1983-91
• Director, ASB Hawaii (HEI subsidiary), since 2014
• Director and Audit Committee Member since 2010 and Risk Committee Chair since 2012, ASB (HEI subsidiary)
• Director since 2004 and Audit Committee chair since 2011, Sunstone Hotel Investors
• Director, Nationwide Health Properties, 2002-11
Skills and qualifications for HEI Board service
•
•
•
10 years of executive leadership, financial oversight, risk management and strategic planning experience from serving
as Vice Chairman/Chief Risk Officer for Mellon Financial Corporation and Chairman of Mellon's West Coast
operations. Mellon was also a major lender and capital provider to the electric utility industry.
8 years of executive and corporate governance experience from serving as Director, President and Chief Operating
Officer of GLENFED/Glendale Federal Bank.
9 years of banking industry experience serving as Senior Vice President and Deputy Administrator for Security Pacific
National Bank, with direct responsibility for a wide breadth of operations, including leasing, consumer and
commercial finance, mortgage banking, venture capital, cash management and trust business.
Barry K. Taniguchi
Director since 2004
Age 67
Audit Committee Chair
Executive Committee Member
Mr. Taniguchi brings to the Board considerable experience as a proven business leader in Hawaii, with extensive
knowledge of the business climate and significant contacts and relationships within the business community and local
governmental agencies. With the successes of his own businesses, and because of his commitment to a wide array of charitable
causes, Mr. Taniguchi is one of the most well-respected businesspersons in Hawaii.
Business experience and other public company and HEI affiliate directorships since 2010
President and Director, K. Taniguchi Ltd. (real estate lessor), since 1989
• Chairman and CEO since 2014 and President and CEO since 1989, KTA Super Stores (grocery store chain)
•
• Director, ASB Hawaii (HEI subsidiary), since 2014
• Director, ASB (HEI subsidiary) since 2002 and Audit Committee Chair
• Director, 2001-11 and Audit Committee Chair, Hawaiian Electric (HEI subsidiary)
• Director, Maui Electric Company, Limited (HEI and Hawaiian Electric subsidiary), 2006-09
• Director, Hawaii Electric Light Company, Inc. (HEI and Hawaiian Electric subsidiary), 1997-2009
Skills and qualifications for HEI Board service
• Current knowledge of and experience with the business community on the island of Hawaii, which is served by one of
HEI's utility subsidiaries, Hawaii Electric Light Company, Inc., from his chief executive roles for the last 25 years.
• Accounting and auditing knowledge and experience gained from obtaining a public accounting certification and from
his prior work as an auditor and as a controller.
182
• Extensive corporate and nonprofit board and leadership experience, including from having served as a director of
Hawaii Community Foundation, as a director and former Chair of both the Hawaii Island Economic Development
Board and the Chamber of Commerce of Hawaii.
EXECUTIVE OFFICERS OF THE REGISTRANT (HEI)
The executive officers of HEI are listed below. Messrs. Oshima and Wacker are officers of HEI subsidiaries rather than of
HEI, but are deemed to be executive officers of HEI under SEC Rule 3b-7 promulgated under the 1934 Exchange Act. HEI
executive officers serve from the date of their initial appointment until the annual meeting of the HEI Board at which officers
are appointed (or the next annual appointment of officers by the applicable HEI subsidiary board), and thereafter are appointed
for one-year terms or until their successors have been duly appointed and qualified or until their earlier resignation or removal.
HEI executive officers may also hold offices with HEI subsidiaries and affiliates in addition to their current positions listed
below.
Name
Constance H. Lau
Age
62
Business experience for last 5 years and prior positions with the Company
HEI President and Chief Executive Officer since 5/06
HEI Director, 6/01 to 12/04 and since 5/06
Hawaiian Electric Chairman of the Board since 5/06
ASB Hawaii Director since 5/06
ASB Chairman of the Board since 5/06
· ASB Chairman of the Board since 11/10
· ASB Chairman of the Board and Chief Executive Officer, 2/08 to 11/10
· ASB Chairman of the Board, President and Chief Executive Officer, 5/06 to 1/08
· ASB President and Chief Executive Officer and Director, 6/01 to 5/06
· ASB Senior Executive Vice President and Chief Operating Officer and Director, 12/99 to 5/01
· HEI Treasurer, 4/89 to 10/99
· HEI Power Corp. Financial Vice President and Treasurer, 5/97 to 8/99
· Hawaiian Electric Treasurer and HEI Assistant Treasurer, 12/87 to 4/89
· Hawaiian Electric Assistant Corporate Counsel, 9/84 to 12/87
HEI Executive Vice President and Chief Financial Officer since 8/13
ASB Hawaii Director since 8/09
· HEI Executive Vice President, Chief Financial Officer and Treasurer, 5/11 to 8/13
· HEI Senior Financial Vice President, Treasurer and Chief Financial Officer, 1/09 to 5/11
James A. Ajello
61
Chester A. Richardson
66
HEI Executive Vice President, General Counsel, Secretary and Chief Administrative Officer since 5/11
· HEI Senior Vice President, General Counsel, Secretary and Chief Administrative Officer, 9/09 to
5/11
· HEI Senior Vice President, General Counsel and Chief Administrative Officer, 12/08 to 9/09
· HEI Vice President, General Counsel, 8/07 to 12/08
Alan M. Oshima
67
Hawaiian Electric President and Chief Executive Officer since 10/14
Hawaiian Electric Director, 2008 to 10/11 and since 10/14
HEI Charitable Foundation President since 10/11
· Hawaiian Electric Senior Executive Officer on loan from HEI, 5/14 to 9/14
· HEI Executive Vice President, Corporate and Community Advancement, 10/11 to 5/14
· Prior to joining the Company: AMO Consulting, Owner and Principal, 2008-10/11; Hawaiian
Telcom Communications, Inc. (Hawaiian Telcom), Senior Advisor, 2008-10; Hawaiian Telcom,
Senior Vice President, General Counsel and Secretary, 2005-08
Richard F. Wacker
52
ASB President and Chief Executive Officer since 11/10
ASB Hawaii Director since 12/14
ASB Director since 11/10
· Prior to joining the Company: Korea Exchange Bank, Chairman, 4/09 to 11/10
Family relationships; executive officer and director arrangements
There are no family relationships between any executive officer or director of HEI and any other executive officer or
director of HEI. There are no arrangements or understandings between any executive officer or director of HEI and any other
person pursuant to which such executive officer or director was selected.
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Securities Exchange Act of 1934 requires HEI’s executive officers, directors and persons who own
more than ten percent of a registered class of HEI’s equity securities to file reports of ownership and changes in ownership with
the Securities and Exchange Commission (SEC). Such reporting persons are also required by SEC regulations to furnish HEI
with copies of all Section 16(a) forms they file. Based solely on its review of such forms provided to it, HEI believes that each
of the persons required to comply with the Section 16(a) reporting requirements with regard to HEI complied with such
reporting requirements for 2014, except that on one occasion, the following officers failed to file timely reports (one report
183
reporting one transaction each was inadvertently filed one day late) relating to shares awarded under the Company's Long-Term
Incentive Plan for the 2011-13 performance period: Constance H. Lau, Chief Executive Officer, James A. Ajello, Executive
Vice President and Chief Financial Officer, Chester A. Richardson, Executive Vice President, General Counsel, Secretary and
Chief Administrative Officer, Richard M. Rosenblum, Hawaiian Electric Company Chief Executive Officer, and Richard F.
Wacker, American Savings Bank Chief Executive Officer. All reports have now been filed.
Code of Conduct
The HEI Board has adopted a Corporate Code of Conduct that includes a code of ethics applicable to, among others, its
principal executive officer, principal financial officer and principal accounting officer. The Corporate Code of Conduct is
available on HEI’s website at www.hei.com. HEI elects to disclose the information required by Form 8-K, Item 5.05,
“Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics,” through this website and
such information will remain available on this website for at least a 12-month period.
Audit Committee
The Audit Committee is responsible for overseeing (i) HEI’s financial reporting processes and internal controls, (ii) the
performance of HEI’s internal auditor, (iii) risk assessment and risk management policies set by management and (iv) the
Corporate Code of Conduct compliance program for HEI and its subsidiaries. In addition, this committee is directly responsible
for the appointment, compensation and oversight of the independent registered public accounting firm that audits HEI’s
consolidated financial statements. The Audit Committee also maintains procedures for receiving and reviewing confidential
reports of potential accounting and auditing concerns.
All Audit Committee members are independent and qualified to serve on the committee pursuant to NYSE and SEC
requirements and the Audit Committee meets the other applicable requirements of the Securities Exchange Act of 1934. None
of the Audit Committee members serve on the audit committees of more than two other public companies.
The Audit Committee is responsible for providing independent, objective oversight of HEI’s accounting functions and
internal controls. It operates and acts under a written charter, which was adopted and approved by the committee and the Board
of Directors. The Board has determined that the three directors currently serving on the Audit Committee (Ms. Fowler and
Messrs. Russell and Taniguchi) meet the independence and other qualification requirements of the NYSE Listed Company
Manual and applicable securities laws. Ms. Fowler and Messrs. Russell and Taniguchi have been determined by the Board to be
the “audit committee financial experts” on the Audit Committee. In addition, the Audit Committee has authority to retain its
own independent legal counsel and accounting advisers at HEI’s expense.
The Audit Committee assists the Board with its financial and risk oversight responsibilities. Management has the primary
responsibility for HEI’s consolidated financial statements and reporting process, including the systems of internal control. The
independent registered public accounting firm has the responsibility for the independent audit of the consolidated financial
statements and for expressing an opinion on the conformity of those audited consolidated financial statements with U.S.
generally accepted accounting principles.
Hawaiian Electric:
The information required by this Item 10 for Hawaiian Electric is incorporated herein by reference to pages 1 to 7 of
Hawaiian Electric Exhibit 99.1.
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ITEM 11.
EXECUTIVE COMPENSATION
HEI:
COMPENSATION DISCUSSION AND ANALYSIS
This section describes our executive compensation program and the compensation decisions made for our 2014 named
executive officers. Three of our named executive officers are executives at HEI (the holding company), one currently leads
Hawaiian Electric Company (our electric utility subsidiary), one heads American Savings Bank (our bank subsidiary) and one
formerly led Hawaiian Electric Company:
Name
Constance H. Lau
James A. Ajello
Chet A. Richardson
Alan M. Oshima*
Richard F. Wacker
Title
HEI President & CEO
HEI Executive Vice President & Chief Financial Officer
Entity
Holding company
Holding company
HEI Executive Vice President, General Counsel, Secretary & Chief Administrative Officer
Holding company
Hawaiian Electric Company President & CEO
American Savings Bank President & CEO
Richard M. Rosenblum**
Former Hawaiian Electric Company President & CEO
Electric utility subsidiary
Bank subsidiary
Electric utility subsidiary
*
**
Effective October 1, 2014, Mr. Oshima was appointed Hawaiian Electric President & CEO. From October 10, 2011 through May 18, 2014, Mr. Oshima
served as HEI Executive Vice President, Corporate and Community Advancement. Effective May 19, 2014 and up to his appointment as Hawaiian
Electric President and CEO, Mr. Oshima served as a senior Hawaiian Electric executive officer on loan from HEI.
Mr. Rosenblum stepped down as Hawaiian Electric President & CEO effective September 30, 2014. He retired in January 2015 and continues as a
consultant to Hawaiian Electric for a six-month period. See "Consulting Agreement with Former Executive" below.
Executive summary
Our guiding principles shape our program design and pay decisions
In designing HEI’s executive compensation program and making pay decisions, the Compensation Committee
(Committee) follows these guiding principles:
•
•
•
•
pay should reflect Company performance, particularly over the
compensation programs should align executive interests with those of our shareholders,
programs should be designed to attract, motivate and retain talented executives who can drive the Company’s success,
and
the cost of programs should be reasonable while maintaining their purpose and benefit.
Key design features
design. The compensation program for our named executive officers is simple and
The
program is comprised of four primary elements - base salary,
incentives earned over three years and
restricted stock units (RSUs) that vest in annual installments over
annual incentives,
four years.
Emphasis on variable
pay over fixed pay. Through the target compensation mix, we emphasize
variable pay over fixed pay, with the majority of the target compensation opportunity for each named executive officer linked
to the Company’s financial, market and operating results.
Balance between
and
components. The compensation program also balances the importance of achieving
strategic priorities and critical
goals that support
objectives.
185
Our compensation practices demonstrate our commitment to sound governance
The tables below summarize our current executive compensation practices - both what we do (to drive performance and
manage risk) and what we don’t do:
What We Do
Link pay to performance
value creation
performance over time
Benchmark toward the competitive median in setting compensation
levels
Review tally sheets when making compensation decisions
Mitigate undue risk in compensation programs
Require stock ownership and retention by named executive
officers; CEO must own five times her base salary
Prohibit pledging of Company stock and transactions designed to
hedge the risk of stock ownership
Utilize independent compensation consultant to advise Committee
What We Don’t Do
No employment contracts
No tax gross ups, except under the Executive Death Benefit Plan
frozen in 2009
No compensation programs that are reasonably likely to create
material risk to Company
No significant perquisites
No dividends or dividend equivalents on unearned performance shares
2014 Say-On-Pay Vote
At our 2014 Annual Meeting, nearly 90% of votes cast approved our executive compensation program through the
advisory say-on-pay vote. The Compensation Committee reviewed this say-on-pay result and considered this vote to be
supportive of the Company’s executive compensation program, including changes made in response to the 2013 say-on-pay
vote and summarized in our proxy statement for our 2014 Annual Meeting, and determined not to make any additional
structural changes to the program for 2014.
How we make compensation decisions
Our roles in determining compensation are
Compensation Committee
The Committee oversees the design and implementation of our executive compensation programs. On an annual basis, the
Committee engages in a rigorous process to arrive at compensation decisions regarding the named executive officers. In the
course of this process, the Committee:
• Engages in extensive deliberations in meetings held over several months
• Consults with its independent compensation consultant during and outside of meetings
•
strategy and
Focuses on the Company’s
metrics and goals
goals to achieve such strategy in setting performance
• Reviews tally sheets for each named executive officer to understand how the elements of compensation relate to each
other and to the compensation package as a whole (the tally sheets include fixed and variable compensation, minimal
perquisites and change in pension value and also show historical compensation)
• Examines data and analyses prepared by its independent compensation consultant concerning peer group selection,
comparative compensation data and evolving best practices
• Reviews Company performance and discusses assessments of the individual performance of senior members of
management
• Analyzes the reasonableness of incentive payouts in light of the
benefits to shareholders
186
• Considers trends in payouts to determine whether incentive programs are working effectively
• Reviews risk assessments to determine whether compensation programs and practices carry undue risk
Early each year, the Committee determines payouts under incentive plans ending in the prior year, establishes performance
metrics and goals for incentive plans beginning that year and recommends to the Board and subsidiary boards the level of
compensation and mix of pay elements for each named executive officer.
The independent directors evaluate the CEO’s performance, consider Committee recommendations concerning her pay and
determine her compensation. The Board and subsidiary boards also review the performance of and Committee
recommendations concerning the other named executive officers and approve their compensation.
Executive officers
The CEO, who is also an HEI director, assesses and reports on the performance of the other named executive officers and
makes recommendations to the Committee with respect to their levels of compensation and mix of pay elements. She also
participates in Board deliberations in acting on the Committee’s recommendations regarding the other named executive
officers. She does not participate in the deliberations of the Committee to recommend, or of the Board to determine, her own
compensation.
Management supports the Committee in executing its responsibilities by providing materials for Committee meetings
(including tally sheets and recommendations regarding performance metrics, goals and pay mix); by attending portions of
Committee meetings as appropriate to provide perspective and expertise relevant to agenda items; and by supplying data and
information as requested by the Committee and/or its independent compensation consultant.
Compensation consultant & consultant independence
The Committee’s independent compensation consultant, Frederick W. Cook & Co., Inc. (Fred Cook & Co.), is retained by,
and reports directly to, the Committee. Fred Cook & Co. provides the Committee with independent expertise on market
practices and developments in executive compensation, compensation program design, peer group composition, and
competitive pay levels, and provides related research, data and analysis. Fred Cook & Co. also advises the Committee
regarding analyses and proposals presented by management. A representative of Fred Cook & Co. generally attends Committee
meetings, participates in Committee executive sessions, and communicates directly with the Committee.
In early 2015, as in 2014, the Committee evaluated Fred Cook & Co.’s independence, taking into account all relevant
factors, including the factors specified in the NYSE listing standards and the absence of other relationships between Fred
Cook & Co. and the Company, its directors or executive officers. Based on its review of such factors, and based on Fred
Cook & Co.’s independence policy, which was shared with the Committee, the Committee concluded that Fred Cook & Co. is
independent and that the work of Fred Cook & Co. has not raised any conflict of interest.
We use comparative market data as a reference point for compensation
Compensation benchmarking
The Committee considers comparative market compensation as a reference in determining pay levels and mix of pay
components. While the Committee seeks to position named executive officer target compensation opportunity (comprised of
base salary, target
at the comparative market median, the Committee may decide that an executive’s pay opportunity should be higher or lower
based on internal equity or the executive’s level of responsibility, experience, expertise, performance and retention and
succession considerations.
annual incentive, target
incentive and
RSUs)
Comparative market data used in setting 2014 executive pay consisted of information from public company proxy
statements for peer group companies and, for Ms. Lau, Mr. Ajello, Mr. Oshima, Mr. Richardson and Mr. Rosenblum, data from
the Towers Watson Energy Services Survey, which consists of compensation data for 104 companies. The data was regressed
based on revenues of $3.3 billion for appropriate size comparison for HEI.
Comparative market data available in late 2013 was used to establish the 2014 target compensation opportunity. On the
basis of such data, the Committee set the target compensation opportunity for all named executive officers at approximately the
comparative market median.
187
Peer groups
Compensation peers
The Committee annually reviews the peer groups used in benchmarking for HEI and subsidiary executive compensation,
with analysis and recommendations provided by Fred Cook & Co.
For 2014 compensation, the Committee used one peer group for the compensation of the named executive officers
employed by HEI (Ms. Lau, Mr. Ajello, Mr. Oshima (while working for HEI) and Mr. Richardson) and its electric utility
(Mr. Rosenblum and Mr. Oshima (while working for Hawaiian Electric)) and used a separate peer group for the named
executive officer employed by ASB (Mr. Wacker), given the differences in ASB’s business from the business of HEI's utility
subsidiaries.
For 2014, the Committee determined, with input from Fred Cook & Co., that HEI’s peer group should be set to situate HEI
near the median for revenues. The Committee determined that the companies in the 2013 bank subsidiary peer group remained
appropriate and no changes to that peer group were needed for 2014. The selection criteria and resulting 2014 HEI and bank
subsidiary peer groups are set forth below.
Selection Criteria
Peer Group for
2014 Compensation
HEI 2014 Peer Group (applies to Ms. Lau,
Mr. Ajello, Mr. Richardson Mr. Oshima &
Mr. Rosenblum)
Bank Subsidiary 2014 Peer Group (applies to
Mr. Wacker)
Revenue balanced in a range of approximately 0.4x to
2.5x HEI’s revenue
Total assets balanced in a range of approximately 0.6x to 3.0x
American Savings Bank’s total assets
Market cap and location as secondary considerations
Available compensation data
Available compensation data
Alliant Energy
Ameren
Avista
CenterPoint Energy
CMS Energy
Great Plains Energy
Integrys Energy
MDU Resources
NiSource
Northeast Utilities
OGE Energy
Pepco Holdings
Pinnacle West
PNM Resources
Portland General Electric
SCANA
TECO Energy
UIL Holdings
UNS Energy
Vectren
Westar Energy
Wisconsin Energy
Italicized companies were new for 2014. UNS Energy
was acquired in 2014 and was subsequently removed.
1st Source
BancFirst
Bank of Hawaii
Bank of the Ozarks
Central Pacific Financial
City Holding Company
Community Bank System
CVB Financial
Dime Community Bancshares
First Financial
Flushing Financial
Glacier Bancorp
Great Southern Bancorp
IBERIABANK
Independent Bank
NBT Bancorp
Park National
Prosperity Bancshares
Republic Bancorp
United Bankshares
Westamerica Bancorp
Performance peers
In addition to the peer companies used for benchmarking executive compensation, certain of the performance metrics used
incentive plans (described below under "Long-term incentives") are based on performance relative to
in the
performance peers. HEI’s Relative TRS performance is measured against the performance of the utilities in the Edison Electric
Institute (EEI) Index and ASB’s Relative Return on Assets (ROA) performance metric is based on ASB’s performance
compared to that of all U.S. banks with assets of $3.5 billion to $8 billion. See Note 4 to the "2014-16 Long-Term Incentive,
Performance Metrics & Why We Use Them" table on page 197 for an explanation of ASB's Relative ROA. The performance
peers for both metrics are set forth below:
188
2014 Edison Electric Index (EEI) Peers for HEI Long-Term Incentive Plan
Relative Total Return to Shareholders Metric
The EEI is an association of U.S. shareholder-owned electric companies that are representative of comparable investment
alternatives to HEI. The EEI’s members serve 95% of the ultimate customers in the shareholder-owned segment of the industry.
Allete, Inc.
Alliant Energy Corp.
Ameren Corp.
Duke Energy Corp.
Edison International
El Paso Electric Co.
American Electric Power Co.
Empire District Electric Co.
Avista Corp.
Black Hills Corp.
Entergy Corp.
Exelon Corp.
Centerpoint Energy Inc.
FirstEnergy Corp.
NextEra Energy Inc.
NiSource Inc.
Northeast Utilities
NorthWestern Corp.
OGE Energy Corp.
Otter Tail Corp.
Pepco Holdings Inc.
Great Plains Energy Inc.
PG&E Corp.
Public Service Enterprise Group Inc.
SCANA Corp.
Sempra Energy
Southern Co.
TECO Energy
UIL Holdings Corp.
Unitil Corp.
Vectren Corp.
Cleco Corp.
CMS Energy Corp.
Consolidated Edison Inc.
Dominion Resources Inc.
DTE Energy Co.
IDACORP Inc.
Pinnacle West Capital Corp.
Westar Energy Inc.
Integrys Energy Group
PNM Resources Inc.
Wisconsin Energy Corp.
MDU Resources Group Inc.
Portland General Electric
Xcel Energy Inc.
MGE Energy Inc.
PPL Corp.
2014 Bank Performance Peer Group for
erm Incentive Plan Relative Return on Assets (ROA) Metric
The performance peer group for ASB’s
incentive plan ROA metric includes all publicly traded banks and thrifts
with total assets between $3.5 billion and $8 billion. The specific banks and thrifts in the bank ROA peer group in one year may
differ from the banks and thrifts in the group in the next year, as total assets for a given institution may change from year to year.
1st Source Corporation
Ameris Bancorp
BancFirst Corporation
Bancorp, Inc.
Bank of the Ozarks, Inc.
Banner Corporation
BBCN Bancorp, Inc.
CVB Financial Corp.
NBT Bancorp Inc.
Dime Community Bancshares, Inc.
Northwest Bancshares, Inc.
Eagle Bancorp, Inc.
PacWest Bancorp
Farmers & Merchants Bank of Long Beatch
Park National Corporation
First Busey Corporation
Pinnacle Financial Partners, Inc.
First Commonwealth Financial Corporation
Renasant Corporation
First Financial Bancorp.
S&T Bancorp, Inc.
Beneficial Mutual Bancorp, Inc. (MHC)
First Financial Bankshares, Inc.
Sandy Spring Bancorp, Inc.
Berkshire Hills Bancorp, Inc.
First Financial Holdings, Inc.
Simmons First National Corporation
Boston Private Financial Holdings, Inc.
First Interstate BancSystem, Inc.
Tompkins Financial Corporation
Brookline Bancorp, Inc.
First Merchants Corporation
TrustCo Bank Corp NY
Capital Bank Financial Corporation
Flushing Financial Corporation
Union First Market Bankshares Corporation
Central Pacific Financial Corporation
Glacier Bancorp, Inc.
Chemical Financial Corporation
Columbia Banking System, Inc.
Community Bank System, Inc.
Community Trust Bancorp, Inc.
Customers Bancorp, Inc.
Great Southern Bancorp, Inc.
Heartland Financial USA, Inc.
Home BancShares, Inc.
Independent Bank Corporation
National Bank Holdings Corporation
*Taylor Capital Group, Inc. was acquired in 2014 and subsequently removed.
United Community Banks, Inc.
WesBanco, Inc.
Westamerica Bancorporation
Willshire Bancorp, Inc.
WSFS Financial Corporation
What we pay and why: Compensation elements and 2014 pay decisions
Each element of compensation supports important objectives
The total compensation program for named executive officers is made up of the five components summarized below. Each
component fulfills important objectives that reflect our focus on pay for performance, competitive programs to attract and
retain talented executives, and aligning executive decisions with the interests of the Company and our shareholders. These
elements are described in further detail in the pages that follow.
189
Compensation
Element
Summary
Objectives
Base Salary
Incentives
Incentives
Fixed level of cash compensation targeted to peer group
median (but may vary based on performance, experience,
responsibilities and other factors).
Attract and retain talented executives by providing
competitive fixed cash compensation.
Drive achievement of key business results linked to
strategy and reward executives for their
performance goals for the year. Award opportunity is a
percentage of base salary. Performance below threshold levels
yields no incentive payment.
contributions to such results.
Balance compensation cost and return by paying awards
based on performance.
percentage of base salary. Performance below threshold levels
yields no incentive payment.
Motivate executives and align their interests with those of
shareholders by promoting
value growth and by
paying awards in the form of equity.
Balance compensation cost and return by paying awards
based on performance.
Annual RSU Grant
Annual equity grants in the form of RSUs that vest in equal
installments over 4 years. Amount of grant is a percentage of
base salary.
Promote alignment of executive and shareholder interests by
ensuring executives have significant ownership of HEI stock.
Retain talented leaders through
vesting.
Includes defined benefit pension plans and retirement savings
plan (for HEI/utility employees) and defined contribution
plan (for bank employees); deferred compensation plans;
Enhance total compensation with meaningful and
competitive benefits that promote peace of mind and
contribute to financial security.
agreements encourage
Benefits
perquisites; and an executive death benefit plan (frozen since
2009).
focused attention of executives during major corporate
transitions.
Modest changes to elements in 2014
On an annual basis, the Committee reviews and recommends each named executive officer’s target compensation
opportunity, which is composed of four of the five elements from the chart above: base salary, annual incentive opportunity at
target,
percentage of base salary.
incentive opportunity at target and annual RSU grant. The last three of these elements are established as a
The Committee made very modest changes to the mix of elements for 2014, as shown in the chart below.
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Base Salary
($)
2013
815,000
2014
same
527,850
543,700
396,550
N/A
591,600
412,400
550,0002
604,000
617,100
630,000
Annual Incentive
(Target Opportunity1
as % of
Base Salary)
(Target Opportunity1
as % of
Base Salary)
Restricted Stock
Units (Grant Value
as % of
Base Salary)
2013
100
60
55
N/A
80
75
2014
same
same
same
50/753
same
same
150
80
70
55
80
90
160
same
same
same
same
same
2013
75
50
50
N/A
20
50
2014
same
same
same
45
same
same
1
2
The threshold and maximum opportunities are 0.5 times target and 2 times target, respectively.
The Committee set Mr. Oshima's base salary at $550,000 upon his promotion to Hawaiian Electric President & CEO effective October 1, 2014. Prior
to that and from January 1, 2014 to May 18, 2014, Mr. Oshima's base salary while at HEI was $331,000 and from May 19, 2014 to September 30,
2014, his base salary as a Hawaiian Electric senior executive on loan from HEI was $386,580. Mr. Oshima's pro-rated base salary for 2014 was
$406,593, which is reflected in the "2014 Summary Compensation Table" on page 205.
3
Mr. Oshima's target opportunity increased from 50% to 75% upon his promotion to Hawaiian Electric President & CEO in October 2014.
Base salary
Base salaries for our named executive officers are reviewed and determined annually. In establishing base salaries for the
year, the Committee considers competitive market data, internal equity, and each executive’s level of responsibility, experience,
expertise, performance and retention and succession considerations. The Committee strives to set base salaries at the
competitive median, but may determine that the foregoing factors compel a higher or lower salary.
For 2014, Ms. Lau’s base salary remained the same. For 2014, Messrs. Ajello, Richardson, Rosenblum and Wacker
received modest base salary increases to recognize their performance and maintain the market competitiveness of their pay. The
percentage increases were as follows: Mr. Ajello (3%), Mr. Richardson (4%), Mr. Rosenblum (2.1%) and Mr. Wacker (2.1%).
Mr. Oshima’s base salary was set at the median level for his position at similar companies at the time of his promotion to
190
Hawaiian Electric President & CEO in October 2014. The resulting 2014 base salaries for the named executive officers are
shown in the table above.
Annual incentives
HEI named executive officers and other executives are eligible to earn an annual cash incentive award under HEI’s
Executive Incentive Compensation Plan (EICP) based on the achievement of performance goals for the year. Each year, the
Committee determines the target annual incentive opportunity for each executive, performance metrics for the year, and goals
for achievement in those metrics.
2014 target annual incentive opportunity
The target annual incentive opportunity is a percentage of base salary, with the threshold and maximum opportunities equal
to 0.5 times and 2 times target, respectively. In establishing the target percentage for each executive, the Committee takes into
account the mix of pay elements, competitive market data, internal equity, performance and other factors described above under
“Base Salary.”
The 2014 target annual incentive opportunities for the named executive officers are shown in the table above. For 2014, the
Committee recommended, and the Board approved, keeping the target opportunity the same as the 2013 target opportunity for
all HEI named executive officers. As a result of Mr. Oshima's promotion to Hawaiian Electric President & CEO in October
2014, Mr. Oshima's target opportunity was increased from 50% to 75%.
2014 performance metrics, goals, results & payouts
The performance metrics for annual incentives are chosen because they connect directly to the Company’s strategic
priorities and correlate with creating shareholder value. The 2014 performance metrics for Ms. Lau, Mr. Ajello, Mr. Oshima
(from January 1, 2014 through May 18, 2014) and Mr. Richardson related to the holding company, while the metrics for Mr.
Oshima (from May 19, 2014 through December 31, 2014) and Mr. Rosenblum concerned the utility and the metrics for
Mr. Wacker related to ASB. The rationale for each metric is shown in the chart below.
In addition to selecting performance metrics, the Committee determines the level of achievement required to attain the
threshold, target and maximum goal for each metric. The level of difficulty of the goals reflects the Committee’s belief that
incentive pay should be motivational - that is, the goals should be challenging but achievable - and that such pay should be
balanced with reinvestment in the Company and return to shareholders. Consistent with this approach, the Committee believes
threshold should represent solid performance with positive financial/operating results, target should denote achievable goals
that include a stretch factor and maximum should signify truly exceptional performance.
The target level for financial goals, such as net income, return on average common equity (ROACE) and ROA is generally
set at the level of the
budget, which represents the level of accomplishment the Company seeks to achieve for
the year. In setting the threshold and maximum levels, the Committee considers whether the risks to accomplishing the budget
weigh more heavily toward the downside and how challenging it would be to achieve incremental improvements over the target
level.
The chart below identifies the 2014 annual incentive metrics, the objective each measure serves, the level of achievement
required to attain the threshold, target and maximum levels for each metric, the results for 2014 and the corresponding payout
as a percentage of the target opportunity. The results shown below for Mr. Wacker incorporate the Committee’s decision to
exclude the impact of one unusual event that affected ASB in 2014. The results shown below for Mr. Rosenblum and Mr.
Oshima (from May 19, 2014 through December 31, 2014) incorporate the Committee’s decision to exclude the impact of one
unusual event that affected the utility in 2014. The results shown below for Ms. Lau, Mr. Ajello, Mr. Richardson and Mr.
Oshima (from January 1, 2014 through May 18, 2014) incorporate the Committee’s decision to exclude the impact of the two
unusual material events that occurred in 2014, one affecting the utility and the other ASB. The two adjustments are described
below under "Adjustments for unusual events - 2014 Annual Incentive."
.
191
2014 Annual Incentive
Performance Metrics & Why We Use Them
Weighting
Threshold
Goals
Target
Maximum
Result
% of Target
Total
Payout as
Lau, Ajello, Richardson and Oshima*
HEI Net Income1 focuses on fundamental earnings
growth, which correlates to shareholder value.
Plant Additions2 promotes execution of the utility’s
robust plant additions program, which is needed to
achieve clean energy goals and maintain reliable
service.
Utility Safety3 rewards improvements in workplace
safety, promoting employee wellbeing and reducing
expense.
Renewable Energy4 encourages development and
integration of additional renewable energy into the
utility’s system.
Utility Customer Satisfaction5 focuses on
improving the customer experience through all
points of contact with the utility.
ASB ROA6 measures how efficiently the bank
deploys its assets by comparing return to total assets.
Oshima* and Rosenblum
Utility Net Income1 - see HEI Net Income above.
Plant Additions2 promotes execution of the utility’s
robust plant additions program, which is needed to
achieve clean energy goals and maintain reliable
service.
Utility Safety3 rewards improvements in workplace
safety, promoting employee wellbeing and reducing
expense.
Renewable Energy4 encourages development and
integration of additional renewable energy into the
utility’s system.
Utility Employee Engagement7 rewards growth in
employee dedication and motivation, which are
crucial to achieving the utility’s objectives.
Utility Customer Satisfaction5 focuses on
improving the customer experience through all
points of contact with the utility.
Utility Service Levels8 promotes improvements in
call center response rates.
Wacker
ASB ROA6 measures how efficiently the bank
deploys its assets by comparing return to total assets.
ASB Net Income9 - see HEI Net Income above.
60%
$150.6M
$167.3M
$179.7M
$170.3M
6.25%
$323M
$359M
$395M
$342M
6.25%
1.70 TCIR
1.44 TCIR
1.18 TCIR
1.17 TCIR
121%
6.25%
100 GWh
150 GWh
200 GWh
569 GWh
6.25%
62%
64%
68%
59%
15%
0.85%
0.95%
1.05%
0.96%
50%
10%
$122.5M
$136.1M
$149.8M
$139.0M
$323M
$359M
$395M
$342M
10%
1.70 TCIR
1.44 TCIR
1.18 TCIR
1.17 TCIR
5%
100 GWh
150 GWh
200 GWh
569 GWh
105%
10%
10%
5%
40%
60%
72%
62%
68%
73%
64%
70%
75%
68%
75%
71%
59%
72%
0.85%
$47M
0.95%
$51M
1.05%
$55M
0.96%
$52.1M
120%
*
1
2
3
4
5
6
7
8
For purposes of determining Mr. Oshima's pro-rated payout for his 2014 annual incentive, Mr. Oshima was subject to the holding company's metrics
and goals for the period from January 1, 2014 through May 18, 2014 and the utility's metrics and goals (that is, the goals of Hawaiian Electric's
CEO) from May 19, 2014 through December 31, 2014.
The HEI and Utility Net Income results represent HEI’s and the utility’s
income differs from what is reported under GAAP because it excludes the impact of the unusual events in 2014 described below under
"Adjustments for unusual events - 2014 Annual Incentive." For a reconciliation of the GAAP and
to
core net income for 2014, respectively.
Measures" on page 216.
results, see "Reconciliation of GAAP
core net
Utility Plant Additions represents plant additions to the utility rate base, net of
contributions in aid of construction.
Utility Safety is measured by Total Cases Incident Rate (TCIR), a standard measure of employee safety. TCIR equals the number of Occupational
Safety and Health Administration recordable cases as of 12/31/14 × 200,000 productive hours divided by productive hours for the year. The lower
the TCIR the better.
Renewable Energy represents gigawatt hours (GWh) of additional renewable energy acquired during the year through a variety of methods,
including new power purchase agreements, new generation projects, new biofuel supply contracts, and net energy metering and
projects.
f
Utility Customer Satisfaction is based on customer surveys conducted by a third party vendor.
The ASB ROA result is ASB’s
note 9 below. Average total assets is calculated by averaging the total assets for each day in the period.
core net income divided by its average total assets for the period. ASB’s core net income is described in
Utility Employee Engagement is based on employee engagement surveys conducted by a third party vendor and compares utility employee
engagement to that of general industry and to utilities in particular.
Utility Service Levels represents the percentage of calls answered in thirty seconds or less.
192
9
The ASB Net Income result represents ASB’s
core net income for 2014, which differs from what is reported under GAAP because it
excludes the adjustment for one unusual event described below under "Adjustments for unusual events - 2014 Annual Incentive." For a reconciliation
of the GAAP and
results, see "Reconciliation of GAAP to
Measures" on page 216.
The following chart shows how Total Payout as a % of Target from the chart above is converted into a dollar value for each
named executive officer. The payout amounts are also shown in the “Nonequity Incentive Plan Compensation” column of the
"2014 Summary Compensation Table" on page 205. The range of possible annual incentive payouts for 2014 is shown in the
"2014 Grants of Plan Based Awards" table on page 207.
Name
Constance H. Lau
James A. Ajello
Chet A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Target
Opportunity
(% of base
salary)
100
60
55
50/752
80
75
×
×
×
×
×
×
Base
Salary
($)
815,000
543,700
412,400
406,5933
604,000
630,000
=
=
=
=
=
=
Target
Payout
($)
815,000
326,220
226,820
236,513
483,200
472,500
×
×
×
×
×
×
Total
Payout as a
% of Target
(%)
121 = $
121 = $
121 = $
110 = $
120 = $
105 = $
2014
Actual
Annual
Incentive
Payout
($)1
984,442
394,044
273,977
259,601
581,821
497,178
1
2
3
Figures in chart may not calculate to the amount shown in 2014 Actual Annual Incentive Payout due to rounding of the Total Payout as % of Target.
Total Payout as % of Target was rounded for ease of presentation. Mr. Oshima's 2014 annual incentive payout reflects a pro-rated amount based
upon varying base salaries, target opportunities, as well as varying metrics and goals.
Mr. Oshima's target opportunity increased from 50% to 75% upon his promotion to Hawaiian Electric President & CEO in October 2014.
Represents Mr. Oshima's pro-rated base salary for 2014, which is reflected in the "2014 Summary Compensation Table" on page 205. The
Committee set Mr. Oshima's base salary at $550,000 upon his promotion to Hawaiian Electric President & CEO effective October 1, 2014. Prior to
that and from January 1, 2014 to May 18, 2014, Mr. Oshima's base salary while at HEI was $331,000 and from May 19, 2014 to September 30,
2014, his salary as a Hawaiian Electric senior executive on loan from HEI was $386,580.
Adjustments for unusual events - 2014 Annual Incentive
The Committee considers adjustments to performance results with caution and only in circumstances that are unforeseen
and unique or extraordinary. The Committee recognizes that the two operating subsidiaries are heavily regulated and external
forces can impact incentive plans significantly. The Committee is also mindful of only considering adjustments that are
warranted and will also serve the
interests of shareholders.
In determining Hawaiian Electric's 2014 net income for purposes of the 2014 EICP, the Committee considered the effects
of one unusual event that was material to the utilities. The event was the unanticipated operational costs relating to Tropical
Storm Iselle, which had a negative impact of $1.4 million on Hawaiian Electric's net income for 2014. The Committee
determined that it was appropriate to exclude the event resulting in a $1.4 million increase in the utilities' net income for
purposes of 2014 performance under the annual incentive plan. The Committee deemed the exclusion of costs resulting from
Tropical Storm Iselle to be appropriate because the event was not anticipated, was not contemplated at the time the
performance goals were established and was unrelated to Hawaiian Electric management's actions, and because of its material
negative impact on Hawaiian Electric and its pre-established incentive plan.
In determining ASB's 2014 net income and ROA performance for purposes of the 2014 EICP, the Committee considered
the effects of one unusual event that was material to ASB. The event was the settlement of the ASB's overdraft fee litigation,
which had a negative impact of $0.6 million on ASB's net income for 2014. The Committee determined that it was appropriate
to exclude this event, resulting in a $0.6 million increase in ASB's net income for purposes of 2014 performance under the
incentive plan. The Committee deemed the exclusion of the settlement costs to be appropriate because such costs were not
anticipated and were unrelated to ASB management's actions, and because of its material negative impact on ASB and its pre-
established incentive plan.
The Committee decided that the exclusions described above should also apply to the holding company named executive
officers (Ms. Lau, Mr. Ajello, Mr. Richardson and Mr. Oshima (from January 1, 2014 through May 18, 2014)) for the 2014
annual incentive for the same reasons stated above.
incentives
HEI named executive officers and other executives are also eligible to earn equity awards under HEI’s
erm
periods. These incentives are
Incentive Plan (LTIP) based on achievement of performance goals over rolling
193
designed to directly tie executive interests with those of shareholders by rewarding executives for
by paying such awards in HEI stock. Because award opportunities are established as a number of shares of HEI stock,
executives are exposed to the risk of change in HEI’s stock price during the performance period. The
periods foster a
addition, the overlapping three-year performance periods encourage sustained high levels of performance because at any one
time three separate potential awards are affected by current performance.
perspective and provide balance with the shorter-term focus of the annual incentive program. In
performance
value growth and
Similar to the annual incentives, in developing
opportunity for each executive, performance metrics for the
incentives, the Committee determines the target incentive
period and goals for achievement in each metric.
incentives
target
incentive opportunity
is a percentage of base salary, with the threshold and maximum opportunities equal to 0.5 times and 2 times target, respectively.
In establishing the target percentage for each executive, the Committee considers the mix of pay elements, competitive market
data, internal equity, performance and other factors described above under “Base Salary.”
incentive opportunity. As with the annual incentives, the target
For the 2014-16 period, the Committee recommended, and the Board approved, an increase in the target opportunity for
Ms. Lau (from 150% to 160%) to increase the proportion of her long-term incentive opportunities tied to performance and to be
at levels closer to the long-term incentive opportunities for her position at comparable companies. The Committee made no
changes to the target incentive opportunities for the other named executive officers for
as it determined that the target
incentive opportunities for the prior performance period remained appropriate. The
target
incentive opportunities for the named executive officers are shown on page 192. Such target opportunities were converted into
a potential number of shares to be received at threshold, target and maximum performance levels based on the fair market value
of HEI Common Stock on the date the award opportunities were established. The range of possible
incentive payouts is shown in the "2014 Grants of Plan Based Awards" table on page 207.
performance metrics and goals. The performance metrics for
value for shareholders. HEI Relative TRS is a
relation to creating
executive officer. Ms. Lau, Mr. Ajello, Mr. Oshima and Mr. Richardson have additional metrics connected to holding company
performance and Mr. Rosenblum and Mr. Wacker have other metrics focused on their respective subsidiaries.
incentives are chosen for their direct
performance metric for each named
In addition to selecting performance metrics, the Committee determines the level of achievement required to attain
threshold, target and maximum performance for each metric. The same principles the Committee applies to annual incentive
goals apply to
incentive pay should be motivational - that is, the goals should be challenging but achievable - and that such pay should be
balanced with reinvestment in the Company and return to shareholders. Consistent with this approach, the Committee believes
threshold should represent solid performance with positive financial/operating results, target should denote achievable goals
that include a stretch factor and maximum should signify truly exceptional performance.
incentive goals. As such, the level of difficulty of the goals reflects the Committee’s belief that
The target level for financial goals, such as
ROACE, relate to the levels the
Company seeks to achieve over the performance period. In setting the threshold and maximum levels, the Committee considers
whether the risks to accomplishing those levels weigh more heavily toward the downside and how challenging it would be to
achieve incremental improvements over the target result. For the
the following chart to encourage
achievement of earnings and growth in shareholder value.
period, the Committee chose the metrics and goals in
average net income and
194
2014-16 Long-Term Incentive
Performance Metrics & Why We Use Them
Weighting
Threshold
Goals
Target
Maximum
Lau, Ajello, Richardson and Oshima*
HEI Relative TRS1 compares the value created for HEI shareholders to that
created by other
Weighted Composite of Utility (2/3) and ASB (1/3) 3-year ROACE2 measures
profitability based on net income returned as a % of average common equity.
electric companies (EEI Index).
Rosenblum
HEI Relative TRS1 - see above.
ROACE as a % of Allowed Return3 measures the performance of
Utility
the utility and its subsidiaries in attaining the level of ROACE they are permitted
to earn by their regulator.
Wacker
ASB Relative ROA4 compares how efficiently ASB deploys its assets compared
to its performance peers (Bank Performance Peers).
ASB
correlates to shareholder value.
Avg. Net Income5 focuses on fundamental earnings growth, which
HEI Relative TRS1 - see above.
50%
50%
50%
50%
40%
40%
20%
30th
percentile
60th
percentile
90th
percentile
8%
8.9%
9.8%
30th
percentile
60th
percentile
90th
percentile
75%
85%
95%
40th
percentile
$50M
30th
percentile
57.5th
percentile
75th
percentile
$54M
$58M
60th
percentile
90th
percentile
*
1
2
3
4
5
Mr. Oshima, Hawaiian Electric President and CEO, was an HEI employee in February 2014 when he was granted the 2014-2016 LTIP award.
Accordingly, HEI's metrics and goals for the 2014 -2016 LTIP will be applied to Mr. Oshima.
HEI Relative TRS compares HEI’s TRS to that of the companies in the EEI Index. For LTIP purposes, TRS is the sum of the growth in price per
share of HEI Common Stock based on the December
December
beginning December
share price at the end of the performance period, plus dividends during the period, assuming reinvestment, divided by the
share price at the beginning of the performance period compared to the
share price.
Weighted Composite of Utility and ASB
net income divided by average common equity for the period, with net income adjusted for exclusions the Committee allows for utility and ASB
results. For purposes of this metric, the utility is weighted two-thirds (2/3) and ASB is weighted one-third (1/3).
ROACE is the weighted composite of the utility's and ASB's ROACE, which calculation is average
Utility
average of the allowed ROACE for the utility and its subsidiaries as determined by the Hawaii Public Utilities Commission for the same period.
ROACE as a % of Allowed Return is the utility’s consolidated average ROACE for the performance period compared to the weighted
ASB Relative ROA represents how ASB’s ROA compared to the ROA of the Bank Performance Peers during the performance period. The result is
obtained by (i) comparing ASB’s ROA to the ROA of the performance peers for each year in the period, resulting in a percentile ranking and
(ii) taking the average of ASB’s ranking for the three years. ROA is ASB’s net income divided by average total assets for the year, with ASB's net
income adjusted for exclusions allowed by the Committee. Average total assets is determined by averaging the daily total assets for each day of the
year.
Average Net Income for ASB is the average over the performance period of ASB’s GAAP net income, adjusted for exclusions allowed by the
Committee.
Shareholders, customers and employees all benefit when the above goals are met. Achievement of these goals makes HEI,
the utility and ASB stronger financially, enabling HEI to raise capital at favorable rates for reinvestment in the operating
companies and supporting dividends to shareholders. From a historical perspective,
achieve, nor are they guaranteed. HEI and its utility and bank subsidiaries face significant external challenges in the
period. Extraordinary leadership on the part of the named executive officers will be needed to achieve the
required for them to earn the incentive payouts.
incentive payouts are not easy to
objectives
incentives
The Committee established the
incentive opportunities, performance metrics and goals in
February 2012.
target
incentive opportunity. In February 2012, the Committee established the following
target incentive opportunities as a percentage of named executive officer base salary. The target opportunities were converted
into a potential number of shares based on the fair market value of HEI Common Stock on the date the award opportunities
were established.
195
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima1
Richard F. Wacker
Richard M. Rosenblum
Target Opportunity
(as % of Base Salary)
Target Opportunity
(in shares)
150%
80%
70%
55%
80%
90%
47,055
15,704
10,373
6,669
17,860
20,958
1
Mr. Oshima was promoted to Hawaiian Electric President and CEO in October 2014 and was not a named executive officer for years 2012 and 2013.
performance metrics, goals, results & payouts. The Committee established the
goals below in February 2012. The Committee selected the metrics for their correlation with
alignment with the
strategic plans of HEI and its utility and bank subsidiaries. The chart below identifies the
incentive metrics, the objective each measure serves, the level of achievement required to attain the
performance metrics and
shareholder value and
threshold, target and maximum levels for each metric, the results for
target.
and the corresponding payout as a percentage of
The results shown below for Mr. Wacker incorporate the Committee’s decision to exclude the impact of two unusual events
that affected ASB in 2013 and 2014. The results shown below for Mr. Rosenblum incorporate the Committee’s decision to
exclude the impact of three unusual events that affected the utility in 2012 and 2014. For Ms. Lau, Mr. Ajello, Mr. Richardson
and Mr. Oshima, the results reflect the exclusion of the impact of all five of the unusual material events that affected both the
utility and ASB during the 2012-2014 period. These various adjustments are described below under "Adjustments for unusual
events - 2012-14 LTIP."
2012-14 Long-Term Incentive
Performance Metrics & Why We
Use Them
Weighting
Threshold
Goals
Target
Maximum
Result
% of Target
Total
Payout as
Lau, Ajello, Richardson, Oshima*
HEI Relative TRS1 compares the value created
for HEI shareholders to that created by other
electric companies (EEI Index).
Avg. Net Income2 focuses on
HEI
fundamental earnings growth, which correlates
to shareholder value.
Rosenblum
HEI Relative TRS1 - see above.
ROACE as a % of Allowed
Utility
Return3 measures the performance of the utility
and its subsidiaries in attaining the level of
ROACE they are permitted to earn by their
regulator.
Utility
measure above.
Avg. Net Income4 - see HEI
50%
30th
percentile
50th
percentile
75th
percentile
26th
percentile
49%
50%
$153M
$170M
$183M
$169M
40%
30th
percentile
50th
percentile
75th
percentile
26th
percentile
30%
72%
80%
90%
84%
72%
30%
$117M
$130M
$143M
$130M
Wacker
ASB Relative ROA5 compares how efficiently
ASB deploys its assets compared to its
performance peers (Bank Performance Peers).
ASB
measure above.
Avg. Net Income6 - see HEI
HEI Relative TRS1 - see above.
40%
40%
20%
th
th
th
percentile
percentile
percentile
$54.9M
$59.7M
$62.7M
30th
percentile
50th
percentile
75th
percentile
70th
percentile
$59.2M
26th
percentile
78%
*
1
2
Mr. Oshima, Hawaiian Electric President and CEO, was an HEI employee in 2012 when he was granted the 2012-14 LTIP award. Accordingly,
HEI's metrics and goals for the 2012 -14 LTIP were applied to Mr. Oshima.
HEI Relative TRS compares HEI’s TRS to that of the companies in the EEI Index. For LTIP purposes, TRS is the sum of the growth in price per
share of HEI Common Stock based on the December
share price at the beginning of the performance period to the December
share price at the end of the performance period, plus dividends during the period, assuming reinvestment, divided by the beginning
December
share price.
Average Net Income result is the average of HEI’s
The HEI
income differs from what is reported under GAAP because it excludes the impact of the unusual events in 2012 through 2014 described below under
"Adjustments for unusual events - 2012-14 LTIP." For a reconciliation of the GAAP and
results, see "Reconciliation of GAAP to
core net income for 2012 through 2014.
core net
Measures" on page 216.
196
3
4
5
6
The Utility 3-year ROACE as % of Allowed Return result represents the utility’s consolidated average ROACE for the performance period
compared to the weighted average of the allowed ROACE for the utility and its subsidiaries as determined by the Hawaii Public Utilities
Commission for the same period. The calculation of utility consolidated average ROACE included the adjustments described below under
"Adjustments for unusual events - 2012-14 LTIP" for 2012 and 2014, both for net income and common equity.
Average Net Income result is the average of the utility’s
The Utility
for 2013.
2014 described below under "Adjustments for unusual events - 2012-14 LTIP." For a reconciliation of the GAAP and
"Reconciliation of GAAP to
core net income for 2012 and 2014 and GAAP net income
core net income differs from what is reported under GAAP because it excludes the impact of the unusual events in 2012 and
Measures" on page 216.
results, see
ASB Relative ROA represents how ASB’s ROA compared to the ROA of the Bank Performance Peers during the performance period. The result is
obtained by (i) comparing ASB’s ROA to the ROA of the performance peers for each year in the period, resulting in a percentile ranking and
(ii) taking the average of the bank’s ranking for the three years. ROA is ASB’s net income divided by average total assets for the year, with ASB's
net income adjusted for exclusions allowed by the Committee. Average total assets is determined by averaging the daily total assets for each day of
the year.
Average Net Income result is the average of ASB’s GAAP net income for 2012 and its
The ASB
2014.
2014 described below under "Adjustments for unusual events - 2012-14 LTIP." For a reconciliation of the GAAP and
"Reconciliation of GAAP to
Measures" on page 216.
core net income differs from what is reported under GAAP because it excludes the impact of the unusual events in 2013 and
core net income for 2013 and
results, see
The following chart shows how Total Payout as a % of Target from the chart above is converted into a number of shares
earned (plus dividend equivalents on earned shares) for each named executive officer. The payouts are also shown in the "2014
Option Exercises and Stock Vested" table on page 209.
Name
Constance H. Lau
James A. Ajello
Chet A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Target
Opportunity
(in shares)
Total
Payout as a
% of Target
(%)
47,055
15,704
10,373
6,669
17,860
20,958
×
×
×
×
×
×
49% =
49% =
49% =
49% =
78% =
72% =
(shares)
22,836
7,621
5,034
3,236
13,882
15,090
Incentive Payout1
(dividend
equivalents paid
as a share
number)
3,471
1,158
765
492
2,110
2,294
1
Figures in chart may not calculate to the number of shares shown in
Payout as % of Target for Ms. Lau, Mr. Ajello, Mr. Richardson, Mr. Oshima and Mr. Wacker. Total Payout as % of Target for such
executives was rounded for ease of presentation.
Incentive Payout column due to rounding of the Total
Adjustments for unusual events - 2012-14 LTIP
As noted above, the Committee considers adjustments to performance results with caution and only in circumstances that
are unforeseen and unique or extraordinary. The Committee recognizes that the two operating subsidiaries are heavily regulated
and external forces can impact incentive plans significantly. The Committee is also mindful of only considering adjustments
that are warranted and will also serve the
interests of shareholders. Some of these exclusions were also discussed
above regarding the annual incentives.
In determining ASB's 2013 and 2014 net income and ROA performance for purposes of the 2012-14 long-term incentive
plan, the Committee considered the effects of two unusual events that were material to ASB. The first event was the
unanticipated application to ASB of the debit card interchange fee cap under the Durbin Amendment to the Dodd-Frank Act
(see Durbin Amendment summary below), which had a negative impact of $3 million on ASB's net income for 2013 and $6.2
million on ASB's net income for 2014. The second was the settlement of ASB's overdraft fee litigation, which had a negative
impact of $0.6 million on ASB's net income for 2014.
The Committee determined that it was appropriate to exclude the impact of these events on ASB' net income for those
periods, resulting in increases of $3.0 million and $6.8 million in ASB's net income for 2013 and 2014, respectively. The
Committee deemed the exclusion of the Durbin Amendment impact to be appropriate because the fee caps were not anticipated
to apply to banks the size of ASB, its application to ASB was unrelated to ASB management's actions, and because of its
material negative impact on ASB and its pre-established incentive plans.The Committee also deemed the exclusion of the
overdraft fee litigation settlement costs to be appropriate because the costs were not anticipated and were unrelated to ASB
management's actions, and because of its material negative impact on ASB and its pre-established incentive plan.
With respect to Hawaiian Electric's 2012 performance under the 2012-14 long-term incentive plan, the Committee
approved in February 2013 the exclusion of an
writedown of approximately $24 million that resulted from a utility
197
regulatory settlement which was designed to benefit the Company, utility customers, and shareholders over a
In reaching the decision to exclude the impact of the writedown for purposes of incentive compensation, the Committee
considered that, on a
basis, in 2012 HEI and the utility achieved among their strongest performance in the past
decade, the settlement and related writedown were not contemplated at the time the performance goals were established, the
settlement and writedown were in the
executives should be encouraged to take such actions.
best interests of the Company, its shareholders and utility customers, and
period.
With respect to Hawaiian Electric's 2014 performance, the Committee considered the effects of two unusual events that
were material to the utilities. The first event was the unanticipated operational costs relating to Tropical Storm Iselle, which
had a negative impact of $1.4 million on Hawaiian Electric's net income for 2014. The second event was the unanticipated
impact of the PUC's decision to implement structural changes to Hawaiian Electric's decoupling mechanism, which had a
negative impact of $3.6 million on Hawaiian Electric's net income for 2014. The Committee determined that it was appropriate
to exclude both events for purposes of measuring 2014 performance under the 2012-14 LTIP, resulting in a $5 million increase
in the utilities' net income for 2014. The Committee deemed the exclusion of costs resulting from Tropical Storm Iselle and the
impact of the decoupling structural changes to be appropriate because these events were not anticipated, were not contemplated
at the time the performance goals were established and were unrelated to Hawaiian Electric management's actions, and because
of their material negative impact on Hawaiian Electric and its pre-established incentive plan.
The Committee decided that the exclusions described above should apply to the holding company named executive
officers (Ms. Lau, Mr. Ajello and Mr. Richardson) and to Mr. Oshima (whose goals were established when he was employed by
the holding company) for the 2012-14 long-term incentive plan for the same reasons stated above.
Durbin Amendment summary. Section 1075 of the
Wall Street Reform and Consumer Protection Act
Act), known as the Durbin Amendment, requires the Federal Reserve to issue regulations limiting debit card
interchange fees. The Durbin Amendment exempts issuers with assets of less than $10 billion from the fee cap. This exemption
is known as the “small issuer exemption.” The Congressional intent of the $10 billion threshold was to protect the profitability
of smaller community banks like ASB, which has approximately $5.5 billion in assets.
Other financial reform provisions of the
Act define assets as including assets of affiliates that are “financial in
nature”; however, the implementing regulations for the Durbin Amendment did not distinguish financial from
affiliates when calculating asset size. Thus, the inclusion of the assets of HEI’s utility causes ASB to be subject to the Durbin
Amendment’s interchange fee cap in the same manner as far larger banks. None of ASB’s performance peers (banks with assets
in the $3.5 to $8 billion range) are subject to the fee caps. The fee caps applied to ASB in 2013 and 2014 (with a negative net
income impacts of $3 and $6.2 million, respectively).
Update on
incentives
Performance results for
incentives will be certified in February 2016, provided the Merger has not yet
been consummated. In 2013, the Committee determined that the 2013, 2014 and 2015 ASB and HEI results for purposes of
incentives should be adjusted to reflect the Durbin Amendment impact described above. The Committee
believes this treatment is appropriate because the Durbin Amendment was not expected to impact the Company when the goals
were established and because it will materially affect HEI and ASB for three years of the
performance period and, as
such, the ability of the plan to incentivize executive performance would be undermined without such action. Accordingly, the
Committee will adjust the results at the end of the performance period to exclude the Durbin Amendment impact.
Restricted stock units
HEI named executive officers are eligible to receive annual
grants in the form of RSUs that vest over a
period. RSUs offer executives the opportunity to receive shares of HEI Common Stock when the restrictions lapse,
generally subject to continued employment with the Company. The value of the annual RSU grant is a percentage of the
value for
executive’s base salary as shown above. These awards are designed to focus executives on creating
shareholders and other stakeholders. Since they take four years to fully vest, the RSUs also promote retention. The RSUs vest
and convert to shares of HEI Common Stock (plus compounded dividend equivalent shares on earned shares) in equal annual
installments beginning one year from the date of grant. The 2014 RSU grants are set forth in the "2014 Grants of
Awards" table on page 207.
198
Benefits
Retirement and savings plans
HEI, Hawaiian Electric and ASB provide retirement benefits to the named executive officers to promote financial security
in recognition of years of service and to attract and retain
leaders.
HEI and Hawaiian Electric employees (including each named executive officer employed by HEI or Hawaiian Electric) are
basis through HEI’s 401(k) Plan, which does not provide matching contributions for participants
eligible to participate in the HEI Retirement Plan, which is a
retirement on a
who joined the Company before May 1, 2011. In 2011, HEI amended the HEI Retirement Plan and HEI 401(k) Plan to create a
new benefit structure for employees hired on or after May 1, 2011. Employees covered by the new benefit structure receive a
reduced pension benefit under the HEI Retirement Plan, but are eligible for limited matching contributions under the HEI 401
(k) Plan. These changes are intended to lower the cost of pension benefits over the long term. Other than Mr. Oshima (who
joined the Company after May 1, 2011), none of the named executive officers who participate or participated in the HEI 401(k)
Plan receive or received matching contributions under that plan, since all of them joined the Company prior to May 1, 2011.
defined benefit pension plan, and to save for
Additional retirement benefits that cannot be paid from the HEI Retirement Plan due to Internal Revenue Code limits are
provided to named executive officers and other executives through the nonqualified HEI Excess Pay Plan. Benefits under the
HEI Excess Pay Plan are determined using the same formula as the HEI Retirement Plan, but are not subject to the Internal
Revenue Code limits on the amount of annual compensation that can be used for calculating benefits under qualified retirement
plans and on the amount of annual benefits that can be paid from qualified retirement plans. This allows those participating in
the HEI Excess Pay Plan a total retirement benefit at the same general percentage of final average pay afforded to other
employees under the HEI Retirement Plan. When he joined Hawaiian Electric Company in 2009, Mr. Rosenblum received two
years of additional credited service for purposes of calculating his retirement benefits under the HEI Excess Pay Plan.
ASB's employees, including its president and CEO (who is a named executive officer), may participate in the American
Savings Bank 401(k) Plan, a qualified defined contribution retirement plan that enables employees to save for retirement on a
basis. After an employee has completed one year of service, ASB matches the employee’s contributions on a
basis up to 4% of eligible compensation deferred. In 2014, eligible compensation was capped at $260,000.
ASB also provides discretionary, nonelective profit sharing contributions to the accounts of employees who are employed on
the last day of the plan year or terminate employment during the plan year because of retirement, death or disability.
Mr. Wacker received matching contributions and a profit sharing contribution under the plan in 2014, in each case limited to the
amount permitted based on eligible compensation.
Retirement benefits are discussed in further detail in the "2014 Pension Benefits" table and related notes on page 210.
Deferred compensation plans
HEI provides named executive officers and other executives the opportunity to participate in plans that allow them to defer
compensation and the resulting tax liability.
Executives of HEI and Hawaiian Electric and directors of HEI, Hawaiian Electric and ASB may participate in the HEI
Deferred Compensation Plan, a nonqualified deferred compensation plan implemented in 2011 that allows deferral of portions
of the participants’ cash compensation, with certain limitations, and provides investment opportunities that are substantially
similar to those available under HEI’s 401(k) Plan. There are no matching or other employer contributions under this plan.
Messrs. Ajello, Richardson and Oshima participated in the HEI Deferred Compensation Plan in 2014. HEI and Hawaiian
Electric Company executives were also eligible to defer payment of annual and
tax liability under a prior nonqualified deferred compensation plan, although no named executive officer has participated in that
plan.
incentive awards and the resulting
The American Savings Bank Select Deferred Compensation Plan is a nonqualified deferred compensation plan that allows
senior members of ASB management to defer up to 100% of current salary, annual bonus and commissions. Pursuant to a 2009
amendment, the plan provides for employer matching contributions and profit sharing contributions. These matching and profit
sharing contributions are in an amount that would have been made to the executive’s American Savings Bank 401(k) Plan
account if not for Internal Revenue Code limits on eligible compensation. Ms. Lau participated in the American Savings Bank
Select Deferred Compensation Plan during her employment with ASB. Mr. Wacker did not elect to defer compensation under
such plan in 2014, but did receive a profit sharing contribution to his account under the plan for the amount that could not be
contributed to his 401(k) Plan account due to Internal Revenue Code limits on eligible compensation. Such profit sharing
contribution is included in the “All Other Compensation” column of the "2014 Summary Compensation Table" on page 205.
199
Deferred compensation benefits are discussed in further detail in the "2014 Nonqualified Deferred Compensation" table
and related notes on page 212.
Executive Death Benefit Plan (frozen since 2009)
In September 2009, HEI froze the Executive Death Benefit Plan of HEI and Participating Subsidiaries, which provides
death benefits to an executive’s beneficiaries following the executive’s death while employed or after retirement. As part of the
freeze, HEI closed the plan to new participants and ceased all benefit accruals for current participants (i.e., there will be no
increase in death benefits due to salary increases after September 9, 2009). Under contracts with plan participants in effect
before September 9, 2009, the death benefits were grossed up for tax purposes. This treatment was considered appropriate
because the executive death benefit is a form of life insurance and traditionally life insurance proceeds have been
Ms. Lau and Messrs. Ajello, Richardson and Rosenblum are covered under the Executive Death Benefit Plan. Mr. Oshima and
Mr. Wacker are not covered under the plan because they joined HEI and ASB, respectively, after the plan was frozen. Death
benefits are discussed in further detail in the "2014 Pension Benefits" table and related notes on page 210.
ol agreements
The Committee and Board consider
agreements to be an appropriate tool to recruit executives as an
expected part of their compensation package, to encourage the continued attention of key executives to the performance of their
duties without distraction in the event of a potential change in control and to assist in retaining key executives.
agreements can protect against executive flight during a transaction when key executives might, in the
absence of the agreement, leave the Company and accept employment elsewhere. Accordingly, other than Mr. Oshima and Mr.
Rosenblum (who has retired), each of the named executive officers currently has a
agreement.
All of the
agreements are double trigger, which means that they provide for cash severance and other
benefits upon a qualifying termination of the executives' employment following a change in control of HEI. In determining the
amount an executive is eligible to receive in such an event, the Committee takes into account the executive’s expected role in a
potential transaction, value to the organization and internal equity. The agreements approved by the Committee provide for a
cash lump sum payment of three times base salary plus annual incentive for Ms. Lau and two times base salary plus annual
incentive for Messrs. Ajello, Richardson and Wacker. The annual incentive pay used in calculating the severance payment is the
greater of the current annual incentive target or the largest actual annual incentive payout during the preceding three fiscal
years. Aggregate payments under these agreements are limited to the maximum amount deductible under Section 280G of the
Internal Revenue Code and there are no tax gross ups with respect to payments under these agreements. Payment of the
severance benefits is conditioned on the Company receiving a release of claims by the executive.
The
agreements have initial terms of two years and automatically renew for an additional year on each
anniversary unless 90 days’ notice of nonrenewal is provided by either party, so that the protected period is at least one year
upon nonrenewal. The agreements remain in effect for two years following a change in control. The agreements define a
change in control as a change in ownership of HEI, a substantial change in the voting power of HEI’s securities or a change in
the majority of the composition of the Board following consummation of a merger, tender offer or similar transaction. The
agreement for Mr. Wacker also defines a change in control as a change in ownership of ASB.
discussed in further detail in the "Potential Payments upon Termination or Change in Control" section and related notes on page
213.
benefits are
Minimal perquisites
HEI provides minimal other compensation to the named executive officers in the form of perquisites because such items
are commonly provided to business executives in Hawaii, such as club memberships primarily for the purpose of business
entertainment, or are necessary to recruit executives, such as relocation expenses or extra weeks of vacation. In 2014, each
named executive officer had a
club membership for the primary purpose of business entertainment expected of
executives in their positions. Mr. Ajello and Mr. Richardson receive four weeks of vacation annually, which is more than other
employees with similar length of service typically receive. Mr. Oshima receives three weeks of vacation annually, which is
more than other employees with similar length of service typically receive. Mr. Wacker receives 28 days of paid time off
annually, which is more than ASB employees with similar length of service below the senior vice president level receive.
No new tax gross ups
HEI has eliminated nearly all tax gross ups. There are no tax gross ups on club membership initiation fees or membership
agreements for the named executive officers who have such agreements. As discussed under
dues, or in the
200
“Executive Death Benefit Plan,” tax gross ups of death benefits only apply to the executives who participated in the Executive
Death Benefit Plan prior to September 9, 2009 (the date the plan was frozen).
Consulting Agreement with Former Executive
Mr. Rosenblum stepped down as Hawaiian Electric President and Chief Executive Officer effective September 30, 2014
and subsequently retired on January 5, 2015. In connection with his stepping down, Mr. Rosenblum entered into a Release,
Transition and Consulting agreement with Hawaiian Electric, under which he would continue as an “employee at will” and
special advisor to the Chairman of the Board until his retirement and then provide consulting services for six months following
his retirement beginning January 6, 2015 and ending July 5, 2015. Under the agreement, in exchange for consulting services,
Hawaiian Electric agreed to pay Mr. Rosenblum a consulting retainer equal to a proportionate amount of his annual 2014 base
salary as calculated on a monthly basis for each month he continues as a consultant. He will also receive a bonus at the end of
the six-month period upon providing a final release of claims to Hawaiian Electric. He also continued to accrue rights in the
annual incentive plan and long-term incentive plan on a pro-rated basis until his retirement, and continues to vest in unvested
RSUs during the six-month period of his consultancy and receives Company paid coverage of health insurance through April
2015.
Additional policies and information
Our programs are designed to guard against excessive risk
HEI’s compensation policies and practices are designed to encourage executives to build value for shareholders and key
stakeholders (including customers of our businesses), and to discourage decisions that introduce inappropriate risks.
HEI’s Enterprise Risk Management (ERM) function is principally responsible for identifying and monitoring risk at the
holding company and its subsidiaries, and for reporting high risk areas to the Board and designated Board committees. As a
result, all HEI directors, including those who serve on the Committee, are apprised of risks that could have a material adverse
effect on HEI.
Risk assessment. On an annual basis, the Committee reviews a risk assessment of compensation programs in place at HEI
and its subsidiaries, which is updated annually by the Company’s ERM function. As a result of its review of the risk assessment
of compensation programs in place in 2014, the Committee believes that the Company’s compensation plans do not encourage
risk taking that is reasonably likely to have a material adverse effect on the Company.
Risk mitigation features of our programs. Our compensation programs incorporate the following features to promote
prudent
and guard against excessive risk:
•
Financial performance objectives for the annual incentive program are linked to
and nonfinancial measures (such as customer satisfaction, safety, employee engagement and renewable energy
initiatives) are aligned with the interests of all of HEI stakeholders.
budget guidelines,
• An executive compensation recovery policy (“clawback policy”) permits recoupment of
compensation paid to executives found personally responsible for fraud, gross negligence or intentional misconduct
that causes a significant restatement of HEI’s financial statements.
• Annual and
•
incentive awards are capped at maximum performance levels.
Financial opportunities under
importance of
Share ownership and retention guidelines, requiring named executive officers to hold significant amounts of HEI
stock, promote a shared interest in HEI’s
incentives are greater than those under annual incentives, emphasizing the
performance.
outcomes.
incentive plan payouts are 100%
so executives share in the same upside potential and
downside risk as all shareholders.
•
•
• Annual grants of RSUs and
incentives vest over a period of years to encourage sustained performance and
executive retention.
•
plans use a variety of financial metrics (e.g., net income, ROACE, TRS) and nonfinancial
performance metrics (e.g., renewable energy initiatives, customer satisfaction and employee engagement) that
correlate with
creation of shareholder value and are impacted by management decisions.
• The Committee and Board continuously monitor risks faced by the enterprise, including through management
presentations at quarterly meetings and through periodic written reports from management.
201
Share ownership and retention are required throughout employment with the Company
HEI named executive officers are required to own and retain HEI stock throughout employment with the Company. Each
officer subject to the requirements has until January 1 of the year following the fifth anniversary of the later of (i) amendment
to his or her required level of stock ownership or (ii) first becoming subject to the requirements (compliance date) to reach the
following ownership levels:
Position
Value of Stock to be Owned
HEI President & CEO
5x base salary
Other Named Executive Officers
2x base salary
The initial compliance dates are January 1, 2015 for Ms. Lau, January 1, 2016 for Messrs. Ajello, Richardson and Wacker
and January 1, 2020 for Mr. Oshima. All named executive officers, with the exception of Mr. Oshima, have already exceeded
the specified level of stock ownership for their positions. Mr. Rosenblum also exceeded the specified level of stock ownership
for his position when he stepped down as Hawaiian Electric's President and CEO on September 30, 2014.
Until reaching the applicable stock ownership target, officers subject to the requirements must retain all shares received in
erm Incentive Plan and 20% of shares received through the exercise of nonqualified stock options or
payout under the
stock appreciation rights or through the vesting of restricted stock or RSUs. The Committee has the authority to approve
hardship exceptions to these retention requirements.
Hedging and pledging are prohibited
The Company’s Insider Trading Policy prohibits all directors, officers and employees of HEI and its subsidiaries (as well
as the spouses, minor children, adult family members sharing the same household and any other person for whom the director,
officer or employee exercises substantial control over such person’s securities trading decisions) from trading in options,
warrants, puts, calls or similar instruments on Company securities, making short sales in Company securities, holding
Company securities in margin accounts or pledging Company securities.
Clawback policy applies to
pay
HEI has a formal executive compensation clawback policy that applies to any
compensation awarded
to an executive officer. Under that policy, in the event the financial statements of HEI or any of its subsidiaries are significantly
restated, the Committee and Board will review the circumstances that caused the need for the restatement and determine
whether fraud, gross negligence or intentional misconduct were involved. If so, the Board may direct the Company to recover
all or a portion of any
required to issue regulations concerning clawback policies pursuant to the
policy to ensure it is consistent with such rules as and when required.
award from the executive officer(s) found personally responsible. The SEC is
Act. HEI will amend its clawback
The Committee considers tax and accounting impacts on compensation
In designing compensation programs, the Committee considers tax and accounting implications of its decisions, along with
other factors described in this section.
Tax matters. A key tax consideration is the potential impact of Section 162(m) of the Internal Revenue Code. Section 162
(m) disallows a publicly traded company a federal income tax deduction for compensation over $1 million paid to the CEO or
any of the next three most highly compensated executive officers (other than the chief financial officer), unless the amount
above $1 million meets the requirements to be deemed
and awards are generally intended to comply with Section 162(m), although the Committee may award compensation that is
not deductible if it believes it is reasonable and appropriate to do so. Another tax consideration factored into the design of the
Company’s compensation programs is compliance with the requirements of Section 409A of the Internal Revenue Code, which
can impose additional taxes on participants in deferred compensation arrangements.
compensation. HEI’s incentive compensation plans
Accounting matters. In establishing performance goals for equity compensation, the Committee considers the impact of
accounting rules in determining how discretion may be used. Accounting rules also prescribe the way in which compensation is
expensed. For example, under GAAP, compensation is generally expensed when earned. Financial Accounting Standards Board
Accounting Standards Codification Topic 718 generally requires that equity compensation awards be accounted for based on
their grant date fair value and vesting periods. The Committee may determine that there should not be any incentive payout that
would result solely from a new way of accounting for a financial measure or vice versa.
202
EXECUTIVE COMPENSATION TABLES
Summary Compensation Table
The following table shows HEI named executive officer total compensation for 2012, 2013 and 2014 for all of the named
executive officers other than Mr. Oshima and for 2014 for Mr. Oshima (who was not a named executive officer in 2012 or
2013), in each case as calculated under Securities and Exchange Commission (SEC) rules. Cash compensation earned for the
applicable year is reported in the “Salary,” “Bonus,” “Nonequity Incentive Plan Compensation” and the “All Other
Compensation” columns. The “Stock Awards” column is comprised of (i) the opportunity to earn shares of Company stock in
the future if performance metrics are achieved and (ii) share units that vest over time and may be forfeited in whole or in part if
the executive leaves before the applicable vesting period ends. The “Change in Pension Value and Nonqualified Deferred
Compensation Earnings” column sets forth the change in value of pension and executive death benefits, which can fluctuate
significantly from
based on changes in discount rates and other actuarial assumptions and does not necessarily
reflect the benefit to be received by the executive. “Total Without Change in Pension Value” shows total compensation as
determined under SEC rules minus the change in pension value and executive death benefits.
2014 SUMMARY COMPENSATION TABLE
Name and 2014
Principal Positions
Constance H. Lau
HEI President & CEO
American Savings Bank Chair
Hawaiian Electric Company Chair
James A. Ajello
HEI Executive Vice
President & Chief Financial Officer
Chester A. Richardson
HEI Executive Vice
President, General
Counsel, Secretary & Chief
Administrative Officer
Alan M. Oshima*
Hawaiian Electric Company
President & CEO
Richard F. Wacker
American Savings Bank
President & CEO
Richard M. Rosenblum**
Hawaiian Electric Company
Former President & CEO
Year
2014
2013
2012
2014
2013
2012
2014
2013
2012
Salary
($)
815,000
815,000
815,000
543,700
527,850
510,000
412,400
396,550
385,000
Stock
Awards
($)1
1,857,292
1,965,583
1,945,033
Nonequity
Incentive Plan
Compensation
($)2
984,442
989,643
1,467,000
687,467
731,747
700,124
482,048
505,806
486,532
394,044
384,576
589,050
273,977
264,839
407,619
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)3
1,967,642
—
1,572,661
Total
Without
Change
in Pension
All Other
Value
Compensation
($)5
($)4
— 3,656,734
— 3,770,226
4,251,009
23,976
383,945
178,311
359,587
284,740
15,551
291,888
15,679
25,307
25,971
1,640,890
1,669,480
1,825,145
10,633
1,179,058
— 1,167,195
— 1,279,151
Total
($)
5,624,376
3,770,226
5,823,670
2,024,835
1,847,791
2,184,732
1,463,798
1,182,746
1,571,039
2014
406,593
322,900
259,601
97,342
19,608
1,008,702
1,106,044
2014
2013
2012
2014
2013
2012
604,000
591,600
580,000
630,000
617,100
605,000
595,413
612,023
596,899
856,791
923,846
886,652
581,821
823,554
584,982
497,178
526,262
484,378
—
—
—
448,905
180,770
482,246
48,639
55,030
50,243
16,275
27,509
29,210
1,829,873
2,082,207
1,812,124
2,000,244
2,094,717
2,005,240
1,829,873
2,082,207
1,812,124
2,449,149
2,275,487
2,487,486
*
**
1
Effective October 1, 2014, Mr. Oshima was appointed Hawaiian Electric President & CEO. Prior to that, Mr. Oshima served as HEI
Executive Vice President, Corporate and Community Advancement from October 10, 2011 through May 18, 2014. Effective May
19, 2014 and up to his appointment as Hawaiian Electric President and CEO, Mr. Oshima served as a senior Hawaiian Electric
executive officer on loan from HEI.
Mr. Rosenblum stepped down as Hawaiian Electric President & CEO effective September 30, 2014. He retired in January 2015 and
continues as a consultant to Hawaiian Electric for a six-month period. See "Consulting Agreement with Former Executive" on page
203.
Stock Awards. These amounts represent the aggregate grant date fair value of stock awards granted in the years shown computed in
accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC Topic 718).
These amounts comprise: (i) the opportunity (based on probable outcome of performance conditions (in this case, target) as of the
grant date) to earn shares of HEI Common Stock in the future pursuant to the
performance goals are achieved and (ii) restricted stock units (RSUs) granted in the year shown and vesting in installments over a
Incentive Plan (LTIP) if
period. See the 2014 Grants of
Awards table below for the portion of the amount in the Stock Awards column
above that is composed of 2014 grants of RSUs and performance award opportunities under the
achievement of the highest level of performance conditions, the maximum value of the performance awards payable in 2017 under
LTIP. Assuming
203
2
3
LTIP would be: Ms. Lau $2,492,039; Mr. Ajello $831,234; Mr. Richardson $551,684; Mr. Oshima $347,908;
the
Mr. Wacker $949,201; and in the case of Mr. Rosenblum, would have been $1,083,584 had he not retired from the Company in
January 2015. For a discussion of the assumptions underlying the amounts set out for the RSUs and performance awards, see
Note 11 to the Consolidated Financial Statements.
Nonequity Incentive Plan Compensation. These amounts represent payouts to named executive officers under the annual
incentive plan, called the Executive Incentive Compensation Plan (EICP), earned for the years shown. EICP payouts are made in
cash.
Change in Pension Value and Nonqualified Deferred Compensation Earnings. These amounts represent the change in present
value of the accrued pension and executive death benefits from beginning of year to end of year for 2012, 2013 and 2014. These
amounts are not current payments; pension and executive death benefits are only paid after retirement or death, as applicable. The
amounts in this column depend heavily on changes in actuarial assumptions, such as discount rates. The 2014 change in pension
value increased significantly from that in 2013 because of lower discount rates and changes to the mortality tables as determined by
the Society of Actuaries, which caused the present value of Ms. Lau’s pension and executive death benefit to increase significantly
compared to the prior year. For a further discussion of the applicable plans, see the 2014 Pension Benefits table and related notes
below. No named executive officer had
periods covered in the table above.
or preferential earnings on nonqualified deferred compensation for the
4
All Other Compensation. The following table summarizes the components of “All Other Compensation” with respect to 2014:
Name
Constance H. Lau*
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Contributions
to Defined
Contribution
Other
Plans
($)b
($)a
—
—
— 15,679
— 10,633
11,931
31,011
— 16,275
7,677
17,628
Total All
Other
Compensation
($)
—
15,679
10,633
19,608
48,639
16,275
a
b
*
Mr. Wacker received matching contributions to his account in the American Savings Bank 401(k) Plan up to the amount
permitted based on eligible compensation ($260,000 in 2014) and the portion of his 2014 profit sharing contribution
based on eligible compensation. Mr. Oshima received matching contributions to his account in the HEI 401(k) Plan up to
the amount permitted based on eligible compensation ($260,000 in 2014).
Messrs. Ajello, Richardson, Oshima and Rosenblum each received club membership dues and had one more week of
vacation than employees with similar length of service would usually receive. Mr. Wacker received club membership
dues, six more days of paid time off than
employees with similar length of service would usually receive,
and a profit sharing contribution to his account under the American Savings Bank Select Deferred Compensation Plan in
the amount of his profit sharing contribution that could not be included in his American Savings Bank 401(k) Plan
account due to limits on eligible compensation.
The total value of perquisites and other personal benefits for Ms. Lau was less than $10,000 for 2014 and is therefore not
included in the table above.
5
Total Without Change in Pension Value. Total Without Change in Pension Value represents total compensation as determined
under SEC rules, minus the change in pension value and executive death benefits amount reported in the Change in Pension Value
and Nonqualified Deferred Compensation Earnings column. We include this column because the magnitude of the change in
pension value and death benefits in a given year is largely determined by actuarial assumptions, such as discount rates and mortality
assumptions set by the Society of Actuaries, and does not reflect decisions made by the Committee for that year or the actual
benefit necessarily to be received by the recipient. The amounts reported in the Total Without Change in Pension Value column may
differ substantially from the amounts reported in the Total column and are not a substitute for the Total column.
Additional narrative disclosure about salary, bonus, stock awards, nonequity incentive plan compensation, pension benefits and
nonqualified deferred compensation earnings and other compensation can be found in the Compensation Discussion and Analysis above.
204
Grants of
Awards
The table below shows cash performance award opportunities under the 2014 EICP, equity performance award
opportunities granted under the LTIP for performance over the
and vesting in installments over four years.
2014 GRANTS OF
AWARDS
period and payable in 2017 and RSUs granted in 2014
Name
Grant Date
Estimated Future Payouts
Under Nonequity Incentive
Plan Awards1
Target
($)
Threshold
($)
Maximum
($)
Estimated Future Payouts
Under Equity Incentive Plan
Awards2
Target
(#)
Threshold
(#)
Maximum
(#)
Constance H.
2/5/14 EICP
407,500
815,000
1,630,000
—
—
—
Lau
James A.
Ajello
Chester A.
Richardson
Alan M.
Oshima
Richard F.
Wacker
Richard M.
Rosenblum
2/5/14 LTIP
2/5/14 RSU
2/5/14 EICP
2/5/14 LTIP
2/5/14 RSU
2/5/14 EICP
2/5/14 LTIP
2/5/14 RSU
2/5/14 EICP
2/5/14 LTIP
2/5/14 RSU
2/5/14 EICP
2/5/14 LTIP
2/5/14 RSU
2/5/14 EICP
2/5/14 LTIP
2/5/14 RSU
—
—
—
—
—
—
163,110
326,220
652,440
—
—
—
—
—
—
113,410
226,820
453,640
—
—
—
—
—
—
118,257
236,513
473,026
—
—
—
—
—
—
241,600
483,200
966,400
—
—
—
—
—
—
236,250
472,500
945,000
—
—
—
—
—
—
EICP Executive Incentive Compensation Plan (annual incentive)
LTIP
erm Incentive Plan
period)
RSU Restricted stock units
25,883
51,767
103,533
—
—
—
—
—
—
8,634
17,267
34,534
—
—
—
—
—
—
5,730
11,460
22,920
—
—
—
—
—
—
3,614
7,227
14,454
—
—
—
—
—
—
9,591
19,182
38,364
—
—
—
—
—
—
11,254
22,509
45,018
All Other
Stock
Awards:
Number of
Shares of
Stock or Units
(#)3
—
Grant Date
Fair Value
of Stock
Awards
($)4
—
— 1,246,031
24,266
611,261
—
—
10,792
—
—
8,186
—
—
5,913
—
—
4,796
—
—
—
415,617
271,850
—
275,843
206,205
—
173,952
148,948
—
474,602
120,811
—
541,790
315,001
—
—
—
12,505
1
2
3
Estimated Future Payouts Under Nonequity Incentive Plan Awards. Shows possible cash payouts under the 2014 EICP based
on meeting performance goals set in February 2014 at threshold, target and maximum levels. Actual payouts for the 2014 EICP are
reported in the 2014 Summary Compensation Table above.
LTIP based upon the achievement of performance goals set in February 2014 at threshold, target and maximum
Estimated Future Payouts Under Equity Incentive Plan Awards. Represents number of shares of stock that may be issued
under the
levels and vesting at the end of the
during the vesting period, except for terminations due to death, disability or retirement, which allow for
based upon completed months of service after a minimum number of months of service in the performance period. Dividend
equivalent shares, not included in the chart, compound over the period at the actual dividend rate and are paid at the end of the
performance period based on actual shares earned. The share amounts listed for Mr. Rosenblum represent amounts he would have
been eligible to receive, subject to achievement of the applicable performance goals, had he remained with the Company through
the end of 2016. However, since he retired in January 2015, his actual 2014-16 LTIP share payout will be pro-rated based on his
completed months of service through the date of his retirement.
performance period. LTIP awards are forfeited for terminations of employment
participation
vesting up to the date of termination. Receipt of RSU awards is generally subject to continued employment and
All Other Stock Awards: Number of Shares of Stock or Units. Represents number of RSUs awarded in 2014 that will vest and
be issued as unrestricted stock in four equal annual installments on the grant date anniversary. The awards are forfeited for
terminations of employment during the vesting period, except for terminations due to death, disability or retirement, which allow
for
expiration of the applicable vesting period. Dividend equivalent shares, not included in the chart, compound over the period at the
actual dividend rate and are paid in HEI stock in conjunction with the annual installment vesting. The share amount listed for Mr.
Rosenblum represents the amount he would have been eligible to receive had he remained with the Company through the end of the
applicable vesting period. However, due to his retirement in January 2015 and the terms of his consulting agreement (described in
"Consulting Agreement with Former Executive" above), the actual shares he will receive will be pro-rated based on his completed
months of service through the end of his consulting agreement in July 2015.
205
4
based measurement of accounting, as described in FASB ASC Topic 718 based upon the probable (in this case,
Grant Date Fair Value of Stock Awards. Grant date fair value for shares under the
the
target) outcome of the performance conditions as of the grant date. For a discussion of the assumptions and methodologies used to
calculate the amounts reported, see the discussion of performance awards contained in Note 11
compensation) to the
Consolidated Financial Statements. Grant date fair value for RSUs is based on the closing price of HEI Common Stock on the
NYSE on the date of the grant of the award.
LTIP is estimated in accordance with
Outstanding Equity Awards at 2014 Fiscal Y
Option Awards
Stock Awards
Name
Constance
H. Lau
James A.
Ajello
Chester A.
Richardson
Alan M.
Oshima
Richard F.
Wacker
Richard M.
Rosenblum
Number of Securities
Underlying Unexercised
Options
Grant
Year
Exerciseable
(#)
Unexerciseable
(#)
2005
2011
2012
2013
2014
Total
2011
2012
2013
2014
Total
2011
2012
2013
2014
Total
2011
2013
2014
Total
2011
2012
2013
2014
Total
2011
2012
2013
2014
Total
50,000
—
—
—
—
50,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Shares or Units of
Stock That Have
Not Vested1
Unexercised
Unearned
Options (#)
Option
Exercise
Price ($)
Option
Expiration
Date
Number
(#)
26.18
4/7/2015
—
Equity Incentive
Plan Awards
Number of
Unearned
Shares,
Units or
Other
Rights
That
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Have Rights That
Have Not
Vested ($)2
—
Not
Vested (#)3
—
—
—
22,731
25,883
48,614
—
—
7,852
8,634
16,486
—
—
5,161
5,730
10,891
—
3,318
3,614
6,932
—
—
17,601
19,182
36,783
—
—
10,327
11,254
21,581
—
—
761,034
866,563
1,627,597
—
—
262,885
289,066
551,951
—
—
172,790
191,840
364,630
—
111,087
120,997
232,084
—
—
589,281
642,213
1,231,494
—
—
345,748
376,784
722,532
Market
Value
($)2
—
191,405
393,859
570,767
812,426
—
5,717
— 11,764
— 17,048
— 24,266
— 58,795 1,968,457
—
—
—
4,781
4,909
7,361
— 10,792
— 27,843
—
—
—
—
1,859
3,706
5,530
8,186
— 19,281
—
—
—
1,443
4,072
5,913
— 11,428
—
—
—
—
1,102
2,233
3,300
4,796
— 11,431
—
—
—
2,415
5,822
8,606
— 12,505
— 29,348
160,068
164,353
246,446
361,316
932,183
62,239
124,077
185,144
274,067
645,527
48,312
136,331
197,967
382,610
36,895
74,761
110,484
160,570
382,710
80,854
194,921
288,129
418,667
982,571
1
Shares or Units of Stock That Have Not Vested. The remaining installments of the 2011 RSUs vested on February 4, 2015 for
Ms. Lau and Messrs. Richardson, Rosenblum and Wacker. For the remaining installments of the 2011 RSUs awarded to Mr. Ajello,
2,281 shares vested on February 4, 2015 and 2,500 shares will vest on August 4, 2015. For the remaining installments of the 2011
RSUs awarded to Mr. Oshima, 1,443 shares will vest on November 1, 2015. For the remaining installments of the 2012 RSUs,
shares vested on February 3, 2015 and will vest on February 3, 2016. For the remaining installments of the 2013 RSUs, shares
vested on February 4, 2015 and will vest in equal annual installments on February 4, 2016 and 2017. For the remaining installments
of the 2014 RSUs, shares vested on February 5, 2015 and will vest in equal annual installments on February 5, 2016, 2017 and
2018.
206
2
3
Market Value. Market value is based upon the closing
of December 31, 2014.
trading price of HEI Common Stock on the NYSE of $33.48 as
Number of Unearned Shares, Units or Other Rights That Have Not Vested. Represents shares of HEI Common Stock that
would be issued under the
the threshold level at the end of the
performance goals at the target level at the end of the
performance periods, except for Mr. Wacker which are based on the achievement of
incentive plans based upon the achievement of performance goals at
performance periods.
and
2014 Option Exercises and Stock Vested
Option Awards
Stock Awards
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Number of Shares
Acquired on Exercise
(#)
Value Realized
on Exercise
($)
—
—
—
—
—
—
—
—
—
—
—
—
Number of Shares
Acquired on Vesting
(#)
43,1531
26,3072
20,0541
8,7792
13,8301
5,7992
2,8681
3,7282
3,4851
15,9922
4,5033
18,6261
17,3842
Value Realized
on Vesting
($)
1,215,120
887,598
557,678
296,203
386,598
195,658
81,426
125,783
92,862
539,570
—
517,677
586,536
1
Represents the number of shares acquired on vesting (and dividend equivalents paid in shares on the 2012 and 2013 grants) of
RSUs granted on May 11, 2010, June 9, 2010, February 4, 2011, August 4, 2011, November 1, 2011, February 3, 2012 and
February 4, 2013 and vesting in February, May, June, August and November 2014. Value realized on vesting also includes dividend
equivalents (based on the number of shares vested and paid in cash for the grants in 2010 and 2011) as follows: Ms. Lau $145,264;
Mr. Ajello $67,378; Mr. Richardson $46,588; Mr. Oshima $5,364; Mr. Wacker $4,099 and Mr. Rosenblum $58,573.
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Number of Shares
Acquired on Vesting
42,281
19,686
13,553
2,800
3,318
18,192
Compounded
Dividend
Equivalents
872
368
277
68
167
434
Total Shares
Acquired on
Vesting
43,153
20,054
13,830
2,868
3,485
18,626
2
Represents the number of shares acquired (and dividend equivalents paid in stock on earned shares) upon vesting of performance
share awards under the
LTIP, which were payable in stock at the end of the performance period. Mr. Oshima was not a
Hawaiian Electric executive officer when the 2012-14 LTIP opportunities were established, but participated in the 2012-14 cycle
based on criteria established for him before becoming a Hawaiian Electric executive officer. The Compensation Committee
certified the achievement of the applicable performance measures on February 6, 2015 and the shares are valued as of the date of
payment.
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker
Richard M. Rosenblum
Number of Shares
Acquired on Vesting
22,836
7,621
5,034
3,236
13,882
15,090
Compounded
Dividend
Equivalents
3,471
1,158
765
492
2,110
2,294
Total Shares
Acquired on
Vesting
26,307
8,779
5,799
3,728
15,992
17,384
3
Represents the number of shares Mr. Wacker acquired on vesting of restricted shares during the year, which is equal to 25% of the
restricted shares granted on December 9, 2010.
207
Pension Benefits
The table below shows the present value as of December 31, 2014 of accumulated benefits for each of the named executive
officers and the number of years of service credited to each executive under the applicable pension plan and executive death
benefit plan, determined using the interest rate, mortality table and other assumptions described below, which are consistent
with those used in HEI’s financial statements (see Note 10 to the Consolidated Financial Statements):
2014 PENSION BENEFITS
Name
Constance H. Lau
James A. Ajello
Chester A. Richardson
Alan M. Oshima
Richard F. Wacker7
Richard M. Rosenblum
Plan Name
HEI Retirement Plan1
American Savings Bank Retirement Plan2
HEI Supplemental Executive Retirement Plan3
HEI Excess Pay Plan4
HEI Executive Death Benefit5
HEI Retirement Plan1
HEI Excess Pay Plan4
HEI Executive Death Benefit5
HEI Retirement Plan1
HEI Excess Pay Plan4
HEI Executive Death Benefit5
HEI Retirement Plan1
HEI Excess Pay Plan4
—
HEI Retirement Plan1
HEI Excess Pay Plan4
HEI Executive Death Benefit5
Number of
Years of
Credited
Service
(#)
23.8
6.4
24.3
6.0
—
5.9
5.9
—
7.3
7.3
—
3.2
3.2
—
6.0
8.0
—
Present Value of
Accumulated
Benefit ($)6
2,210,028
262,577
8,963,255
1,296,639
564,179
561,915
599,875
329,003
610,796
342,651
306,112
176,344
64,207
—
532,410
1,153,050
479,266
Payments
During the
Last
Fiscal
Year ($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
2
The HEI Retirement Plan is the standard retirement plan for HEI and Hawaiian Electric employees. Normal retirement benefits
under the HEI Retirement Plan for management employees hired before May 1, 2011, including all of the named executive officers
(other than Messrs. Oshima and Wacker), are calculated based on a formula of 2.04% × Credited Service (maximum 67%) × Final
Average Compensation (average monthly base salary for highest
consecutive months out of the last ten years). Credited
service is generally the same as the years of service with HEI or other participating companies (Hawaiian Electric Company and its
subsidiaries). Credited service is also provided for limited unused sick leave and for the period a vested participant is on
disability. The normal form of benefit is a joint and 50% survivor annuity for married participants and a single life annuity for
unmarried participants. Actuarially equivalent optional forms of benefit are also available. Participants who qualify to receive
benefits immediately upon termination may also elect a single sum distribution of up to $100,000 with the remaining benefit
payable as an annuity. Single sum distributions are not eligible for early retirement subsidies, and so may not be as valuable as an
annuity at early retirement. Retirement benefits are increased by an amount equal to approximately 1.4% of the initial benefit every
twelve months following retirement.
The plan provides benefits at early retirement (prior to age 65), normal retirement (age 65), deferred retirement (over age 65) and
Early
death. Early retirement benefits are available for participants who meet certain age and service requirements at ages
retirement benefits are reduced for participants who retire prior to age 60. The accrued normal retirement benefit is reduced by an
applicable percentage, which ranges from 30% for early retirement at age 50 to 1% at age 59. Accrued benefits are not reduced for
eligible employees who retire at age 60 and above. HEI and Hawaiian Electric nonunion employees who commence employment
on or after May 1, 2011, like Mr. Oshima, receive reduced benefits under the HEI Retirement Plan (e.g., reduced benefit formula,
later early retirement date and reduced early retirement benefits, and no post-retirement cost-of-living adjustment). As of December
31, 2014, Mr. Oshima exceeded normal retirement age. Ms. Lau and Messrs. Ajello, Richardson, Oshima and Rosenblum are
eligible for retirement benefits under the HEI Retirement Plan. Mr. Rosenblum retired in January 2015.
Ms. Lau is a participant in the American Savings Bank Retirement Plan, which was frozen effective December 31, 2007. She is
eligible for early retirement under the plan. No other named executive officer is a participant in the plan or entitled to benefits under
the plan. At the time of Ms. Lau’s promotion to HEI President and Chief Executive Officer on May 2, 2006, her credited service
under the plan was frozen and she resumed participation in the HEI Retirement Plan. Future benefit accruals for all participants
under the plan were frozen effective December 31, 2007. As a result, credited service and compensation after December 31, 2007
are not recognized in calculating retirement benefits under the plan. Normal retirement benefits under the frozen plan are calculated
based on a formula of 1.5% × Credited Service to December 31, 2007 (maximum 35 years) × Final Average Compensation at
December 31, 2007 (averaged over the highest paying five consecutive calendar years out of the last ten calendar years prior to
2008). Compensation is primarily gross earnings but excludes commissions, stock options and other equity compensation,
208
3
4
5
6
incentive plan payments, deferrals to and distributions from the American Savings Bank Select Deferred Compensation
Plan and other “fringe benefits” as defined in the plan. Early retirement benefits are available for participants who retire after
attaining age 55 with a minimum of 10 years of service. Early retirement benefits are reduced for participants who retire prior to
age 65. The accrued normal retirement benefit is reduced by an applicable percentage which ranges from 59.8% for early retirement
at age 55 to 2% at age 64.
Ms. Lau is a participant in the HEI Supplemental Executive Retirement Plan, which was frozen effective December 31, 2008. She
is eligible for early retirement benefits under the plan. No other named executive officer is a participant in the plan or entitled to
benefits under the plan. Benefits under the plan are determined based on a formula of 2.04% × Credited Service to December 31,
2008 (maximum 60%) × Final Average Compensation at December 31, 2008 (average monthly base salary plus annual incentive
awards for the three highest calendar years out of the last sixty months prior to 2009). Credited service is based on actual years of
service through December 31, 2008 with any
Company and its subsidiaries. Thus, although Ms. Lau has more than 30 years of actual service with
receives only 24.3 years of credited service for purposes of the HEI Supplemental Executive Retirement Plan. Benefits under the
plan were reduced by benefits accrued as of December 31, 2008 under the HEI Retirement Plan, American Savings Bank
Retirement Plan, and social security. Early retirement and death benefits similar to those available under the HEI Retirement Plan
are available under the plan.
filiated company, including American Savings Bank and Hawaiian Electric
filiated companies, she
As of December 31, 2014, all of the named executive officers except for Mr. Wacker were participants in the HEI Excess Pay Plan
and eligible for retirement benefits under the HEI Excess Pay Plan. Mr. Rosenblum retired in January 2015. In 2009, the HEI
Board approved an Addendum to the HEI Excess Pay Plan that granted Mr. Rosenblum an additional two years of credited service
to be applied in the calculation of his benefit under the HEI Excess Pay Plan. This resulted in the present value of his accumulated
benefit under the HEI Excess Pay Plan shown in the table above being $396,568 more than it would have been without the
additional credited years (i.e., without the additional credited years, the present value of his accumulated benefit under the HEI
Excess Pay Plan would be $756,482). Benefits under the HEI Excess Pay Plan are determined using the same formula as the HEI
Retirement Plan, but are not subject to the Internal Revenue Code limits on the amount of annual compensation that can be used for
calculating benefits under qualified retirement plans ($260,000 in 2014 as indexed for inflation) and on the amount of annual
benefits that can be paid from qualified retirement plans (the lesser of $210,000 in 2014 as indexed for inflation, or the participant’s
highest average compensation over three consecutive calendar years). Benefits payable under the HEI Excess Pay Plan are reduced
by the benefit payable from the HEI Retirement Plan. Early retirement, death benefits and vesting provisions are similar to the HEI
Retirement Plan.
Ms. Lau and Messrs. Ajello, Richardson and Rosenblum are covered by the Executive Death Benefit Plan of HEI and Participating
Subsidiaries. The plan was amended effective September 9, 2009 to close participation to new participants and freeze the benefit for
existing participants. Under the amendment, death benefits will be paid based on salaries as of September 9, 2009. The plan
provides death benefits equal to two times the executive’s base salary as of September 9, 2009 if the executive dies while actively
employed or, if disabled, dies prior to age 65, and one times the executive’s base salary as of September 9, 2009 if the executive
dies following retirement. The amounts shown in the table above assume death following retirement. Death benefits are grossed up
by the amount necessary to pay income taxes on the grossed up benefit amount as an equivalent to the exempt status of death
benefits paid from a life insurance policy. Mr. Oshima was not a participant in the plan at the time it was frozen and are therefore
not entitled to any benefits under the plan.
The present value of accumulated benefits for the named executive officers included in the 2014 Pension Benefits table was
determined based on the following:
Methodology: The present values are calculated as of December 31, 2014 based on the credited service and pay of the named
executive officer as of such date (or the date of benefit freeze, if earlier).
Assumptions:
a. Discount Rate - The discount rate is the interest rate used to discount future benefit payments in order to reflect the time value
of money. The discount rates used in the present value calculations are 4.22% for retirement benefits and 4.17% for executive
death benefits as of December 31, 2014.
b. Mortality Table - The RP-2014 Healthy Annuitant Mortality Table (separate male and female rates) with generational
improvements using scale MP-2014 is used to discount future pension benefit payments in order to reflect the probability of
survival to any given future date. For the calculation of the executive death benefit present values, the mortality table rates are
multiplied by the death benefit to capture the death benefit payments assumed to occur at all future dates. Mortality is applied
only.
c. Retirement Age - A named executive officer included in the table is assumed to remain in active employment until, and
assumed to retire at, the earliest age when unreduced pension benefits would be payable, but no earlier than attained age as of
December 31, 2014 (if later).
d.
Decrements -
decrements refer to events that could occur between the measurement date and
the retirement age (such as withdrawal, early retirement and death) that would impact the present value of benefits. No
decrements are assumed in the calculation of pension benefit table present values.
decrements
are assumed for financial statement purposes.
e. Unused Sick Leave - Each named executive officer who participates in the HEI Retirement Plan is assumed to have
accumulated 1,160 unused sick leave hours at retirement age.
209
7
Mr. Wacker is not eligible to participate in any of the plans in the above 2014 Pension Benefits table because such plans are either
(i) not open to employees of American Savings Bank or (ii) were frozen to new participants before Mr. Wacker joined American
Savings Bank.
2014 Nonqualified Deferred Compensation
Name
Constance H. Lau1
James A. Ajello
Chester A. Richardson2
Alan M. Oshima2
Richard F. Wacker3
Richard M. Rosenblum
Executive
Contributions
in Last FY
($)
Registrant
Contributions
in Last FY
($)
Aggregate
Earnings/(Losses)
in Last FY
($)
Aggregate
Withdrawals/
Distributions
($)
—
—
100,000
297,160
—
—
—
—
—
—
—
—
33,427
8,870
22
4,790
—
—
—
—
—
—
—
—
Aggregate
Balance at
Last FYE
($)
384,376
160,772
261,129
366,700
—
—
1
2
3
While employed by American Savings Bank, Ms. Lau was eligible to defer compensation under the American Savings Bank Select
Deferred Compensation Plan (ASB Deferred Compensation Plan), a contributory nonqualified deferred compensation plan. She
elected to defer $100,000 each year from bonuses awarded to her in 2004 and 2005. These amounts are reflected in the “Aggregate
Balance at Last FYE” column of the 2014 Nonqualified Deferred Compensation table above and were previously reported as
compensation to Ms. Lau in the 2004 and 2005 Summary Compensation Tables in the proxy statements for such years. Since 2008
she no longer earns any compensation from American Savings Bank that could be deferred to the plan. The ASB Deferred
Compensation Plan allows select American Savings Bank employees to defer up to 100% of current salary, bonus and commissions.
Pursuant to a 2009 amendment, the plan provides for employer matching contributions and profit sharing contributions for plan
years beginning January 1, 2010. These matching and profit sharing contributions are in an amount that would have been made to
the executive’s American Savings Bank 401(k) Plan account if not for certain Internal Revenue Code limits. The deferred amounts
are credited with gains/losses of deemed investments chosen by the participant from a designated list of publicly traded mutual
or preferential and therefore are not included in the 2014
funds and other investment offerings. Earnings are not
Summary Compensation Table above. Under the plan, a participant can receive an interim distribution while employed, but no
earlier than the first day of the fourth plan year following the effective date of the initial election to defer. A participant may also
request a withdrawal of a portion of his or her account to satisfy an unforeseeable emergency. The distribution of accounts from the
plan is triggered by disability, death or separation from service (including retirement) and will be delayed for a
the extent necessary to comply with Internal Revenue Code Section 409A. A participant may elect to receive such distributions in a
lump sum or in substantially equal payments spread over a period not to exceed 15 years.
period to
Represents salary and incentive compensation deferrals under the HEI Deferred Compensation Plan, a contributory nonqualified
deferred compensation plan implemented in 2011. The plan allows certain HEI and Hawaiian Electric Company executives to defer
100% of annual base salary in excess of the compensation limit set forth in section 401(a)(17) of the Internal Revenue Code
($260,000 in 2014, as indexed for inflation) and up to 80% of any incentive compensation paid in cash. There are no matching or
other employer contributions under the plan. The deferred amounts are credited with gains/losses of deemed investments chosen by
the participant from a designated list of publicly traded mutual funds and other investment offerings. Earnings are not
or preferential and therefore are not included in the 2014 Summary Compensation Table above. The distribution of
accounts from the plan is triggered by disability, death or separation from service (including retirement) and will be delayed for a
period to the extent necessary to comply with Internal Revenue Code Section 409A. A participant may elect to receive
such distributions in a lump sum or in substantially equal payments spread over a period not to exceed 15 years. Messrs. Ajello,
Richardson and Oshima participated in the HEI Deferred Compensation Plan in 2014. Messrs. Richardson and Oshima's executive
deferral contributions are reflected as compensation in the 2014 Summary Compensation Table above.
Mr. Wacker has not deferred any amounts under the ASB Deferred Compensation Plan. In 2014 he received a profit sharing
contribution to his account under such plan for the portion of his profit sharing contribution that could not be made to his ASB 401
(k) Plan account due to Internal Revenue Code limits on eligible compensation for 401(k) plans. Such profit sharing contribution is
included in the “All Other Compensation” column of the Summary Compensation Table.
210
Potential Payments Upon Termination or Change in Control
The table below shows the amount of potential payments to each named executive officer in the event of retirement,
voluntary termination, termination for cause, termination without cause and qualifying termination following a change in
control, assuming termination occurred on December 31, 2014. The amounts listed below are estimates; actual amounts to be
paid would depend on the actual date of termination and circumstances existing at that time.
2014 TERMINATION/CHANGE-IN-CONTROL PAYMENT TABLE
Name/
Benefit Plan or Program
Constance H. Lau
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
TOTAL
James A. Ajello
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
TOTAL
Chester A. Richardson
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
TOTAL
Alan M. Oshima
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
TOTAL
Richard F. Wacker
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
TOTAL
Richard M. Rosenblum
Executive Incentive Compensation Plan6
erm Incentive Plan7
Restricted Stock Units8
Retirement
on 12/31/14
($)1
Voluntary
Termination
on 12/31/14
($)2
Termination
for Cause
on 12/31/14
($)3
Termination
without Cause
on 12/31/14
($)4
Qualifying
Termination after
Change in
Control
on 12/31/14
($)5
—
1,721,675
796,403
—
2,518,078
—
587,507
376,822
—
964,329
—
387,464
259,083
—
646,547
—
247,451
102,607
—
350,058
—
—
—
—
—
—
770,342
385,456
—
1,155,798
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,644,724
10,644,724
—
—
—
3,404,763
3,404,763
—
—
—
2,623,735
2,623,735
—
247,451
412,902
—
660,353
—
—
—
3,371,897
3,371,897
—
770,342
1,073,128
—
1,843,470
TOTAL
*
**
Mr. Oshima does not have a change-in-control agreement.
Mr. Rosenblum's change-in-control agreement was not extended beyond January 1, 2015 and he subsequently retired on January 5,
2015. Accordingly, Mr. Rosenblum will not receive any payments or other compensation as a result of a change in control under a
change-in-control agreement.
Note: All
closing price of HEI Common Stock on the NYSE of $33.48 per
share. Other benefits that are available to all salaried employees on a nondiscriminatory basis and perquisites aggregating less than $10,000 in
value have not been listed.
award amounts were valued using the
1
Retirement Payments & Benefits. Only Mr. Wacker was not eligible for retirement as of December 31, 2014 and accordingly no
amounts are shown in this column for him. Amounts in this column also do not include amounts payable under the 2014 EICP and
211
LTIP because those amounts would have vested without regard to retirement since December 31, 2014 was the end of the
applicable performance periods. In addition to the amounts shown in this column, retired executives are entitled to receive their
vested retirement plan and deferred compensation benefits under all termination scenarios. See the 2014 Pension Benefits and 2014
Nonqualified Deferred Compensation table above.
2
Voluntary Termination Payments & Benefits. If a named executive officer voluntarily terminates employment, he or she could
lose any annual or
incentive award or any portion of it at any time. Voluntary termination results in the forfeiture of unvested RSUs and participation
in incentive plans. The executive’s entitlement to rights under his or her
agreement would also end. Amounts in
LTIP because those amounts would have vested
this column do not include amounts payable under the 2014 EICP or the
without regard to voluntary termination since December 31, 2014 was the end of the applicable performance periods.
incentives based upon the Compensation Committee’s right to amend, suspend or terminate any
3
Termination for Cause Payments and Benefits. If the executive is terminated for cause, he or she could lose any annual or
incentives based upon the Compensation Committee’s right to amend, suspend or terminate any incentive award or any
portion of it at any time. “Cause” generally means a violation of the HEI Corporate Code of Conduct or, for purposes of awards
under the 2010 Equity and Incentive Plan, as amended (EIP), has the meaning set forth in those plans. Termination for cause results
in the forfeiture of all unvested RSUs, and participation in incentive plans. The executive’s entitlement to rights under his or her
agreement would also end.
4
5
6
Termination without Cause Payments and Benefits. If the executive is terminated without cause, he or she could lose any
annual or
award or any portion of it at any time. Termination without cause results in the forfeiture of unvested RSUs. As discussed in note 5
below, different benefits would be payable to the named executive officers if their termination without cause were to follow a
change in control under the terms of their
incentives based upon the Compensation Committee’s right to amend, suspend or terminate any incentive
agreements.
ol Payments and Benefits. All named executive officers, except for Mr. Oshima (and Mr. Rosenblum, whose
agreement is no longer in effect), have
January 1, 2015 and he subsequently retired on January 5, 2015.
agreements. Mr. Rosenblum's agreement was not extended beyond
“Change in control” generally means a change in ownership of HEI, a substantial change in the voting power of HEI’s securities or
a change in the majority of the composition of the Board following the consummation of a merger, tender offer or similar
transaction. Mr. Wacker’s
agreement defines “change in control” to also mean a sale of (or equivalent
transaction involving) American Savings Bank. The
agreements are also double trigger, which means that they
provide for cash severance and other benefits upon a qualifying termination of the executives' employment following a change in
control of HEI. Ms. Lau has a lump sum severance multiplier of three times and Messrs. Ajello, Richardson and Wacker have a
lump sum severance multiplier of two times, in each case applied to the sum of the executive’s base salary and annual incentive
compensation (determined to be the greater of the current target or the largest actual annual incentive compensation during the
preceding three years).
agreements executives would receive continued life, disability, dental, accident and health
In addition, under the
insurance benefits for the severance period (i.e., the number of years equal to the applicable severance multiplier). Executives
would receive a lump sum payment equal to the present value of the additional benefit the executives would have earned under
their respective retirement and savings plans during the severance period. Executives would also receive the greater of current
target or actual projected annual and
incentive compensation, pro-rated if termination occurs during the first half of the
applicable performance period and the full value if termination occurs after the end of the first half of the applicable performance
period (provided that, under the EICP and LTIP cycles presently in effect, the terms of those arrangements provide that, upon a
change in control, the awards will be paid out in cash at the target level, pro-rated for the amount of time elapsed upon the change
in control). For RSUs, in the event of a change in control either (i) the acquiring entity shall assume all outstanding awards or
substitute similar awards for all outstanding awards or (ii) all outstanding awards shall become fully vested. For the named
executive officers who are eligible to participate in the HEI Retirement Plan, additional age and service credit is received for the
severance period for purposes of determining retiree welfare benefit eligibility. Executives would receive financial, tax planning
and outplacement services, capped at 15% of annual base salary. Payment would generally be delayed for six months following
termination of employment to the extent required to avoid an additional tax under Section 409A of the Internal Revenue Code.
Interest would accrue during any
certificate of deposit rate and payments
would be set aside during that period in a grantor (rabbi) trust. There are no tax gross ups provided for in the agreements. All the
foregoing benefit amounts are included in this column but the total severance amount shown is limited to the maximum amount
deductible under Section 280G of the Internal Revenue Code with respect to each named executive officer. Payment of the
foregoing benefits is subject to a release of claims by the applicable named executive officer.
delay period at the prevailing
basis if the executive has met applicable minimum service requirements, with payment to be made by the
Executive Incentive Compensation Plan (EICP). Upon death, disability or retirement, executives continue to participate in the
EICP on a
Company if the applicable performance goals are achieved. For executives without a change-in-control agreement, the EIP provides
that in the event of termination following a change in control, the EICP award would be immediately paid out at target level for
full-year performance.“Change in control” under the EIP generally means a change in ownership of HEI, a substantial change in the
voting power of HEI’s securities or a change in the majority of the composition of HEI’s Board following the consummation of a
merger, a tender offer or similar transaction. In termination scenarios other than a termination following a change in control, death,
disability or retirement, participants who terminate during the plan cycle forfeit any accrued EICP award. Annual incentive
compensation payments in the event of a change in control are described in footnote 5 above and quantified as part of the
Agreement payment in the table above.
212
7
erm Incentive Plan (LTIP). Upon death, disability or retirement, executives continue to participate in each ongoing LTIP
basis if the executive has met applicable minimum service requirements, with payment to be made by the
cycle on a
Company if performance goals are achieved. The amounts shown are at target for goals deemed achievable (or at below the
threshold, if deemed unachievable at the date of termination) for all applicable plan years, pro-rated based upon service through
December 31, 2014; actual payouts will depend upon performance achieved at the end of the plan cycle. For executives without a
change-in-control agreement, the EIP provides that in the event of termination following a change in control, the LTIP award would
be immediately paid out at target level, pro-rated for completed months of service in the performance period. “Change in control”
under the EIP generally means a change in ownership of HEI, a substantial change in the voting power of HEI’s securities or a
change in the majority of the composition of HEI’s Board following the consummation of a merger, a tender offer or similar
transaction. In termination scenarios other than a termination following a change in control, death, disability or retirement,
participants who terminate during the plan cycle forfeit any accrued LTIP award.
the event of a change in control are described in footnote 5 above and quantified as part of the
payment in the table above.
incentive compensation payments in
Agreement
8
vesting of RSUs. Retirement results in
RSU Awards. Termination for or without cause results in the forfeiture of unvested RSUs. Termination due to death or disability
results in
agreement, the EIP provides that in the event of termination following a change in control, RSUs become fully vested, payable or
free from restrictions. “Change in control” under the EIP generally means a change in ownership of HEI, a substantial change in
the voting power of HEI’s securities or a change in the majority of the composition of HEI’s Board following the consummation of
a merger, a tender offer or similar transaction. The vesting of RSUs in the event of a change in control is described in footnote 5
above and has been quantified as part of the
based on the
Agreement payment in the table above. The amount shown is
vesting of RSUs. For executives without a change-in-control
trading price of vested shares.
closing
213
Reconciliation of GAAP1 to
Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the United States of
America (GAAP). However, management uses certain
subsidiaries. Management believes these
operating activities. Core earnings and other financial measures as presented below may not be comparable to similarly titled
measures used by other companies. The table below provides a reconciliation of GAAP earnings to
core earnings
for HEI consolidated, the Utilities and ASB.
measures provide useful information and are a better indicator of our core
measures to evaluate the performance of HEI and its
Hawaiian Electric Industries, Inc. and Subsidiaries
Unaudited
(in millions, except per share amounts)
Years ended December 31
CONSOLIDATED NET INCOME
GAAP (as reported)
Tropical Storm Iselle related cost
Overdraft litigation settlement
Settlement agreement for the partial writedown of certain utility assets
Lower debit card interchange fees due to Durbin Amendment
Structural changes to decoupling mechanism
Hawaiian Electric Company, Inc. and Subsidiaries
UTILITY NET INCOME
GAAP (as reported)
Tropical Storm Iselle related cost
Settlement agreement for the partial writedown of certain utility assets
Structural changes to decoupling mechanism
ASB NET INCOME
GAAP (as reported)
Overdraft litigation settlement
Lower debit card interchange fees due to Durbin Amendment
Note: Columns may not foot due to rounding.
1
Accounting principles generally accepted in the United States of America
214
Years ended December 31
2014
2013
2012
Average
2012-2014 for
LTIP
purposes
168.3 $
161.5 $
138.7
1.4
0.6
170.3
—
6.2
3.6
—
3.0
—
24.4
—
—
180.7 $
164.5 $
163.1 $
169
137.6 $
122.9 $
99.3
1.4
139
—
3.6
—
—
24.4
—
144.0 $
122.9 $
123.7 $
130
51.5 $
57.5 $
58.6
0.6
52.1
6.2
3.0
—
58.3 $
60.5 $
58.6 $
59
$
$
$
$
$
$
$
$
$
DIRECTOR COMPENSATION
How director compensation is determined
The Board believes that a competitive compensation package is necessary to attract and retain individuals with the
experience, skills and qualifications needed for the challenging role of serving as a director of a publicly traded company with a
unique blend of highly regulated industries. Nonemployee director compensation is composed of a mix of cash and HEI
Common Stock to align the interests of directors with those of HEI shareholders. Only nonemployee directors are compensated
for their service as directors. Ms. Lau, the only employee director of HEI, does not receive separate or additional compensation
for serving as a director. Although Ms. Lau is a member of the HEI Board, neither she nor any other executive officer
participates in the determination of nonemployee director compensation.
The Compensation Committee reviews nonemployee director compensation no less frequently than once every three years
and recommends changes to the Board. In 2012, the committee asked its independent compensation consultant, Frederic W.
Cook & Co. Inc. (Fred Cook & Co.), to conduct an evaluation of HEI’s nonemployee director compensation practices. Fred
Cook & Co. assessed the structure of HEI’s nonemployee director compensation program and its value compared to
competitive market practices of peer companies, similar to the assessments used in its executive compensation review, which is
described under “Compensation Discussion and Analysis - We Use Comparative Market Data as a Reference Point for
Compensation” below. Based on the 2012 analysis, the Compensation Committee maintained 2013 director compensation at
the same level as in 2012. For 2014, director compensation remained the same as in 2013 with the exception of modest changes
concerning extra meeting fees; such changes are described under "Extra meeting fees" below.
Components of director compensation
Cash retainer. HEI nonemployee directors received the cash amounts shown below as retainer for their 2014 HEI Board
service and for their 2014 service on HEI and subsidiary board committees. No separate fees are paid to HEI directors for
service on subsidiary company boards. Cash retainers were paid in quarterly installments.
Position
HEI Nonexecutive Chairman of the Board
HEI Director
HEI Audit Committee Chair
HEI Compensation Committee Chair
HEI Nominating and Corporate Governance Committee Chair
HEI Audit Committee Member
HEI Compensation Committee Member
HEI Nominating and Corporate Governance Committee Member
Hawaiian Electric Company Audit Committee Chair
Hawaiian Electric Company Audit Committee Member
American Savings Bank Audit Committee Chair
American Savings Bank Audit Committee Member
American Savings Bank Risk Committee Chair
American Savings Bank Risk Committee Member
2014 Retainer
$250,000
65,000
15,000
15,000
10,000
6,000
6,000
4,000
10,000
4,000
10,000
4,000
10,000
4,000
Extra meeting fees. Nonemployee directors are also entitled to meeting fees for each board or committee meeting attended
(as member or chair) after the number of meetings specified below. The changes to extra meeting fees for 2014 were: (1) the
addition of extra meeting fees for the HEI Board to be consistent with extra meeting fees for committees, (ii) a modest increase
in extra meeting fees for the Hawaiian Electric Company Audit Committee (increased from $750 to $1,000 per extra meeting),
and (iii) an increase in the number of meetings that members of the HEI and American Savings Bank Audit Committee
members are required to attend before becoming eligible for extra meeting fees.
HEI Board
HEI Audit Committee
HEI Compensation Committee
$1,500 per meeting after 8 meetings
$1,500 per meeting after 10 meetings
$1,500 per meeting after 6 meetings
HEI Nominating and Corporate Governance Committee
$1,500 per meeting after 6 meetings
Hawaiian Electric Company Audit Committee
$1,000 per meeting after 6 meetings
American Savings Bank Audit Committee
American Savings Bank Risk Committee
$1,000 per meeting after 10 meetings
$1,000 per meeting after 6 meetings
215
Stock awards. On June 30, 2014, each HEI nonemployee director received shares of HEI Common Stock with a value
equal to $75,000 as an annual grant under HEI’s 2011 Nonemployee Director Stock Plan (2011 Director Plan), which was
approved by HEI shareholders on May 10, 2011, for the purpose of further aligning directors’ and shareholders’ interests. The
number of shares issued to each HEI nonemployee director was determined based on the closing sales price of HEI Common
Stock on the NYSE on June 30, 2014. Stock grants to nonemployee directors under the 2011 Director Plan are made annually
on the last business day in June.
Retirement benefit. HEI’s Nonemployee Director Retirement Plan, which provided retirement benefits to nonemployee
directors, was terminated in 1996. Directors who were retired from their primary occupation at that time remained eligible to
receive benefits under the plan based on years of service as a director at the time of the plan’s termination. Mr. Myers is the
only current director still eligible to receive benefits under the terminated plan. Upon his retirement from service as a director,
Mr. Myers is eligible to receive retirement benefits in an annual total of $15,000, for a period equal to the number of years of
his service through December 31, 1996 (6 years). All benefits payable under the plan cease upon the death of the nonemployee
director.
Deferred compensation. Nonemployee directors may participate in the HEI Deferred Compensation Plan implemented in
2011 (2011 Deferred Compensation Plan) and described under “Compensation Discussion and Analysis - Benefits - Deferred
Compensation Plans” above. Under the plan, deferred amounts are credited with gains/losses of deemed investments chosen by
the participant from a list of publicly traded mutual funds and other investment offerings. Earnings are not
or
preferential. Participants may elect the timing upon which distributions are to begin following disability, death or separation
from service (including retirement) and may choose to receive such distributions in a lump sum or in installments over a period
of up to fifteen years. Mr. Taketa participated in this plan in 2014.
Nonemployee directors are also eligible to participate in the HEI Nonemployee Directors’ Deferred Compensation Plan, as
amended January 1, 2009, although no nonemployee director participated in such plan in 2014.
Health benefits. Nonemployee directors may participate, at their election and at their cost, in the group employee medical,
vision and dental plans generally made available to HEI, Hawaiian Electric Company or American Savings Bank employees.
No nonemployee director currently participates in such plans.
2014 DIRECTOR COMPENSATION TABLE
The table below shows the compensation paid to HEI nonemployee directors in 2014.
Name
Thomas B. Fargo
Peggy Y. Fowler
A. Maurice Myers
Keith P. Russell
James K. Scott
Kelvin H. Taketa1
Barry K. Taniguchi
Jeffrey N. Watanabe, Chairman2
Fees Earned
or Paid in Cash
($)3
90,000
81,000
81,000
91,000
73,500
79,500
94,500
327,000
Stock
Awards
($)4
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
Change in Pension
Value &
Nonqualified Deferred
Total
Compensation Earnings
($)5
($)
— 165,000
— 156,000
157,683
— 166,000
— 148,500
— 154,500
— 169,500
— 402,000
1,683
1
2
3
4
5
In 2014, Mr. Taketa elected to defer $60,000 of his fees under the 2011 Deferred Compensation Plan. Mr. Taketa did not have
or preferential earnings on nonqualified deferred compensation in 2014.
Mr. Watanabe’s fees were for service as director and Chairman of the HEI Board and as a member of the Compensation Committee.
He also served on the HEI Executive Committee and the American Savings Bank Board and Executive Committee. As explained
above, HEI directors do not receive additional compensation for service on the boards of HEI’s subsidiaries but do receive fees for
service on subsidiary committees. Mr. Watanabe’s responsibilities are described above under “Corporate Governance - The Board’s
leadership structure.”
See detail of cash retainers for Board and committee service below.
As discussed above under “Components of director compensation,” HEI nonemployee directors received shares of HEI Common
Stock valued at $75,000 as the annual grant to HEI directors under the HEI 2011 Nonemployee Director Stock Plan.
As discussed above under “Components of director compensation,” pension benefits for Mr. Myers were frozen in 1996, when the
HEI Nonemployee Director Retirement Plan was terminated. Accordingly, he does not receive credit for service after 1996 under
that plan. Change in pension value reflects actuarial assumptions, such as discount rate.
216
The table below shows the breakdown of cash retainers paid to HEI nonemployee directors for Board and committee
service (including subsidiary committee service) and extra meeting fees in 2014.
Name
Thomas B. Fargo
Peggy Y. Fowler
A. Maurice Myers
Keith P. Russell
James K. Scott
Kelvin H. Taketa
Barry K. Taniguchi
Jeffrey N. Watanabe, HEI Chairman
HEI
Board
Retainer
($)
71,000
71,000
71,000
71,000
69,500
69,500
69,500
71,000
HEI
Committee
Retainer
($)
19,000
6,000
6,000
6,000
4,000
10,000
15,000
6,000
HEI
Chairman
Retainer
($)
—
—
—
—
—
—
—
250,000
HECO Audit
Committee
Retainer
($)
—
4,000
—
—
—
—
—
—
ASB Audit
Committee
Retainer
($)
—
—
—
4,000
—
—
10,000
—
ASB Risk
Committee
Total
Retainer
($)
($)
90,000
—
81,000
—
81,000
4,000
91,000
10,000
73,500
—
79,500
—
—
94,500
— 327,000
Director stock ownership and retention
HEI directors are required to own and retain HEI stock throughout their service with the Company. Each director has until
January 1 of the year following the fifth anniversary of the later of (i) amendment to his or her required level of stock
ownership or (ii) first becoming subject to the requirements (compliance date) to reach the following ownership levels:
Chairman of the Board - 2x annual cash retainer, other HEI directors - 5x annual cash retainer. As of January 1, 2015, each
director who had reached his or her compliance date had achieved his or her stock ownership target.
Until reaching the applicable stock ownership target, directors must retain all shares received under their annual stock
retainer. The Committee has the authority to approve hardship exceptions to these retention requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of the three independent directors listed below under "Compensation Committee
Report." No member of the Compensation Committee during 2014 was an employee or former employee of HEI. During 2014,
no member of the Compensation Committee had a relationship that must be described under SEC rules regarding disclosure of
related person transactions. In 2014, none of HEI’s executive officers served on the compensation committee (or its equivalent)
or board of directors of another entity, excluding
organizations, where an executive officer of such an entity served
on HEI’s Compensation Committee or Board of Directors.
COMPENSATION COMMITTEE REPORT
The Compensation Committee, which is composed solely of independent directors, has reviewed and discussed with
management the foregoing Compensation Discussion and Analysis. Based on such review and discussion, the Compensation
Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on
Form 10-K for the year ended December 31, 2014.
Compensation Committee
Thomas B. Fargo, Chairperson
Maurice Myers
Jeffrey N. Watanabe
Hawaiian Electric:
The information required by this Item 11 for Hawaiian Electric is incorporated herein by reference to:
•
Pages 7 to 33 of Hawaiian Electric Exhibit 99.1 to this Form 10-K;
• The discussion of “2013-15 Long-Term Incentive Plan” at pages 14-15 of Hawaiian Electric Exhibit 99.1 to the
Annual Report on Form 10-K for the year ended December 31, 2013.
•
Information concerning compensation paid to directors of Hawaiian Electric who are also directors of HEI under
“Director Compensation” in this Item 11 of Part III to this Form 10-K.
217
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
HEI:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below shows the number of shares of HEI Common Stock beneficially owned as of February 12, 2015 (or such
other date as indicated below) by (a) each person known by HEI to own beneficially more than five percent of the outstanding
shares of HEI Common Stock, (b) each director who is a current director or served as a director during any part of 2014 and
each named executive officer (as listed in the 2014 Summary Compensation Table above) and (c) all directors and executive
officers as a group, based in part on information furnished by the respective shareholders. No HEI directors, executive officers
or named executive officers own any shares of Preferred Stock of HEI’s wholly owned subsidiary, Hawaiian Electric Company.
Amount And Nature Of Beneficial Ownership Of HEI Common Stock
Shared Voting or
Investment
Power2
Other Beneficial
Ownership3
Stock Options/
Restricted Stock
and RSUs4
Total
Percent
of Class
6,369,085
6.2%
6,498,146
6.33%
Sole Voting or
Investment
Power1
6,369,085
6,438,382
1,244
24,630
12,671
40,543
34,793
42,036
418,299
54,127
460
53,635
Name of Individual or
Group
BlackRock, Inc.5
The Vanguard Group,
Inc.6
Nonemployee directors
Thomas B. Fargo
Peggy Y. Fowler
A. Maurice Myers
Keith P. Russell
James K. Scott
Kelvin H. Taketa
Barry K. Taniguchi
Jeffrey N. Watanabe
Employee director and
Named Executive Officer
Constance H. Lau
Other Named Executive
Officers
James A. Ajello
Chester A. Richardson
Richard M. Rosenblum
Richard F. Wacker
Alan M. Oshima
All directors and executive
officers as a group (13
persons)
59,764
30,547
20,328
38,827
51,936
69,213
17,592
21,657
5
30,547
21,572
46,287
12,671
40,543
34,793
38,827
42,041
14,682
432,981
3,422
1,324
13,935
1,465
57,549
53,720
67,570
69,213
19,057
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
628,803
228,443
21,662
20,893
899,801
1
2
3
4
Includes the following shares held as of February 12, 2015 in the form of stock units in the HEI Common Stock fund pursuant to the
HEI Retirement Savings Plan: approximately 100 shares for Ms. Lau and 460 shares for Mr. Richardson and 561 shares for all directors
and executive officers as a group. The value of a unit is measured by the closing price of HEI Common Stock on the measurement
date.
For individuals, includes (i) shares registered in name of the individual and spouse; and/or (ii) shares registered in trust with the
individual and spouse serving as
Shares owned by spouse, children or other relatives sharing the home of the director or officer in which the director or officer disclaims
beneficial interest.
Includes the number of shares that the individuals named above had a right to acquire as of or within 60 days after February 12, 2015
pursuant to stock options, stock appreciation rights, RSUs and related dividend equivalent rights thereon, including shares which
retirement eligible individuals have a right to acquire upon retirement. These shares are included for purposes of calculating the
218
5
6
*
percentage ownership of each individual named above and all directors and executive officers as a group, but are not deemed to be
outstanding as to any other person.
Based solely on information provided in a Schedule 13G report filed on February 9, 2015 by BlackRock, Inc., 55 East 52nd Street,
New York, NY 10022.
Based solely on information provided in a Schedule 13G report filed on February 10, 2015 by The Vanguard Group, Inc., 100 Vanguard
Blvd., Malvern, PA 19355.
As of February 12, 2015, the directors and executive officers of HEI as a group and each individual named above beneficially owned
less than one percent of the record number of outstanding shares of HEI Common Stock as of that date and no shares were pledged
as security.
A change in control will occur if the Merger, as contemplated by the Merger Agreement, is consummated.
Equity Compensation Plan Information
Information as of December 31, 2014 about HEI Common Stock that may be issued under all of the Company’s equity
compensation plans was as follows:
Plan category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(a)
Number of
securities
to be issued upon
exercise of
outstanding
options, warrants
and rights (1)
(b)
Weighted-average
exercise price of
outstanding
options,
warrants and
rights (2)
(c)
Number of securities
remaining available for
future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)) (3)
941,488
—
941,488
$
$
26.18
—
26.18
2,884,030
—
2,884,030
(1) This column includes the number of shares of HEI Common Stock which may be issued under the Revised and Amended HEI 2010
Equity Incentive Plan (EIP) and the 1987 Stock Option and Incentive Plan (SOIP) on account of awards outstanding as of December 31,
2014, including:
SOIP
EIP
TOTAL
17,443
—
17,443 Stock appreciation rights plus accrued dividend equivalent rights
—
—
—
17,443
192,195
139,424
592,426
924,045
Restricted stock units plus estimated compounded dividend equivalents (if
192,195
applicable) *
Shares issued in February 2015 under the 2012-2014 LTIP plus
139,424
compounded dividend equivalents
Shares issuable at maximum payouts under the 2013-2015 and 2014-2016
592,426
LTIPs, including estimated compounded dividend equivalents
941,488
* Under the EIP as of December 31, 2014, RSUs count as one share against shares available for issuance less estimated shares
withheld for taxes under net share settlement which again become available for the issuance of new shares on a one-to-one basis.
(2) The weighted average exercise price in this column relates to the outstanding 80,000 stock appreciation rights which were granted in
2005.
(3) This represents the number of shares available as of December 31, 2014 for future awards, including 2,714,741 shares available for
future awards under the EIP and 169,290 shares available for future awards under the 2011 Nonemployee Director Plan. As of May 11,
2010, no new awards may be granted under the SOIP.
219
Hawaiian Electric:
The information required by this Item 12 for Hawaiian Electric is incorporated herein by reference to pages 34 to 35 of
Hawaiian Electric Exhibit 99.1.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
HEI:
RELATED PERSON TRANSACTION POLICY
The Board of Directors has adopted a related person transaction policy that is specifically incorporated in HEI’s Corporate
Code of Conduct. The related person transaction policy is specific to transactions between the Company and related persons
such as executive officers and directors, their immediate family members or entities with which they are affiliated in which the
amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest.
Under the policy, the Board, acting through the Nominating and Corporate Governance Committee, may approve a related
person transaction involving a director or an officer if the Board determines in advance that the transaction is not inconsistent
with the best interests of HEI and its shareholders and is not in violation of HEI’s Corporate Code of Conduct.
Related person transactions with HEI or its subsidiaries
American Savings Bank has made other loans and extensions of credit to directors and executive officers, members of their
immediate families and affiliated entities in the ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and which did not
involve more than the normal risk of collectibility or present other unfavorable features.
DIRECTOR INDEPENDENCE
Under HEI's Corporate Governance Guidelines, a majority of Board members must qualify as independent under the
listing standards of the NYSE and any additional requirements as determined by the Board from time to time.
•
For a director to be considered independent under NYSE listing standards, the Board must determine that the director
does not have any direct or indirect material relationship with HEI or its subsidiaries apart from his or her service as a
director. The NYSE listing standards also specify circumstances under which a director may not be considered
independent, such as when the director has been an employee of the Company within the last three fiscal years, if the
director has had certain relationships with the Company's external or internal auditor within the last three fiscal years
or when the Company has made or received payments for goods or services to entities with which the director or an
immediate family member of the director has specified affiliations and the aggregate amount of such payments in any
year within the last three fiscal years exceeds the greater of $1 million or 2% of such entity's consolidated gross
revenues for the fiscal year.
• The Board has also adopted Categorical Standards for Director Independence (HEI Categorical Standards), which are
available for review on HEI's website at www.hei.com. The HEI Categorical Standards specify circumstances under
which a director may not be considered independent. In addition to the circumstances that would preclude
independence under the NYSE listing standards, the HEI Categorical Standards provide that a director is not
independent if HEI and its subsidiaries have made charitable contributions to a nonprofit organization for which the
director serves as an executive officer and the aggregate amount of such contributions in any single fiscal year of the
nonprofit organization within the last three fiscal years exceeds the greater of $1 million or 2% of such organization's
consolidated gross revenues for the fiscal year.
The Nominating and Corporate Governance Committee and the Board considered the relationships described below in
assessing the independence of Board members. Based on its consideration of such relationships and the recommendations of
the Nominating and Corporate Governance Committee, the Board determined that all of the nonemployee directors of HEI
(Messrs. Fargo, Myers, Russell, Scott, Taketa, Taniguchi and Watanabe and Ms. Fowler) are independent. The remaining
director, Ms. Lau, is an employee director of HEI and therefore is not independent.
Relationships considered in determining director independence:
220
With respect to Messrs. Scott, Taketa, Taniguchi and Watanabe, the Board considered amounts paid in the last three fiscal
years to purchase electricity from HEI subsidiaries, Hawaiian Electric Company or Hawaii Electric Light Company (the sole
public utilities providing electricity to the islands of Oahu and Hawaii, respectively), by entities employing these directors or
where a family member of the director was an executive officer. None of the amounts paid by these entities for electricity
(excluding pass-through charges for fuel, purchased power and Hawaii state revenue taxes) exceeded the thresholds in the
NYSE listing standards or HEI Categorical Standards that would automatically result in a director not being independent. Since
Hawaiian Electric Company and Hawaii Electric Light Company are the sole source of electric power on the islands of Oahu
and Hawaii, the rates they charge for electricity are fixed by state regulatory authority and purchasers of electricity from these
public utilities have no choice as to supplier and no ability to negotiate rates or other terms, the Board determined that these
relationships do not impair the independence of these directors.
With respect to Messrs. Scott and Taketa, the Board considered charitable contributions in the last three fiscal years from
HEI and its subsidiaries to nonprofit organizations where these directors serve as executive officers. None of the contributions
exceeded the threshold in the HEI Categorical Standards that would automatically result in a director not being independent. In
determining that these donations did not impair the independence of these directors, the Board also considered the fact that
Company policy requires that charitable contributions from HEI or its subsidiaries to entities where an HEI director serves as
an executive officer, and where the director has a direct or indirect material interest, and the aggregate amount donated by HEI
and its subsidiaries to such organization would exceed $120,000 in any single fiscal year, be preapproved by the Nominating
and Corporate Governance Committee.
With respect to Mr. Taketa, the Board considered modest fees paid during the last three fiscal years to the charitable
foundation for which he serves as an executive officer for management of scholarship and nonprofit grant programs and
concluded that such fees did not affect Mr. Taketa's independence. None of the fees paid within the last three fiscal years
exceeded the threshold in the NYSE listing standards or HEI Categorical Standards that would automatically result in a director
not being independent.
With respect to Messrs. Fargo, Scott, Taniguchi and Watanabe, the Board considered other director or officer positions held
by those directors at entities for which an HEI executive officer serves as a director or trustee and determined that none of these
relationships affected the independence of these directors. None of these relationships resulted in a compensation committee
interlock or would automatically preclude independence under the NYSE listing standards or HEI Categorical Standards.
Hawaiian Electric:
The information required by this Item 13 for Hawaiian Electric is incorporated herein by reference to pages 35 to 36 of
Hawaiian Electric Exhibit 99.1.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
HEI:
AUDITORS’ FEES
The following table sets forth the fees paid or payable to PricewaterhouseCoopers LLP (PwC), the Company’s independent
registered public accounting firm for 2013 and 2014:
Audit fees (principally consisted of fees associated with the audit of HEI’s, Hawaiian Electric
Company’s and American Savings Bank’s consolidated financial statements and internal
reviews, issuances of letters to underwriters, statutory audits, review of registration
statements and issuance of consents)
$
2,412,000
85.7 $
2,525,000
83.9
2013
Fees
%
2014
Fees
%
certain employee benefit plans, the audit of internal control over transfer agent and registrar
duties, the agreed upon procedures for revenue balancing accounts, the agreed upon
procedures in 2014 related to green energy market securitization, and the Department of
Energy grant attestation in 2013)
Tax fees (tax compliance services with respect to federal and state taxes)
All other fees
321,000
79,000
2,000
11.4
2.8
0.1
381,000
100,340
2,000
12.7
3.3
0.1
$
2,814,000
100.0 $
3,008,340
100.0
Pursuant to its charter, the Audit Committee preapproves all audit and permitted nonaudit services to be performed by the
independent registered public accounting firm. The Audit Committee may delegate this responsibility to one or more of its
221
members, provided that such member or members report any such preapprovals to the full Audit Committee at its next
regularly scheduled meeting. All of the amounts set forth in the table above were preapproved. In addition, the Audit
Committee reviewed the professional fees billed by PwC and determined that the provision of nonaudit services was
compatible with the maintenance of the auditor’s independence.
Hawaiian Electric:
The information required by this Item 14 for Hawaiian Electric is incorporated herein by reference to page 36 of Hawaiian
Electric Exhibit 99.1.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial statements
See Item 8 for the combined Consolidated Financial Statements of HEI and Hawaiian Electric.
(a)(2) and (c) Financial statement schedules
The following financial statement schedules for HEI and Hawaiian Electric are included in this report on the
pages indicated below:
Schedule I
Schedule II
NA Not applicable.
Condensed Financial Information of Registrant, Hawaiian Electric
Industries, Inc. (Parent Company) at December 31, 2014 and 2013 and for
the years ended December 31, 2014, 2013 and 2012
Valuation and Qualifying Accounts, Hawaiian Electric Industries, Inc. and
subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries for the
years ended December 31, 2014, 2013 and 2012
Page/s in Form 10-K
HEI
Hawaiian Electric
223-225
226
NA
226
Certain schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required
information is shown in the Consolidated Financial Statements.
222
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31
(dollars in thousands)
Assets
Cash and cash equivalents
Accounts receivable
Property, plant and equipment, net
Deferred income tax assets
Other assets
Investments in subsidiaries, at equity
Liabilities and shareholders’ equity
Liabilities
Accounts payable
Interest payable
Notes payable to subsidiaries
Commercial paper
Long-term debt, net
Retirement benefits liability
Other
Shareholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 102,565,266
shares and 101,259,800 shares
Retained earnings
Accumulated other comprehensive loss
Note to Balance Sheets
HEI Term loan LIBOR + .90%, due 2016
HEI medium-term note 6.51%, due 2014
HEI senior note 4.41%, due 2016
HEI senior note 5.67%, due 2021
HEI senior note 3.99%, due 2023
$
$
$
$
$
2014
2013
276
$
1,991
4,917
15,922
11,070
571
1,661
5,419
10,057
9,550
2,224,452
2,122,841
2,258,628
$
2,150,099
1,993
$
2,583
7,857
118,972
300,000
32,030
3,765
467,200
817
4,630
7,936
105,482
275,000
21,559
7,605
423,029
—
—
1,521,297
1,488,126
297,509
(27,378)
1,791,428
2,258,628
125,000
—
75,000
50,000
50,000
$
$
255,694
(16,750)
1,727,070
2,150,099
—
100,000
75,000
50,000
50,000
$
300,000
$
275,000
The aggregate payments of principal required subsequent to December 31, 2014 on long-term debt are nil in 2015, $200
million in 2016, nil in 2017, 2018 and 2019.
As of December 31, 2014, HEI has a General Agreement of Indemnity in favor of both Liberty Mutual Insurance Company
(Liberty) and Travelers Casualty and Surety Company of America (Travelers) for losses in connection with any and all bonds,
undertakings or instruments of guarantee and any renewals or extensions thereof executed by Liberty or Travelers, including,
but not limited to, a $0.2 million self-insured United States Longshore & Harbor bond and a $0.6 million self-insured
automobile bond.
The Company has revised its previously issued "Schedule I - Condensed Financial Information of Registrant; Hawaiian
Electric Industries, Inc. (Parent Company); Condensed Balance Sheets" to correct for an error in the presentation of deferred
tax amounts related to Hawaiian Electric’s net operating loss carryforwards as of December 31, 2013. Amounts were
reclassified among deferred income tax assets, other assets, deferred income taxes (liabilities) and other liabilities. These
223
adjustments are not considered material, individually or in the aggregate, to the previously issued Condensed Balance Sheet as
of December 31, 2013 and had no impact on the Company's Consolidated Balance Sheet as of December 31, 2013. The table
below illustrates the effects of these adjustments on the Condensed Balance Sheet for those line items affected:
(in thousands)
As previously filed
As revised
Difference
December 31, 2013
Deferred income tax assets
$
1,594
$
10,057
$
Other assets
Total assets
Deferred income taxes
Other liabilities
Total liabilities
Total liabilities and shareholders' equity
23,679
2,155,765
11,385
1,886
428,695
2,155,765
9,550
2,150,099
—
7,605
423,029
2,150,099
8,463
(14,129)
(5,666)
(11,385)
5,719
(5,666)
(5,666)
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Years ended December 31
(in thousands)
Revenues
Equity in net income of subsidiaries
Expenses:
Operating, administrative and general
Depreciation of property, plant and equipment
Taxes, other than income taxes
Interest expense
Income before income tax benefits
Income tax benefits
Net income
2014
2013
2012
$
303
$
288
$
221
188,534
180,359
157,883
20,921
16,063
16,191
575
469
11,599
155,273
13,047
596
497
16,207
147,284
14,232
672
421
16,695
124,125
14,533
$
168,320
$
161,516
$
138,658
The Company’s financial reporting policy for income tax allocations is based upon a separate entity concept whereby each
subsidiary provides income tax expense (or benefits) as if each were a separate taxable entity. The difference between the
aggregate separate tax return income tax provisions and the consolidated financial reporting income tax provision is charged or
credited to HEI’s separate tax provision.
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
STATEMENTS OF COMPREHENSIVE INCOME
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Incorporated by reference are HEI and Subsidiaries’ Statements of Consolidated Comprehensive Income and Consolidated
Statements of Changes in Shareholders’ Equity in Part II, Item 8.
224
Hawaiian Electric Industries, Inc.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Equity in net income
Common stock dividends/distributions received from subsidiaries
Depreciation of property, plant and equipment
Other amortization
Increase in deferred income taxes
Excess tax benefits from share-based payment arrangements
Changes in assets and liabilities
Increase in accounts receivable
Increase (decrease) in accounts and interest payable
Change in prepaid and accrued income taxes
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
Changes in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Investments in subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or
less
Net increase in short-term borrowings with original maturities of three months or less
Proceeds from issuance of long-term debt
Repayment of long-term debt
Excess tax benefits from share-based payment arrangements
Net proceeds from issuance of common stock
Common stock dividends
Net cash used in financing activities
Net increase (decrease) in cash and equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
2014
2013
2012
$ 168,320
$ 161,516
$ 138,658
(188,534)
124,492
575
786
(15,913)
(277)
(2,687)
(871)
15,867
10,472
(11,436)
100,794
(74)
(40,000)
(40,074)
(222)
13,490
125,000
(100,000)
277
26,898
(126,458)
(61,015)
(295)
571
276
$
$
(180,359)
121,578
596
800
15,228
(430)
(2,167)
(23,420)
(15,604)
(6,449)
10,985
82,274
(201)
(78,500)
(78,701)
56
21,788
50,000
(50,000)
430
55,086
(98,383)
(21,023)
(17,450)
18,021
571
(157,883)
118,044
672
845
150
(61)
(475)
19,995
(4,861)
1,805
10,229
127,118
(410)
(44,000)
(44,410)
(1,797)
14,873
—
(7,000)
61
23,613
(96,202)
(66,452)
16,256
1,765
18,021
$
Supplemental disclosures of noncash activities:
In 2014, 2013 and 2012, $2.4 million, $2.3 million and $1.8 million, respectively, of HEI accounts receivable from ASB Hawaii were
reduced with a corresponding reduction in HEI notes payable to ASB Hawaii in noncash transactions.
In 2014, 2013 and 2012, $2.5 million, $2.5 million and $2.5 million, respectively, were contributed as equity by HEI into ASB Hawaii
with a corresponding increase in HEI notes payable to ASB Hawaii in noncash transactions.
Under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), common stock dividends reinvested by shareholders in HEI
common stock in noncash transactions amounted to nil, $24 million and $24 million in 2014, 2013 and 2012, respectively. HEI satisfied the
requirements of the HEI DRIP, Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and ASB 401(k) Plan (from March 6, 2014
to date and from August 18, 2011 through January 8, 2012) by acquiring for cash its common shares through open market purchases rather
than by issuing additional shares.
Note:
The “Notes to Consolidated Financial Statements” in Part II, Item 8 should be read in conjunction with the above HEI (Parent Company)
financial statements.
225
Hawaiian Electric Industries, Inc. and subsidiaries
and Hawaiian Electric Company, Inc. and subsidiaries
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2014, 2013 and 2012
(in thousands)
Description
Col. A
2014
Col. B
Balance
at begin-
ning of
period
Col. C
Additions
Col. D
Col. E
Charged to
costs and
expenses
Charged
to other
accounts
Deductions
Balance at
end of
period
Allowance for uncollectible accounts – electric utility $
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Allowance for mortgage-servicing assets – bank
Deferred tax valuation allowance – HEI
$
$
$
$
2013
Allowance for uncollectible accounts – electric utility $
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Allowance for mortgage-servicing assets – bank
Deferred tax valuation allowance – HEI
$
$
$
$
2012
Allowance for uncollectible accounts – electric utility $
Allowance for uncollectible interest – bank
Allowance for losses for loans receivable – bank
Allowance for mortgage-servicing assets – bank
Deferred tax valuation allowance – HEI
$
$
$
$
2,329
1,661
40,116
251
278
2,148
3,166
41,985
498
278
2,221
4,825
37,906
175
278
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,384
$
1,613 (a)
— $
—
6,126
53
17
$
$
$
4,926 (a)
—
—
3,812
$
1,943 (a)
— $
—
1,507
$
4,826 (a)
— $
— $
(60)
—
3,230
$
1,180 (a)
— $
—
12,883
504
$
$
— $
4,026 (a)
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,367 (b)
147
5,550 (b)
95
250
5,574 (b)
1,505
8,202 (b)
187
—
4,483 (b)
1,659
12,830 (b)
181
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,959
1,514
45,618
209
45
2,329
1,661
40,116
251
278
2,148
3,166
41,985
498
278
(a) Primarily recoveries.
(b) Bad debts charged off.
226
(a)(3) and (b) Exhibits
The Exhibit Index attached to this Form 10-K is incorporated herein by reference. The exhibits listed for HEI and
Hawaiian Electric are listed in the index under the headings “HEI” and “Hawaiian Electric,” respectively, except that the
exhibits listed under “Hawaiian Electric” are also exhibits for HEI.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly
caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The execution of this report by
registrant Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its
subsidiaries.
HAWAIIAN ELECTRIC INDUSTRIES, INC.
HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant)
(Registrant)
By
/s/ James A. Ajello
James A. Ajello
By
/s/ Tayne S. Y. Sekimura
Tayne S. Y. Sekimura
Executive Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer of HEI)
(Principal Financial Officer of Hawaiian Electric)
Date:
February 26, 2015
Date:
February 26, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrants and in the capacities indicated on February 26, 2015. The execution of this report by each of
the undersigned who signs this report solely in such person’s capacity as a director or officer of Hawaiian Electric
Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its subsidiaries.
Signature
/s/ Constance H. Lau
Constance H. Lau
/s/ Alan M. Oshima
Alan M. Oshima
/s/ James A. Ajello
James A. Ajello
/s/ Tayne S. Y. Sekimura
Tayne S. Y. Sekimura
/s/ Patsy H. Nanbu
Patsy H. Nanbu
Title
President of HEI and Director of HEI
Chairman of the Board of Directors of Hawaiian Electric
(Chief Executive Officer of HEI)
President and Director of Hawaiian Electric
(Chief Executive Officer of Hawaiian Electric)
Executive Vice President and Chief Financial Officer of HEI
(Principal Financial and Accounting Officer of HEI)
Senior Vice President and
Chief Financial Officer of Hawaiian Electric
(Principal Financial Officer of Hawaiian Electric)
Controller of Hawaiian Electric
(Principal Accounting Officer of Hawaiian Electric)
227
Signature
/s/ Don E. Carroll
Don E. Carroll
/s/ Thomas B. Fargo
Thomas B. Fargo
/s/ Peggy Y. Fowler
Peggy Y. Fowler
/s/ Timothy E. Johns
Timothy E. Johns
/s/ Micah A. Kane
Micah A. Kane
/s/ Bert A. Kobayashi, Jr.
Bert A. Kobayashi, Jr.
/s/ A. Maurice Myers
A. Maurice Myers
/s/ Keith P. Russell
Keith P. Russell
/s/ James K. Scott
James K. Scott
/s/ Kelvin H. Taketa
Kelvin H. Taketa
/s/ Barry K. Taniguchi
Barry K. Taniguchi
/s/ Jeffrey N. Watanabe
Jeffrey N. Watanabe
SIGNATURES (continued)
Title
Director of Hawaiian Electric
Director of HEI and Hawaiian Electric
Director of HEI and Hawaiian Electric
Director of Hawaiian Electric
Director of Hawaiian Electric
Director of Hawaiian Electric
Director of HEI
Director of HEI
Director of HEI
Director of HEI and Hawaiian Electric
Director of HEI
Chairman of the Board of Directors of HEI
228
The exhibits designated by an asterisk (*) are filed herewith. The exhibits not so designated are incorporated by reference to the
indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI
Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808-0730.
EXHIBIT INDEX
Exhibit no.
HEI:
2
3(i)
3(ii)
4.1
4.2
Description
Agreement and Plan of Merger, dated as of December 3, 2014, by and among NextEra Energy, Inc.,
NEE Acquisition Sub I, LLC, NEE Acquisition Sub II, Inc. and HEI (Exhibit 2.1 to HEI’s Current
Report on Form 8-K December 3, 2014, File No. 1-8503).
HEI’s Amended and Restated Articles of Incorporation (Exhibit 3(i) to HEI’s Current Report on Form 8-
K, dated May 5, 2009, File No. 1-8503).
Amended and Restated Bylaws of HEI as last amended May 9, 2011 (Exhibit 3(ii) to HEI’s Current
Report on Form 8-K May 9, 2011, File No. 1-8503).
Agreement to provide the SEC with instruments which define the rights of holders of certain long-term
debt of HEI and its subsidiaries (Exhibit 4.1 to HEI’s Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-8503).
Master Note Purchase Agreement among HEI and the Purchasers thereto, dated March 24, 2011
(Exhibit 4(a) to HEI’s Current Report on Form 8-K dated March 24, 2011, File No. 1-8503).
4.2(a)
First Supplement to Note Purchase Agreement among HEI and the Purchasers thereto, dated March 6,
2013 (Exhibit 4(a) to HEI’s Current Report on Form 8-K dated March 6, 2013, File No. 1-8503).
4.3
4.4
4.5
4.6
4.6(a)
4.6(b)
4.7
4.8
10.1
10.2
Underwriting Agreement, dated March 19, 2013, among HEI, J.P. Morgan Securities LLC and Morgan
Stanley & Co. LLC, individually and acting as representatives of each of the other Underwriters listed in
Schedule 1 thereto and J.P. Morgan Securities LLC acting as forward seller (Exhibit 1.1 to HEI’s Current
Report on Form 8-K, dated March 19, 2013, File No. 1-8503).
Loan Agreement dated as of May 2, 2014 among HEI, as Borrower, the Lenders Party Thereto and
Royal Bank of Canada, as Syndication Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as
Administrative Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd. and RBC Capital Markets, as Joint
Lead Arrangers and Joint Book Runners (Exhibit 4 to HEI’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, File No. 1-8503).
Hawaiian Electric Industries Retirement Savings Plan, restatement effective January 1, 2013 (Exhibit 4.5
to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 1-8503).
Master Trust Agreement dated as of September 4, 2012 between HEI and ASB and Fidelity Management
Trust Company, as Trustee (Exhibit 4 to HEI’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2012, File No. 1-8503).
Letter Amendment effective November 28, 2012 to Master Trust Agreement dated as of September 4,
2012 between HEI and ASB and Fidelity Management Trust Company (Exhibit 4.6(a) to HEI’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 1-8503).
Letter Amendment effective October 1, 2014 to Master Trust Agreement dated as of September 4, 2012
between HEI and ASB and Fidelity Management Trust Company (Exhibit 4 to HEI’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2014, File No. 1-8503).
Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan, as amended and
restated (Exhibit 4(a) to Registration Statement on Form S-3, Registration No. 333-180413).
American Savings Bank 401(k) Plan, restatement effective January 1, 2013 (Exhibit 4.8 to HEI’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 1-8503).
Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc. dated
September 23, 1982. (Exhibit 10.1 to HEI’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, File No. 1-8503).
Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and
the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle)
(Exhibit (28)-2 to HEI’s Current Report on Form 8-K dated May 26, 1988, File No. 1-8503).
Exhibit no.
10.3
OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement
dated May 26, 1988 (Exhibit 10.3(a) to HEI’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 1-8503).
Description
HEI Exhibits 10.4 through 10.21 are management contracts or compensatory plans or arrangements required to be filed as
exhibits pursuant to Item 15(b) of this report. HEI Exhibits 10.4 through 10.19 are also management contracts or
compensatory plans or arrangements with Hawaiian Electric participants.
10.4
10.5
10.6
10.6(a)
10.6(b)
10.6(c)
10.6(d)
10.6(e)
10.7
10.7(a)
10.7(b)
10.7(c)
10.7(d)
10.8
10.9
10.9(a)
HEI Executive Incentive Compensation Plan amended as of February 4, 2013 (Exhibit 10.4 to HEI’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 1-8503).
HEI Executives’ Deferred Compensation Plan (Exhibit 10.2 to HEI’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008, File No. 1-8503).
Hawaiian Electric Industries, Inc. 2010 Equity and Incentive Plan, as amended and restated
November 16, 2010 (Exhibit 10.6 to HEI’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, File No. 1-8503).
Form of Non-Qualified Stock Option Agreement pursuant to 2010 Equity and Incentive Plan
(Exhibit 4.4 to Registration Statement filed on May 11, 2010 on Form S-8 Registration
No. 333-166737).
Form of Stock Appreciation Right Agreement pursuant to 2010 Equity and Incentive Plan (Exhibit 4.5 to
Registration Statement filed on May 11, 2010 on Form S-8 Registration No. 333-166737).
Form of Restricted Shares Agreement pursuant to 2010 Equity and Incentive Plan (Exhibit 4.6 to
Registration Statement filed on May 11, 2010 on Form S-8 Registration No. 333-166737).
Form of Performance Shares Agreement pursuant to 2010 Equity and Incentive Plan (Exhibit 4.7 to
Registration Statement filed on May 11, 2010 on Form S-8 Registration No. 333-166737).
Form of Restricted Stock Unit Agreement, amended as of February 4, 2013, pursuant to 2010 Equity and
Incentive Plan (Exhibit 10.6(e) to HEI’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, File No. 1-8503).
1987 Stock Option and Incentive Plan of HEI (as amended and restated effective January 22, 2008)
(Exhibit 10.3 to HEI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, File
No. 1-8503).
Form of Hawaiian Electric Industries, Inc. Stock Option Agreement with Dividend Equivalents
(Exhibit 10.7(b) to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004,
File No. 1-8503).
Form of Hawaiian Electric Industries, Inc. Stock Appreciation Right Agreement with Dividend
Equivalents (Exhibit 10.2 to HEI’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2004, File No. 1-8503).
Form of Hawaiian Electric Industries, Inc. Stock Appreciation Right Agreement with Dividend
Equivalents (effective for April 7, 2005 stock appreciation rights grant) (Exhibit 10.1 to HEI’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-8503).
Form of Restricted Stock Unit Agreement Pursuant to the 1987 Stock Option and Incentive Plan of HEI
(Exhibit 10.7(f) to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
File No. 1-8503).
HEI Long-Term Incentive Plan amended as of February 4, 2013 (Exhibit 10.8 to HEI’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012, File No. 1-8503).
HEI Supplemental Executive Retirement Plan amended and restated as of January 1, 2009 (Exhibit 10.3
to Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File No. 1-8503).
Amendments to the HEI Supplemental Executive Retirement Plan Freezing Benefit Accruals Effective
December 31, 2008 (Exhibit 10.9(a) to HEI’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, File No. 1-8503).
10.10
HEI Excess Pay Plan amended and restated as of January 1, 2009 (Exhibit 10.10 to HEI’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, File No. 1-8503).
10.10(a)
HEI Excess Pay Plan Addendum for Constance H. Lau (Exhibit 10.10(a) to HEI’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, File No. 1-8503).
Exhibit no.
10.10(b)
10.10(c)
10.11
10.12
10.13
10.14
10.15
10.16
10.16(a)
10.17
10.17(a)
10.18
10.19
10.20
10.21
10.21(a)
10.22
Description
HEI Excess Pay Plan Addendum for Richard M. Rosenblum (Exhibit 10.10(c) to HEI’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, File No. 1-8503).
Amendment No. 1 dated December 13, 2010 to January 1, 2009 Restatement of HEI Excess Pay Plan
(Exhibit 10.10(c) to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012,
File No. 1-8503).
Form of Change in Control Agreement (Exhibit 10.11 to HEI’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, File No. 1-8503).
Nonemployee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI’s Annual
Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503).
HEI 2011 Nonemployee Director Stock Plan (Appendix A to HEI’s Proxy Statement for 2011 Annual
Meeting of Shareholders filed on March 21, 2011, File No. 1-8503).
Nonemployee Director’s Compensation Schedule effective January 1, 2011 (Exhibit 10.14 to HEI’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2010, File No. 1-8503).
HEI Non-Employee Directors’ Deferred Compensation Plan (Exhibit 10.5 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008, File No. 1-8503).
Executive Death Benefit Plan of HEI and Participating Subsidiaries restatement effective as of
January 1, 2009 (Exhibit 10.6 to HEI’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008, File No. 1-8503).
Resolution of the Compensation Committee of the Board of Directors of Hawaiian Electric
Industries, Inc. Re: Adoption of Amendment No. 1 to January 1, 2009 Restatement of the Executive
Death Benefit Plan (Exhibit 10.1 to HEI’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, File No. 1-8503).
Severance Pay Plan for Merit Employees of HEI and affiliates, restatement effective as of January 1,
2009 (Exhibit 10.17 to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
File No. 1-8503).
Addendum A of Severance Pay Plan for Merit Employees of HEI and affiliates, restatement effective as
of January 1, 2009 for James A. Ajello and Richard M. Rosenblum (Exhibit 10.17(a) to HEI’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 1-8503).
Hawaiian Electric Industries Deferred Compensation Plan adopted on December 13, 2010
(Exhibit 10.18 to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, File
No. 1-8503).
Form of Indemnity Agreement (HEI, Hawaiian Electric and ASB with their respective directors and HEI
with certain of its senior officers) (Exhibit 10.1 to HEI’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2012, File No. 1-8503).
American Savings Bank Select Deferred Compensation Plan (Restatement Effective January 1, 2009)
(Exhibit 10.7 to HEI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File
No. 1-8503).
American Savings Bank Supplemental Executive Retirement, Disability, and Death Benefit Plan,
effective January 1, 2009 (Exhibit 10.8 to HEI’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008, File No. 1-8503).
Amendments to the American Savings Bank Supplemental Executive Retirement, Disability, and Death
Benefit Plan Freezing Benefit Accruals Effective December 31, 2008 (Exhibit 10.19(b) to HEI’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 1-8503).
Amended and Restated Credit Agreement, dated as of April 2, 2014, among HEI, as Borrower, the
Lenders Party Thereto and Wells Fargo Bank, National Association, as Syndication Agent, and Bank of
America, N.A., Bank of Hawaii, Royal Bank of Canada, Union Bank, N.A. and U.S. Bank National
Association as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent,
Swingline Lender and Issuing Bank, and J.P. Morgan Securities LLC and Wells Fargo Securities, LLC,
as Joint Lead Arrangers and Joint Book Runners (Exhibit 10.1 to HEI’s Current Report on Form 8-K
dated April 2, 2014, File No. 1-8503).
Exhibit no.
10.23
10.24
Description
Confirmation of Forward Sale Transaction dated March 19, 2013 between HEI and JPMorgan Chase
Bank, National Association, London Branch (Exhibit 10.1 to HEI’s Current Report on Form 8-K dated
March 19, 2013, File No. 1-8503).
Confirmation of Additional Forward Sale Transaction dated March 20, 2013 between HEI and
JPMorgan Chase Bank, National Association, London Branch (Exhibit 10.2 to HEI’s Current Report on
Form 8-K dated March 19, 2013, File No. 1-8503).
*10.25
Amendments to Forward Confirmations dated November 3, 2014 between HEI and J.P. Morgan
Securities LLC (as agent for JP Morgan Chase Bank, National Association).
*11
*12.1
*21.1
*23.1
*31.1
*31.2
HEI - Computation of Earnings per Share of Common Stock.
HEI - Computation of Ratio of Earnings to Fixed Charges.
HEI - Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Constance H. Lau
(HEI Chief Executive Officer).
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of James A. Ajello (HEI
Chief Financial Officer).
*32.1
HEI Certification Pursuant to 18 U.S.C. Section 1350.
*101.INS
XBRL Instance Document.
*101.SCH XBRL Taxonomy Extension Schema Document.
*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
*101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB XBRL Taxonomy Extension Label Linkbase Document.
*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
Hawaiian Electric:
3(i).1
3(i).2
3(i).3
3(i).4
3(ii)
4.1
4.2
4.3
Hawaiian Electric’s Certificate of Amendment of Articles of Incorporation (Exhibit 3.1 to Hawaiian
Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).
Articles of Amendment to Hawaiian Electric’s Amended Articles of Incorporation (Exhibit 3.1(b) to
Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No.
1-4955).
Articles of Amendment to Hawaiian Electric’s Amended Articles of Incorporation (Exhibit 3(i).4 to
Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No.
1-4955).
Articles of Amendment amending Article V of Hawaiian Electric’s Amended Articles of Incorporation
effective August 6, 2009 (Exhibit 3(i).4 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2009, File No. 1-4955).
Hawaiian Electric’s Amended and Restated Bylaws (as last amended August 6, 2010) (Exhibit 3(ii) to
Hawaiian Electric’s Current Report on Form 8-K dated August 9, 2010, File No. 1-4955).
Agreement to provide the SEC with instruments which define the rights of holders of certain long-term
debt of Hawaiian Electric, Hawaii Electric Light and Maui Electric (Exhibit 4.1 to HEI’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2002, File No. 1-4955).
Certificate of Trust of HECO Capital Trust III (incorporated by reference to Exhibit 4(a) to Registration
No. 333-111073).
Amended and Restated Trust Agreement of HECO Capital Trust III dated as of March 1, 2004 (Exhibit 4
(c) to Hawaiian Electric’s Current Report on Form 8-K dated March 16, 2004, File No. 1-4955).
Exhibit no.
Description
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
Hawaiian Electric Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 2004
(Exhibit 4(f) to Hawaiian Electric’s Current Report on Form 8-K dated March 16, 2004, File
No. 1-4955).
6.500% Quarterly Income Trust Preferred Security issued by HECO Capital Trust III, dated March 18,
2004 (Exhibit 4(d) to Hawaiian Electric’s Current Report on Form 8-K dated March 16, 2004, File
No. 1-4955).
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Hawaiian Electric,
dated March 18, 2004 (Exhibit 4(g) to Hawaiian Electric’s Current Report on Form 8-K dated March 16,
2004, File No. 1-4955).
Trust Guarantee Agreement between The Bank of New York, as Trust Guarantee Trustee, and Hawaiian
Electric dated as of March 1, 2004 (Exhibit 4(l) to Hawaiian Electric’s Current Report on Form 8-K
dated March 16, 2004, File No. 1-4955).
Maui Electric Junior Indenture with The Bank of New York, as Trustee, including Hawaiian Electric
Subsidiary Guarantee, dated as of March 1, 2004 (Exhibit 4(h) to Hawaiian Electric’s Current Report on
Form 8-K dated March 16, 2004, File No. 1-4955).
Hawaii Electric Light Junior Indenture with The Bank of New York, as Trustee, including Hawaiian
Electric Subsidiary Guarantee, dated as of March 1, 2004 (Exhibit 4(j) to Hawaiian Electric’s Current
Report on Form 8-K dated March 16, 2004, File No. 1-4955).
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Maui Electric, dated
March 18, 2004 (Exhibit 4(i) to Hawaiian Electric’s Current Report on Form 8-K dated March 16, 2004,
File No. 1-4955).
6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Hawaii Electric Light,
dated March 18, 2004 (Exhibit 4(k) to Hawaiian Electric’s Current Report on Form 8-K dated March 16,
2004, File No. 1-4955).
Expense Agreement, dated March 1, 2004, among HECO Capital Trust III, Hawaiian Electric, Maui
Electric and Hawaii Electric Light (Exhibit 4(m) to Hawaiian Electric’s Current Report on Form 8-K
dated March 16, 2004, File No. 1-4955).
Note Purchase Agreement among Hawaiian Electric and the Purchasers that are parties thereto, dated
April 19, 2012 (Exhibit 4(a) to Hawaiian Electric’s Current Report on Form 8-K dated April 19, 2012,
File No. 1-4955).
Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui Electric and the Purchasers that
are parties thereto, dated April 19, 2012 (Exhibit 4(b) to Hawaiian Electric’s Current Report on Form 8-
K dated April 19, 2012, File No. 1-4955).
Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii Electric Light and the
Purchasers that are parties thereto, dated April 19, 2012 (Exhibit 4(c) to Hawaiian Electric’s Current
Report on Form 8-K dated April 19, 2012, File No. 1-4955).
Note Purchase Agreement among Hawaiian Electric and the Purchasers that are parties thereto, dated
September 13, 2012 (Exhibit 4 to Hawaiian Electric’s Current Report on Form 8-K dated September 13,
2012, File No. 1-4955).
Note Purchase Agreement among Hawaiian Electric Company, Inc. and the Purchasers that are parties
thereto, dated as of October 3, 2013. (Exhibit 4(a) to Hawaiian Electric’s Current Report on Form 8-K
dated October 3, 2013, File No. 1-4955).
Note Purchase and Guaranty Agreement among Maui Electric Company, Limited and the Purchasers
that are parties thereto, dated as of October 3, 2013. (Exhibit 4(b) to Hawaiian Electric’s Current Report
on Form 8-K dated October 3, 2013, File No. 1-4955).
Note Purchase and Guaranty Agreement among Hawaii Electric Light Company, Inc. and the Purchasers
that are parties thereto, dated as of October 3, 2013. (Exhibit 4 to Hawaiian Electric’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2013, 2013, File No. 1-4955).
10.1(a)
Power Purchase Agreement between Kalaeloa Partners, L.P., and Hawaiian Electric dated October 14,
1988 (Exhibit 10(a) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, File No. 1-4955).
Exhibit no.
10.1(b)
10.1(c)
10.1(d)
10.1(e)
10.1(f)
10.1(g)
10.1(h)
10.2(a)
10.2(b)
10.2(c)
10.2(d)
10.2(e)
10.3(a)
10.3(b)
10.3(c)
10.3(d)
Description
Amendment No. 1 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners,
L.P., dated June 15, 1989 (Exhibit 10(c) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, File No. 1-4955).
Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and Hawaiian Electric, as Lessee, dated
February 27, 1989 (Exhibit 10(d) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, File No. 1-4955).
Restated and Amended Amendment No. 2 to Power Purchase Agreement between Hawaiian Electric and
Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to Hawaiian Electric’s Annual Report
on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).
Amendment No. 3 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners,
L.P., dated December 10, 1991 (Exhibit 10.2(e) to Hawaiian Electric’s Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 1-4955).
Amendment No. 4 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners,
L.P., dated October 1, 1999 (Exhibit 10.1 to Hawaiian Electric’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, File No. 1-4955).
Confirmation Agreement Concerning Section 5.2B(2) of Power Purchase Agreement and Amendment
No. 5 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated
October 12, 2004 (Exhibit 10.3 to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, File No. 1-4955).
Agreement for Increment Two Capacity and Amendment No. 6 to Power Purchase Agreement between
Hawaiian Electric and Kalaeloa Partners, L.P., dated October 12, 2004 (Exhibit 10.4 to Hawaiian
Electric’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-4955).
Power Purchase Agreement between AES Barbers Point, Inc. and Hawaiian Electric, entered into on
March 25, 1988 (Exhibit 10(a) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 1988, File No. 1-4955).
Agreement between Hawaiian Electric and AES Barbers Point, Inc., pursuant to letters dated
May 10, 1988 and April 20, 1988 (Exhibit 10.4 to Hawaiian Electric’s Annual Report on Form 10-K for
fiscal year ended December 31, 1988, File No. 1-4955).
Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement between AES
Barbers Point, Inc. and Hawaiian Electric (Exhibit 10 to Hawaiian Electric’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955).
Hawaiian Electric’s Conditional Notice of Acceptance to AES Barbers Point, Inc. dated
January 15, 1990 (Exhibit 10.3(c) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year
ended December 31, 1989, File No. 1-4955).
Amendment No. 2, entered into as of May 8, 2003, to Power Purchase Agreement between AES
Hawaii, Inc. and Hawaiian Electric (Exhibit 10.2(e) to Hawaiian Electric’s Annual Report on Form 10-K
for fiscal year ended December 31, 2003, File No. 1-4955).
Agreement between Maui Electric and Hawaiian Commercial & Sugar Company pursuant to letters
dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to Hawaiian Electric’s Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).
Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its
division, Hawaiian Commercial & Sugar Company, and Maui Electric, dated November 30, 1989
(Exhibit 10(e) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, File No. 1-4955).
First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-
Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and Maui Electric, dated
November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated
November 30, 1989 (Exhibit 10(f) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-4955).
Termination Notice dated December 27, 1999 for Amended and Restated Power Purchase Agreement by
and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and
Maui Electric, dated November 30, 1989, as amended (Exhibit 10.2 to Hawaiian Electric’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-4955).
Exhibit no.
10.3(e)
10.3(f)
10.3(g)
10.3(h)
10.3(i)
10.4(a)
10.4(b)
10.4(c)
10.4(d)
10.4(e)
10.4(f)
10.4(g)
10.5(a)
Description
Rescission dated January 23, 2001 of Termination Notice for Amended and Restated Power Purchase
Agreement by and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar
Company, and Maui Electric, dated November 30, 1989, as amended (Exhibit 10.4(f) to Hawaiian
Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955).
Letter agreement dated July 2, 2007 to not issue a notice of termination of Amended and Restated Power
Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar
Company, and Maui Electric dated November 30, 1989, as Amended on November 1, 1990
(Exhibit 10.3(f) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, File No. 1-4955).
Letter agreement dated December 18, 2013 to not issue a notice of termination of Amended and
Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian
Commercial & Sugar Company, and Maui Electric dated November 30, 1989, as Amended on
November 1, 1990 (Exhibit 10.3(f) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, file No. 1-4955).
Letter agreement dated March 26, 2014 to not issue a notice of termination and HC&S’s exercise of its
one-time right to decrease firm capacity to 8 MW of the Amended and Restated Power Purchase
Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company,
and Maui Electric dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.3(f) to
Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, file No.
1-4955).
Letter agreement dated July 15, 2014 to amend March 26, 2014 letter agreement for Amended and
Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian
Commercial & Sugar Company, and Maui Electric dated November 30, 1989, as Amended on
November 1, 1990 (Exhibit 10.3(f) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, file No. 1-4955).
Purchase Power Contract between Hawaii Electric Light and Thermal Power Company dated March 24,
1986 (Exhibit 10(a) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, File No. 1-4955).
Firm Capacity Amendment between Hawaii Electric Light and Puna Geothermal Venture (assignee of
AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power
Contract between Hawaii Electric Light and Thermal Power Company dated March 24, 1986 (Exhibit 10
(b) to Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File
No. 1-4955).
Amendment made in October 1993 to Purchase Power Contract between Hawaii Electric Light and Puna
Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to Hawaiian Electric’s Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).
Third Amendment dated March 7, 1995 to the Purchase Power Contract between Hawaii Electric Light
and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(c) to Hawaiian Electric’s
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).
Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power
Contract between Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as
amended (Exhibit 10.5(b) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4955).
Fifth Amendment dated February 7, 2011 to the Purchase Power Contract between Hawaii Electric Light
and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.4(f) to Hawaiian Electric’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2011, File No. 1-4955).
Power Purchase Agreement between Puna Geothermal Venture and Hawaii Electric Light dated
February 7, 2011 (Exhibit 10.4(g) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2011, File No. 1-4955).
Power Purchase Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated October 22,
1997 (but with the following attachments omitted: Attachment C, “Selected portions of the North
American Electric Reliability Council Generating Availability Data System Data Reporting Instructions
dated October 1996” and Attachment E, “Form of the Interconnection Agreement between Encogen
Hawaii, L.P. and Hawaii Electric Light,” which is provided in final form as Exhibit 10.6(b))
(Exhibit 10.7 to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4955).
Exhibit no.
10.5(b)
10.5(c)
10.5(d)
10.5(e)
10.5(f)
10.6
10.6(a)
10.7(a)
10.7(b)
10.7(c)
10.7(d)
10.8
10.9
Description
Interconnection Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated October 22,
1997 (Exhibit 10.7(a) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4955).
Amendment No. 1, executed on January 14, 1999, to Power Purchase Agreement between Encogen
Hawaii, L.P. and Hawaii Electric Light dated October 22, 1997 (Exhibit 10.7(b) to Hawaiian Electric’s
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-4955).
Power Purchase Agreement Novation dated November 8, 1999 by and among Encogen Hawaii, L.P.,
Hamakua Energy Partners and Hawaii Electric Light (Exhibit 10.7(c) to Hawaiian Electric’s Annual
Report on Form 10-K for fiscal year ended December 31, 2001, File No. 1-4955).
Consent and Agreement Concerning Certain Assets of Black River Energy, LLC By and Among Great
Point Power Hamakua Holdings, LLC, Hamakua Energy Partners, L.P. and Hawaii Electric Light dated
April 19, 2010 (Exhibit 10.6(e) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2010, File No. 1-4955).
Guarantee Agreement between Great Point Power Hamakua Holdings, LLC and Hawaii Electric Light
dated June 4, 2010 (Exhibit 10.6(f) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, File No. 1-4955).
Low Sulfur Fuel Oil Supply Contract by and between Chevron and Hawaiian Electric dated as of
August 24, 2012 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.2 to
Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, File
No. 1-4955).
First Amendment, dated August 27, 2014, to Low Sulfur Fuel Oil Supply Contract by and between
Chevron Products Company and Hawaiian Electric, dated August 24, 2012 (confidential treatment has
been requested for portions of this exhibit, which has been redacted accordingly) (Exhibit 10.1 to
Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, File
No. 1-4955).
Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between Chevron and Hawaiian
Electric, Maui Electric, Hawaii Electric Light, HTB and YB dated as of November 14, 1997
(confidential treatment has been requested for portions of this exhibit) (Exhibit 10.9 to Hawaiian
Electric’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).
Amendment to Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between
Chevron and Hawaiian Electric, Maui Electric and Hawaii Electric Light entered into as of April 12,
2004 (confidential treatment has been requested for portions of this exhibit, which has been redacted
accordingly) (Exhibit 10(d) to Hawaiian Electric’s Current Report on Form 8-K, dated May 28, 2004,
File No. 1-4955).
Second Amendment dated December 17, 2013 to Inter-Island Industrial Fuel Oil and Diesel Fuel Supply
Contract by and between Chevron and Hawaiian Electric, Maui Electric and Hawaii Electric Light
entered into as of November 14, 1997, as amended by Amendment dated April 12, 2004 (confidential
treatment has been requested for portions of this exhibit, which has been redacted accordingly)
(Exhibit 10.7(c) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2013, File No. 1-4955).
Third Amendment, dated August 27, 2014, to the Inter-Island Industrial Fuel Oil and Diesel Fuel Supply
Contract, dated November 14, 1997, as amended, between Hawaiian Electric, Maui Electric and Hawaii
Electric Light and Chevron Products Company (Exhibit 10.2 to Hawaiian Electric’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2014, File No. 1-4955).
Facilities and Operating Contract by and between Chevron and Hawaiian Electric dated as of
November 14, 1997 (confidential treatment has been requested for portions of this exhibit, which has
been redacted accordingly) (Exhibit 10.10 to Hawaiian Electric’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No. 1-4955).
Low Sulfur Fuel Oil Supply Contract by and between Tesoro and Hawaiian Electric dated as of
August 28, 2012 (confidential treatment has been requested for portions of this exhibit, which has been
redacted accordingly) (Exhibit 10.3 to Hawaiian Electric’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2012, File No. 1-4955).
Exhibit no.
10.10(a)
10.10(b)
10.10(c)
10.10(d)
10.11(a)
10.11(b)
10.12(a)
10.12(b)
10.13
*10.14
10.15
11
*12.2
*21.2
*31.3
*31.4
Description
Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP Petroleum
Americas Refining Inc. and Hawaiian Electric, Maui Electric and Hawaii Electric Light dated
November 14, 1997 (confidential treatment has been requested for portions of this exhibit, which has
been redacted accordingly) (Exhibit 10.12 to Hawaiian Electric’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No. 1-4955).
First Amendment to Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between
Tesoro Hawaii Corporation, formerly known as BHP Petroleum Americas Refining Inc., and Hawaiian
Electric, Maui Electric and Hawaii Electric Light dated March 29, 2004 (confidential treatment has been
requested for portions of this exhibit, which has been redacted accordingly) (Exhibit 10(b) to Hawaiian
Electric’s Current Report on Form 8-K, dated May 28, 2004, File No. 1-4955).
Second Amendment to Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between
Tesoro Hawaii Corporation, formerly known as BHP Petroleum Americas Refining Inc., and Hawaiian
Electric, Maui Electric and Hawaii Electric Light dated January 31, 2012 (confidential treatment has
been requested for portions of this exhibit, which has been redacted accordingly) (Exhibit 10.4 to
Hawaiian Electric’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, File
No. 1-4955).
Letter agreement dated December 11, 2013 between Hawaiian Electric, Maui Electric and Hawaii
Electric Light and Hawaiian Independent Energy LLC (formerly known as Tesoro Hawaii Corporation,
formerly known as BHP Petroleum Americas Refining Inc.) Re: The Inter-Island Industrial Fuel Oil and
Diesel Supply Contract dated November 14, 1997, as amended by First Amendment and Second
Amendment (Exhibit 10.10(d) to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2013, File No. 1-4955).
Contract of private carriage by and between HITI and Hawaii Electric Light dated December 4, 2000
(Exhibit 10.13 to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, File No. 1-4955).
Consent to Change of Ownership/Control of Carrier by and between K-Sea Operating Partnership, L.P.,
and Hawaii Electric Light, dated July 1, 2011 (Exhibit 10.13(b) to Hawaiian Electric’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2012, File No. 1-4955).
Contract of private carriage by and between HITI and Maui Electric dated December 4, 2000
(Exhibit 10.14 to Hawaiian Electric’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, File No. 1-4955).
Consent to Change of Ownership/Control of Carrier by and between K-Sea Operating Partnership, L.P.,
and Maui Electric, dated July 1, 2011 (Exhibit 10.14(b) to Hawaiian Electric’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2012, File No. 1-4955).
Stipulated Settlement Agreement between the Hawaiian Electric Companies and the Division of
Consumer Advocacy regarding Certain Regulatory Matters (Exhibit 10 to Hawaiian Electric’s Current
Report on Form 8-K, dated January 28, 2013, File No. 1-4955).
Release, Transition and Consulting agreement between Richard M. Rosenblum and Hawaiian Electric
dated October 8, 2014
Amended and Restated Credit Agreement, dated as of April 2, 2014, among Hawaiian Electric, as
Borrower, the Lenders Party Thereto and Wells Fargo Bank, National Association, as Syndication Agent,
and Bank of America, N.A., Bank of Hawaii, Royal Bank of Canada, Union Bank, N.A. and U.S. Bank
National Association as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative
Agent, Swingline Lender and Issuing Bank, and J.P. Morgan Securities LLC and Wells Fargo Securities,
LLC, as Joint Lead Arrangers and Joint Book Runners (Exhibit 10.2 to Hawaiian Electric’s Current
Report on Form 8-K dated April 2, 2014, File No. 1-4955).
Computation of Earnings Per Share of Common Stock (See note on Hawaiian Electric’s Item 6. Selected
Financial Data).
Hawaiian Electric - Computation of Ratio of Earnings to Fixed Charges.
Hawaiian Electric - Subsidiaries of the Registrant
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Alan M. Oshima
(Hawaiian Electric Chief Executive Officer).
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura
(Hawaiian Electric Chief Financial Officer).
Exhibit no.
*32.2
*99.1
Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350.
Description
Hawaiian Electric’s Directors, Executive Officers and Corporate Governance; Hawaiian Electric’s
Executive Compensation; Hawaiian Electric’s Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters; Hawaiian Electric’s Certain Relationships and Related
Transactions, and Director Independence; and Hawaiian Electric’s Principal Accounting Fees and
Services.
Exhibit A
Shareholder Return Performance Graph
The graph below compares the cumulative total shareholder return on HEI Common Stock against the cumulative
total return of the S&P 500 Stock Index and the average cumulative total return of the investor owned companies in the
Edison Electric Institute (EEI) (48 companies were included as of December 31, 2014). The graph is based on the market
price of common stock for all companies in the indices at December 31 each year and assumes that $100 was invested on
December 31, 2009, in HEI Common Stock, S&P 500 Stock Index and the common stock of all investor owned
companies in EEI and that dividends were reinvested.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$250
$200
$150
$100
$50
$0
2009
Source: FactSet
2010
2011
2012
2013
2014
Hawaiian Electric Industries, Inc.
S&P 500 Index
EEI Average
Exhibit B
Explanation of HEI’s Use of Certain Unaudited Non-GAAP Measures
HEI and Hawaiian Electric Company management use certain non-GAAP measures to evaluate the performance of
the utility and HEI. Management believes these non-GAAP measures provide useful information and are a better
indicator of the companies’ core operating activities. Core earnings and other financial measures as presented here may
not be comparable to similarly titled measures used by other companies. The accompanying tables provide a
reconciliation of reported GAAP1 measures to non-GAAP core measures for consolidated net income, consolidated
diluted earnings per share and consolidated return on average common equity (ROACE).
The reconciling adjustments from GAAP earnings to core earnings is limited to a) costs related to the pending
merger between HEI and NextEra Energy, Inc. 2 and spin-off of ASB Hawaii, Inc. and b) the partial writedown of utility
assets in 2012 based upon the settlement agreement between Hawaiian Electric Company and the Hawaii Consumer
Advocate which was subsequently approved by the Hawaii Public Utilities Commission. Management does not consider
these items to be representative of the company’s fundamental core earnings.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
Hawaiian Electric Industries, Inc. and Subsidiaries (HEI)
Unaudited
($ in millions, except per share amounts)
HEI CONSOLIDATED NET INCOME
GAAP (as reported)
Excluding special items (after-tax):
2014
2013
2012
$
168.3 $ 161.5
$ 138.7
Costs related to pending merger with NextEra Energy, Inc. and spin-off of ASB Hawaii, Inc.
Settlement agreement for the partial writedown of certain utility assets
4.9
—
—
—
—
24.4
Non-GAAP (core)
$
173.2 $ 161.5
$ 163.1
HEI CONSOLIDATED DILUTED EARNINGS PER SHARE
GAAP (as reported)
Excluding special items (after-tax):
$
1.64 $
1.62
$
1.42
Costs related to pending merger with NextEra Energy, Inc. and spin-off of ASB Hawaii, Inc. 0.05
Settlement agreement for the partial writedown of certain utility assets
—
—
—
—
0.25
Non-GAAP (core)
$
1.68 $
1.62
$
1.68
HEI CONSOLIDATED RETURN ON AVERAGE COMMON EQUITY (ROACE) (simple average)
Based on GAAP
Based on non-GAAP (core)3
9.6 %
9.8 %
9.7 %
9.7 %
8.9 %
10.4 %
Note: Columns may not foot due to rounding
1 Accounting principles generally accepted in the United States of America
2 For more information on the pending merger, see HEI’s definitive proxy statement on Form DEFM14A filed on
March 26, 2015
3 Calculated as core net income divided by average GAAP common equity
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James A. Ajello
Executive Vice President and
Chief Financial Officer
Chet A. Richardson
Executive Vice President, General Counsel,
Secretary and Chief Administrative Officer
Stephen M. McMenamin
Senior Vice President and
Chief Information Officer
Tayne S. Y. Sekimura
Senior Vice President and
Chief Financial Officer
Patricia U. Wong
Senior Vice President,
Corporate Services
Colton K. Ching
Vice President,
Energy Delivery
Ronald R. Cox
Vice President,
Power Supply
Darcy L. Endo-Omoto
Vice President,
Government and Community Affairs
Richard R. Houck
Vice President,
Enterprise Project Management
Shelee M. T. Kimura
Vice President,
Corporate Planning and
Business Development
Scott W. H. Seu
Vice President,
System Operation
Lynne T. Unemori
Vice President,
Corporate Relations
Joseph P. Viola
Vice President,
Regulatory Affairs
Gabriel S. H. Lee
Executive Vice President,
Commercial Markets
Richard C. Robel
Executive Vice President,
Operations and Technology
Heather M. Schwarm
Executive Vice President and
Chief Financial Officer
Natalie M. H. Taniguchi
Executive Vice President,
Enterprise Risk and Regulatory Relations
K. Elizabeth Whitehead
Executive Vice President,
Chief Administrative Officer and
Assistant Secretary
Terence C. Y. Yeh
Executive Vice President and
Chief Credit Officer
Executive Management
Hawaiian Electric Industries
Constance H. Lau
President and Chief Executive Officer,
Hawaiian Electric Industries, Inc.
Chairman,
Hawaiian Electric Company, Inc.
Chairman,
American Savings Bank, F.S.B.
Hawaiian Electric
Alan M. Oshima
President and Chief Executive Officer
Jay M. Ignacio
President,
Hawai‘i Electric Light
Sharon M. Suzuki
President,
Maui Electric
Jimmy D. Alberts
Senior Vice President,
Customer Service
Susan A. Li
Senior Vice President,
General Counsel, Chief Compliance Officer
and Secretary
American Savings Bank
Richard F. Wacker
President and Chief Executive Officer
Thomas A. Bowers
Executive Vice President,
Marketing and Business Development
Alexander S. Kim
Executive Vice President,
Operations
8
L02E_HEAR14_FinalBlueline_060915_CC2014.indd 8
6/12/15 6:01 PM
Hawaiian Electric Industries, Inc. Board of Directors
Left to right seated: Keith P. Russell, Barry K. Taniguchi, Constance H. Lau, Jeffrey N. Watanabe, Thomas B. Fargo. Standing: Kelvin H. Taketa,
Bert A. Kobayashi, Sr., Micah A. Kane, Alan M. Oshima, Shirley J. Daniel, Timothy E. Johns, Don E. Carroll, James K. Scott, Richard F. Wacker,
Bert A. Kobayashi, Jr., A. Maurice Myers, Peggy Y. Fowler.
Hawaiian Electric Industries
Jeffrey N. Watanabe (1, 3)
Retired Founder,
Watanabe Ing LLP
Chairman,
Hawaiian Electric Industries, Inc.
Constance H. Lau (1)
President and Chief Executive Officer,
Hawaiian Electric Industries, Inc.
Chairman,
Hawaiian Electric
Chairman,
American Savings Bank, F.S.B.
Admiral Thomas B. Fargo,
USN (Retired) (3, 4)
Chairman,
Huntington Ingalls Industries, Inc.
Former Commander of the
U.S. Pacific Command
Peggy Y. Fowler (2)
Retired President and
Chief Executive Officer,
Portland General Electric Company
A. Maurice Myers (3)
Chief Executive Officer and Owner,
Myers Equipment Leasing, LLC
James K. Scott, Ed.D. (4)
President,
Punahou School
Retired Chairman, President and
Chief Executive Officer,
Waste Management, Inc.
Keith P. Russell (2)
President,
Russell Financial, Inc.
Kelvin H. Taketa (4)
President and Chief Executive Officer,
Hawai‘i Community Foundation
Barry K. Taniguchi (1, 2)
Chairman and Chief Executive Officer,
KTA Super Stores
Committees of the Board of Directors:
(1) Executive
Jeffrey N. Watanabe, Chairman
(2) Audit
(3) Compensation
(4) Nominating & Corporate Governance
Barry K. Taniguchi, Chairman
Thomas B. Fargo, Chairman
Kelvin H. Taketa, Chairman
Hawaiian Electric
American Savings Bank
Don E. Carroll
Retired Chairman,
Oceanic Time
Warner Cable Advisory Board
Timothy E. Johns
Chief Consumer Officer,
Hawai‘i Medical Service Association
Micah A. Kane
Chief Operating Officer,
Pacific Links Hawai‘i LLC
Bert A. Kobayashi, Jr.
Managing Partner,
BlackSand Capital, LLC
Shirley J. Daniel, Ph.D.
Professor of Accountancy,
Shidler College of Business,
University of Hawai‘i-Ma–noa
Bert A. Kobayashi, Sr.
Chairman and Chief Executive Officer,
Kobayashi Development Group LLC
Richard F. Wacker
President and Chief Executive Officer,
American Savings Bank, F.S.B.
Alan M. Oshima
President and Chief Executive Officer,
Hawaiian Electric
The following HEI directors are also directors
of Hawaiian Electric:
Constance H. Lau, Chairman
Thomas B. Fargo
Peggy Y. Fowler
Kelvin H. Taketa
The following HEI directors are also directors
of American Savings Bank, F.S.B.:
Constance H. Lau, Chairman
A. Maurice Myers
Keith P. Russell
James K. Scott
Barry K. Taniguchi
Jeffrey N. Watanabe
Hawaiian Electric Industries, Inc.
Shareholder Information
Corporate Headquarters
Hawaiian Electric Industries, Inc.
1001 Bishop Street, Suite 2900
Honolulu, Hawaii 96813
Telephone: 808-543-5662
Mailing address:
P.O. Box 730
Honolulu, Hawaii 96808-0730
New York Stock Exchange
Common stock symbol: HE
Trust preferred securities symbol: HEPrU (HECO)
Shareholder Services
P.O. Box 730
Honolulu, Hawaii 96808-0730
Telephone: 808-532-5841
Toll Free: 866-672-5841
Facsimile: 808-532-5868
E-mail: invest@hei.com
Office hours: 7:30 a.m. to 3:30 p.m. H.S.T.
Correspondence about common stock and utility preferred
stock ownership, dividend payments, transfer requirements,
changes of address, lost stock certificates, duplicate mailings,
and account status may be directed to shareholder services.
A copy of the 2014 Form 10-K Annual Report for Hawaiian
Electric Industries, Inc. and Hawaiian Electric Company, Inc.,
including financial statements and schedules, will be provided
by HEI without charge upon written request directed to Shareholder
Services, at the above address for Shareholder Services or through
HEI’s website.
Website
Internet users can access information about HEI and its subsidiaries
at http://www.hei.com.
Dividends and Distributions
Common stock quarterly dividends are customarily paid on or
about the 10th of March, June, September, and December to
shareholders of record on the dividend record date.
Quarterly distributions on trust preferred securities are paid by
HECO Capital Trust III, an unconsolidated financing subsidiary of HECO,
on or about March 31, June 30, September 30, and December 31 to
holders of record on the business day before the distribution is paid.
Utility company preferred stock quarterly dividends are paid on the
15th of January, April, July, and October to preferred shareholders of
record on the 5th of these months.
Direct Registration
HEI common stock can be issued in direct registration (book entry)
form. The stock is DRS (Direct Registration System) eligible.
Dividend Reinvestment and Stock Purchase Plan
Any individual of legal age or any entity may buy HEI common stock
at market prices directly from HEI. The minimum initial investment is
$250. Additional optional cash investments may be as small as $25.
The annual maximum investment is $300,000. After your account is
open, you may reinvest all of your dividends to purchase additional
shares or elect to receive some or all of your dividends in cash.
You may instruct HEI to electronically debit a regular amount from
a checking or savings account. HEI can also deposit dividends
automatically to your checking or savings account. A prospectus
describing the plan may be obtained through HEI’s website or by
contacting shareholder services.
Annual Meeting
Thursday, August 20, 2015, 10:00 a.m. Please direct inquiries to:
American Savings Bank Tower
1001 Bishop Street
8th Floor, Room 805
Honolulu, Hawaii 96813
Chet A. Richardson
Executive Vice President,
General Counsel, Secretary
and Chief Administrative Officer
Telephone: 808-543-5885
Facsimile: 808-203-1991
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
601 South Figueroa Street
Los Angeles, CA 90017
Telephone: 213-356-6000
Facsimile: 813-637-4444
Institutional Investor and Securities Analyst Inquiries
Please direct inquiries to:
Clifford H. Chen
Manager, Investor Relations and Strategic Planning
Telephone: 808-543-7300
Facsimile: 808-203-1164
E-mail: ir@hei.com
Transfer Agents
Common stock and utility company preferred stock:
Shareholder Services
Common stock only:
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
Telephone: 212-509-4000
Facsimile: 212-509-5150
Trust preferred securities:
Contact your investment broker for information on
transfer procedures.
To minimize our environmental impact, the Hawaiian Electric Industries 2014
Annual Report to Shareholders was printed on papers containing fibers
from products from socially and environmentally responsible forestry.
To learn more, please visit us at www.hei.com
You may access
the HEI website
by scanning the
barcode with your
mobile device on
the right.