Hawaiian Electric Industries
Annual Report 2018

Plain-text annual report

Working together for a sustainable future 2018 Annual Report to Shareholders Our home state of Hawai‘i is like no place else on earth. A remote island archipelago. Abundant in natural beauty. With a vibrant economy, a rich tapestry of cultures woven together into strong, diverse communities, and a drive to preserve and protect its way of life. As a company, we are focused on working collaboratively with our communities to create a path toward a more sustainable future—to strengthen our state’s economy, improve the well-being and resilience of our communities and protect Hawai‘i’s extraordinary environment. Letter to Shareholders “ Over a decade ago, Hawai‘i set out on what was viewed as an ambitious journey to power 40% of our electricity needs with renewable sources. Since then Hawai‘i has embarked on an even more bold expedition, seeking to use clean energy for 100% of our electricity needs and to achieve a carbon neutral economy, including transportation, by 2045. These goals aim not only to preserve our environment, but to increase our energy independence, resilience and economic strength.” Constance H. Lau HEI President and Chief Executive Officer Dear Fellow Shareholders, Over a decade ago, Hawai‘i set out on what was viewed as an ambitious journey to power 40% of our electricity needs with renewable sources. Since then Hawai‘i has embarked on an even more bold expedition, seeking to use clean energy for 100% of our electricity needs and to achieve a carbon neutral economy, including transportation, by 2045. These goals aim not only to preserve our environment, but to increase our energy independence, resilience and economic strength. Our work to advance these efforts benefits our state and also creates value for our shareholders. There is no guidebook or map for achieving Hawai‘i’s goals. We are collaborating with our communities to chart a path to the more sustainable, resilient future we envision. The paragraphs that follow summarize the progress we made in 2018. On the road ahead we’re sure to encounter some rocky terrain and steep climbs. And we’ll continue working together with our communities to keep moving forward. Continuing our Legacy of Creating Shareholder Value In 2018, our consolidated companies generated $201.8 million in net income, resulting in diluted earnings per share (EPS) of $1.85 and growth of 22% in both net income and EPS over 2017. Excluding one-time tax reform impacts that reduced our 2017 earnings, our 2018 core net income and core EPS each grew a healthy 12% over the prior year. American Savings Bank (ASB) produced record earnings due to its hard work to deepen its relationships with customers, improve efficiency and deliver disciplined growth. Hawaiian Electric also had improved earnings and a strengthened return on equity, and continued to deliver on key priorities of its five-year transformation plan. Growing our Dividend In 2018 we continued our record of paying uninterrupted dividends to our shareholders. In early 2019 our Board approved a 3% dividend increase, raising the quarterly dividend from 31 cents to 32 cents per share and reflecting the strength of our 2018 results and the Board’s confidence in our future prospects. Provides electricity and related services for 95% of Hawai‘i’s population and operates 3 utilities and 5 separate island grids 3rd largest bank in Hawai‘i with more than $7 billion in assets and 49 branches across the state Invests in clean energy and sustainability projects as a part of HEI’s strategy to be a catalyst for a better Hawai‘i 2018 Annual Report 1 PACIFIC CURRENT 46869 Merrill HEIAR18-830am-031019_Insert.indd 1 3/10/19 3:46 PM In 2018 we contracted for a record amount of renewable energy resources for Hawai‘i and continued to make it easier for customers to add rooftop solar and storage. We’re continuing to invest in our grids to enable us to integrate even more renewables and storage, provide more customer options and improve the resilience of our systems. D N E G E L P A M Current Renewable Energy Projects Selected Proposed/Under Construction Renewable Projects Biofuels (B), Biomass (M), Geothermal (G), Hydroelectric (H), Photovoltaic (P), Photovoltaic + Storage (P/S), Wind (W) A proposed 47 MW wind project awaits approval. Four solar + storage projects totaling 139 MW await approval. W W B W M P P P P P B P P/S Oahu P Three grid-scale solar projects under construction will add 110 MW to the grid starting in 2019. 35% of single family homes on Oahu had rooftop solar in 2018. Hawaiian Electric’s 20 MW West Loch solar facility comes online in 2019. Hawaiian Electric Company In 2018, Hawaiian Electric continued its collaborative work with the communities we serve to reach our renewable energy goals, strengthen our economy and make our towns and neighborhoods more resilient. These efforts, like many of our accomplishments in 2018, reflect the goals of Hawaiian Electric’s multi-year strategic transformation, which focuses on delivering affordable, reliable, renewable energy; providing more value and an improved experience to customers; strengthening our relationships with communities; building resilience; and maintaining the financial strength to achieve our transformation plan and our state’s ambitious goals. Affordable, reliable, renewable energy is critical to the future of our company, our customers and our state, and in 2018 we made great progress. Collectively, our utilities achieved 27 percent of energy sales from renewable sources—up from just 9 percent a decade ago. Individually, on some days, when conditions are right, 50 to 80 percent of electricity demand on our islands is being met with local, renewable resources. We’re adding even more clean energy, contracting for eight new solar-plus-storage projects for over 275 megawatts of solar and more than one gigawatt of battery storage, all at prices well below the cost of fossil fuel generation. On Hawai‘i Island, if lava flows had not impacted the third party geothermal power plant, we would have met 64 percent of the island’s electricity needs with clean energy in 2018. And with the prospect of more renewable resources in the pipeline and the possible restart of the geothermal plant, we have the potential to meet over 80 percent of energy needs with renewable energy on that island by 2022 if all projects are approved and constructed in the projected timelines. 27% #1 27% of electricity needs met with renewable energy; On track to exceed 2020 goal of 30% #1 in the nation in rooftop solar integration 18% of residential customers have rooftop solar compared to 2% national average 2 Hawaiian Electric Industries, Inc. 46869 Merrill HEIAR18-830am-031019_Insert.indd 2 3/10/19 3:46 PM A new 2.7 MW solar plus battery storage project is planned for Moloka‘i and will be the first large-scale solar project on the island. P/S Moloka‘i Lanai P H P/S W BW Maui P/S P P W In 2018, wind provided 61% of Maui Electric’s renewable energy. 75 MW of solar + storage expected to come online by 2022. 60 MW of solar + storage expected to come online by 2022. W P/S P/S M H H H Hawai‘i Island With a unique mix of geothermal, solar, wind and hydroelectricity, Hawai‘i Island has the potential to use renewables to generate more than half its electricity. A new 30 MW power plant to be fueled by locally-grown biomass is under construction. G Two new grid-scale solar farms of 3 MW each went into operation in 2018. W We’re seeing results from our focus on providing greater customer value, with customer satisfaction improving 17% since 2014. We’ve made it easier for customers to add rooftop solar with our new online interconnection system, cutting approval times in half. In 2018 we were again #1 in the nation in private rooftop solar adoption. We created Project Footprint to encourage customers to take carbon-reducing actions like moving to paperless billing, adding rooftop solar or buying an electric vehicle (EV). And we laid the foundation for more EVs in Hawai‘i by filing our electrification of transportation roadmap in 2018. We’re also leading the Drive Electric Hawai‘i coalition with other stakeholders, including leading environmental groups and government agencies who all understand the unique importance of EV adoption for our islands. More daytime uses of increasingly clean electricity to displace fossil fuel in ground transportation will add measurably to our goals to reach 100 percent renewable energy and cleaner air while providing customer value. As more renewable energy, customer-sited resources and electric vehicles come onto our system, we need a high-tech grid to collect and deliver information on a real-time basis and get energy where it is needed and when it is needed—and just as importantly, to store it when it is not needed. In 2018, the Hawai‘i Public Utilities Commission accepted our Grid Modernization Strategy and we applied to implement the first phase of that plan. We’re pleased that the Smart Electric Power Association named our utilities the 2018 Investor-Owned Utility of the Year, citing our collaboration with our customers and communities. 19% 17% 19% lower fossil fuel use and greenhouse gas emissions from our plants over last 10 years 17% improvement in utility customer satisfaction since 2014 46869 Merrill HEIAR18-830am-031019_Insert.indd 3 3/11/19 9:39 AM 2018 Annual Report 3 As the lava and storm events that affected our state in 2018 remind us, the resilience of our communities and our grids is of paramount importance. We’ve been focused on this for some time, strengthening our transmission infrastructure, investing in vegetation management and building relationships with industry and emergency management partners and within our communities to create more resilient neighborhoods and towns. In 2018, we brought online the efficient, biofuel-capable Schofield Generating Station, a key part of system recovery in the event of an emergency affecting the grid. We’re also convening community conversations about resilience planning, bringing together stakeholders to discuss risks, strengths and approaches to enhance resilience. Our utilities’ financial strength remains a key focus as well. Third party renewable energy developers who sell energy to Hawaiian Electric depend on the strong financial standing of the utility, which is the sole customer of those projects, in obtaining financing. Lower cost financing for those third party resources lowers the cost of energy to our customers. We’re working collaboratively with the Hawai‘i Public Utilities Commission, Consumer Advocate and other stakeholders on performance-based regulation to ensure alignment of our regulatory framework with our state’s policy goals. We’re also improving efficiency, implementing in 2018 a new enterprise-wide technology system to streamline and standardize processes, and increasingly operating our three utilities as one. A Hawaiian Electric crew replaces utility poles that support the circuit feeding the Pacific Palisades neighborhood on Oahu. Replacing aging and damaged poles with stronger ones is one of the equipment upgrades we make to improve grid resilience and service reliability for our customers. Engaging Our Customers Launched in early 2019, Project Footprint is our utility customer rewards and customer engagement program that provides Hawai‘i residents options to reduce their carbon footprint, and help us reach our 100% renewable energy goal by 2045. Through Project Footprint, we also invite customers to support community partners who are aligned with our mission of preserving our islands. And we encourage Hawai‘i youth to post their artwork and share what inspires them to reduce their carbon footprint. Learn more by vis iting footprint.hawaiianelectric.com. 4 Hawaiian Electric Industries, Inc. 46869 Merrill HEIAR18-830am-031019_Insert.indd 4 3/10/19 3:46 PM Strengthening Our Communities Our dedication to creating a better Hawai‘i extends to our community involvement. We continue to be recognized as one of Hawai‘i’s most charitable companies. In 2018, our family of companies contributed more than $2.4 million in charitable donations and our employees volunteered more than 25,000 hours to serve our local communities. Our employees’ generosity never ceases to both impress and humble me, and I am proud of the contributions our employees and our companies are making in our communities. Maui Electric Company and the Hawaiian Electric Industries Charitable Foundation recently donated an electric vehicle to the Moloka‘i transportation program of Maui Economic Opportunity, Inc. (MEO). The vehicle will support much needed transportation services that MEO provides on Moloka‘i and will play a key role in promoting electric vehicle transportation on the island. The donation is emblematic of the focus on stakeholder engagement that characterizes our electrification of transportation efforts. About 40 Hawaiian Electric employees and their families joined with the nonprofit Kumuola Foundation for a community workday to revitalize Lua _ noa Valley. In addition ‘Alaea, a living, learning cultural farm in Oahu’s Ma to pulling out invasive weeds from a lo‘i (taro patch), volunteers removed vines and cleared root areas of the ‘awa (kava) plants to make way for new plantings and to support Kumuola’s efforts to expand sustainable farming. In September 2018, 200 American Savings Bank teammates, friends, family and community members participated in the bank’s annual Statewide Seeds of Service volunteering event. Projects took place at a local public school on each island, with activities ranging from landscaping to painting. 2018 Annual Report 5 46869 Merrill HEIAR18-830am-031019_Insert.indd 5 3/10/19 3:46 PM • Focused on making banking easier for customers and deepening customer relationships • Continued strong financial position, with record earnings in 2018 • Track record of efficiency improvement and disciplined growth At American Savings Bank, we see ourselves as more than just bankers—we help make people’s dreams possible. Our business has always focused on serving and investing in Hawai‘i’s families, businesses and communities. American Savings Bank Our team at ASB pursues the bank’s vision every day to help Hawai‘i’s families, businesses and communities realize their dreams. In 2018, ASB invested approximately $1.8 billion in our community—providing the capital to help customers grow their businesses, plan for retirement and their children’s education, or buy a first home. ASB delivered record financial performance in 2018, with net income increasing 23% to $82.5 million and return on equity climbing to 13.5%. Our team’s consistent focus on improving capital and operating efficiency while delivering disciplined growth helped the bank build upon the benefits of a lower tax rate from tax reform. As a bank entirely focused on Hawai‘i, ASB is committed to building a sustainable local economy through our business lending activities and by using our expertise to foster innovation and entrepreneurship. Our financing for small businesses helps diversify our economy and create new jobs, our lending for clean energy projects supports our state’s move to a renewable energy, carbon neutral future, and our funding for low income housing provides a more stable foundation for Hawai‘i families. Our team at ASB believes passionately in the importance of innovation and entrepreneurship to the future of our economy. The bank sponsors—and our teammates devote their energy and talents to—a broad array of entrepreneurship programs, from our own “KeikiCo” business plan competition for K-12 students, to university programs such as the University of Hawai‘i Pacific and Asian Center for Entrepreneurship and Chaminade University’s Hogan Entrepreneurs Program, to nationally recognized start-up accelerators XLR8UH and Elemental Excelerator. ASB’s focus on making banking easier for customers permeates its culture and drives efforts to provide personalized solutions, simplify processes ASB’s award-winning culture • Best Places to Work in Hawaii 2010-19, Hawaii Business Magazine • Best Bank to Work For, 2013-16, 2018, American Banker Magazine • Certified Great Place to Work, 2018, Fortune Magazine 6 Hawaiian Electric Industries, Inc. 46869 Merrill HEIAR18-830am-031019_Insert.indd 6 3/10/19 3:46 PM New campus designed to benefit our customers, employees, community and environment • The new campus brings our employees together in an open space design that fosters collaboration • Our employees have dedicated over 8,000 hours to community clean-ups in the campus area since 2015 • 469 solar panels power the building with renewable energy, and energy efficiency technologies help reduce energy needs and efficiently deliver an excellent customer service experience across all channels. As part of this, ASB has enhanced its online and mobile banking platform, enriched its website content, and launched offerings to educate customers on smart borrowing, taxes, and using technology to plan for the future. To be even more effective and efficient in delivering for customers, ASB’s teammates are moving to our new ASB Campus in the first part of 2019. This consolidation of all non-branch activities into this innovative, collaborative space marks a new and exciting stage in the bank’s development and brings many opportunities to further strengthen execution and the bank’s award-winning culture. The campus exemplifies our companies’ sustainability goals, with EV charging stations and bike facilities, hundreds of solar panels, and state-of- the-art energy efficiency and smart building technology. The campus also serves as a platform for community partnerships and revitalization of part of Honolulu’s urban core. Our teammates have devoted more than 8,000 hours to community cleanups in the campus area since 2015, and we’re partnering with neighbor organizations to help improve the surrounding area for the whole community. Pacific Current Our newest subsidiary, Pacific Current, further strengthens our strategy to be a catalyst for a better Hawai‘i by building local partnerships to invest in projects advancing Hawai‘i’s sustainability goals. Pacific Current’s portfolio currently includes solar-plus-storage projects under development at five University of Hawai‘i campuses to help the university achieve its goal of net zero energy by 2035 as well as the 60-megawatt biofuel- capable Hamakua Energy power plant on Hawai‘i Island. As Pacific Current grows, it is focused on potential investments in water and transportation, as well as clean energy. Pacific Current now has its own small, highly talented management team in place to lead the company forward. We are excited about its potential to grow and contribute to a more sustainable future for our state. A Bright Outlook I am excited about the possibilities ahead for our companies as well as for our state. As we enter 2019, we are building upon the strong foundation we have established to provide affordable, reliable renewable energy for our customers, enhance the resilience of our communities and help our state reach its aggressive climate goals. We look forward to the new possibilities that will be created by bringing ASB’s employees together into its new campus. And we are excited about the opportunities for Pacific Current to invest in a more sustainable future for Hawai’i and for the next generation. On behalf of our employees, our executive team and our Board, mahalo (thank you) to our shareholders for your continued support as we strive to build a better tomorrow for our companies and our state. Aloha, Constance H. Lau President and Chief Executive Officer Hawaiian Electric Industries, Inc. 2018 Annual Report 7 46869 Merrill HEIAR18-830am-031019_Insert.indd 7 3/11/19 9:43 AM Financial Highlights Years ended December 31 (dollars in millions, except per share amounts) 2018 2017 2016 Operating income 3 $ 333 $ 346 $ 356 Net income (loss) for common stock by segment Electric utility Bank Other Net income for common stock Core1 net income for common stock Diluted earnings per common share Core1 diluted earnings per common share Return on average common equity Core1 return on average common equity Dividends per common share Annual dividend yield 2 Common shares (millions) December 31 Weighted-average — basic Weighted-average — diluted 144 83 (24 ) 202 202 1.85 1.85 9.5 % 9.5% 1.24 3.4 % 108.9 108.9 109.1 120 67 (22) 165 179 1.52 1.65 7.9% 8.6% 1.24 3.4% 108.8 108.7 108.9 142 57 49 248 190 2.29 1.75 12.4% 9.5% 1.24 3.7% 108.6 108.1 108.3 Total Shareholder Return (percent) Dividend Yield (percent) HEI 5.0 41.7 72.1 2018 3-Year 5-Year S&P 500 Index Edison Electric Institute (EEI) Index KBW Regional Banking Index -4.4 30.4 50.3 3.7 36.0 68.5 -17.5 16.7 26.6 87.2 10-Year 166.0 243.0 176.4 4.3 3.7 3.8 3.7 3.3 3.4 3.4 3.4 3.4 3.4 6 4 2 0 Source: S&P Global Inc. / HEI NYSE symbol: HE EEI Index HEI Sources: S&P Global Inc. and EEI 2014 2015 2016 2017 2018 (1) Non-GAAP measure that excludes: for 2017, the tax reform act and related items; and for 2016, merger and spin-off-related income and costs after-tax including costs related to the terminated LNG contract, which required PUC approval of the merger with NextEra Energy, Inc. See Appendix B to this 2018 Annual Report to Shareholders for the reconciliation of GAAP to non-GAAP measures. (2) At December 31. (3) Operating income for 2017 and 2016 has been updated to reflect retrospective adoption of ASU No. 2017-07. 8 Hawaiian Electric Industries, Inc. 46869 Merrill HEIAR18-830am-031019_Insert.indd 8 3/11/19 9:13 AM Hawaiian Electric Industries, Inc. 2018 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, 2018 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-8503 Registrant; State of Incorporation; Address; and Telephone Number HAWAIIAN ELECTRIC INDUSTRIES, INC., a Hawaii corporation 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813 Telephone (808) 543-5662 I.R.S. Employer Identification No. 99-0208097 1-4955 HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation 99-0040500 900 Richards Street, Honolulu, Hawaii 96813 Telephone (808) 543-7771 Securities registered pursuant to Section 12(b) of the Act: Registrant Hawaiian Electric Industries, Inc. Hawaiian Electric Company, Inc. Title of each class Common Stock, Without Par Value Guarantee with respect to 6.50% Cumulative Quarterly Income Preferred Securities Series 2004 (QUIPSSM) of HECO Capital Trust III Securities registered pursuant to Section 12(g) of the Act: Registrant Hawaiian Electric Industries, Inc. Hawaiian Electric Company, Inc. Name of each exchange on which registered New York Stock Exchange New York Stock Exchange Title of each class None Cumulative Preferred Stock Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Hawaiian Electric Industries Inc. Yes X No Hawaiian Electric Company, Inc. Yes No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Hawaiian Electric Industries Inc. Yes No X Hawaiian Electric Company, Inc. Yes No X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Hawaiian Electric Industries Inc. Yes X No Hawaiian Electric Company, Inc. Yes X No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 Smaller reporting company Emerging growth company Accelerated filer Non-accelerated filer X Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Hawaiian Electric Industries Inc. Yes No Hawaiian Electric Company, Inc. Yes No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Hawaiian Electric Industries Inc. Yes No X Hawaiian Electric Company, Inc. Yes No X Aggregate market value of the voting and non- voting common equity held by non-affiliates of the registrants as of June 30, 2018 Hawaiian Electric Industries, Inc. (HEI) $3,734,558,104 Hawaiian Electric Company, Inc. (Hawaiian Electric) None Number of shares of common stock outstanding of the registrants as of June 30, 2018 February 13, 2019 108,879,245 (Without par value) 108,936,902 (Without par value) 16,142,216 ($6 2/3 par value) 16,751,488 ($6 2/3 par value) DOCUMENTS INCORPORATED BY REFERENCE Hawaiian Electric’s Exhibit 99.1, consisting of: Hawaiian Electric’s Directors, Executive Officers and Corporate Governance—Part III Hawaiian Electric’s Executive Compensation—Part III Hawaiian Electric’s Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters— Part III Hawaiian Electric’s Certain Relationships and Related Transactions, and Director Independence—Part III Hawaiian Electric’s Principal Accounting Fees and Services—Part III Selected sections of Proxy Statement of HEI for the 2019 Annual Meeting of Shareholders to be filed-Part III This combined Form 10-K represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each registrant on its own behalf. Hawaiian Electric makes no representations as to any information not relating to it or its subsidiaries. TABLE OF CONTENTS Glossary of Terms Cautionary Note Regarding Forward-Looking Statements Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Executive Officers of the Registrant (HEI) PART I PART II Item 5. Item 6. Item 7. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Signatures Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV Exhibits and Financial Statement Schedules Page ii vi 1 17 27 28 28 28 28 29 30 32 68 71 168 168 169 169 170 171 171 172 172 184 i Defined below are certain terms used in this report: GLOSSARY OF TERMS Terms ABO ADIT AES Hawaii AFS AFUDC AOCI AOS APBO ARO ASB ASB Hawaii ASC ASU Btu CAA CERCLA Chevron CIAC CIP CT-1 CIS Company Consolidated Financial Statements Definitions Accumulated benefit obligation Accumulated deferred income tax balances AES Hawaii, Inc. Available-for-sale Allowance for funds used during construction Accumulated other comprehensive income (loss) Adequacy of supply Accumulated postretirement benefit obligation Asset retirement obligations American Savings Bank, F.S.B., a wholly-owned subsidiary of ASB Hawaii Inc. ASB Hawaii, Inc. (formerly American Savings Holdings, Inc.), a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. Accounting Standards Codification Accounting Standards Update British thermal unit Clean Air Act Comprehensive Environmental Response, Compensation and Liability Act Chevron Products Company, which assigned their fuel oil supply contracts with the Utilities to Island Energy Services, LLC. Contributions in aid of construction Campbell Industrial Park 110 MW combustion turbine No. 1 Customer Information System When used in Hawaiian Electric Industries, Inc. sections and in the Notes to Consolidated Financial Statements, “Company” refers to Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; Pacific Current, LLC and its subsidiaries, Hamakua Holdings, LLC (and its subsidiary, Hamakua Energy, LLC) and Mauo Holdings, LLC (and its subsidiary, Mauo, LLC); The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and HEI Properties, Inc. (dissolved in 2015 and wound up in 2017). When used in Hawaiian Electric Company, Inc. sections, “Company” refers to Hawaiian Electric Company, Inc. and its direct subsidiaries. HEI’s or Hawaiian Electric’s Consolidated Financial Statements, including notes, in Item 8 of this Form 10-K Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii CBRE D&O DBEDT DBF DG DER Dodd-Frank Act DOH DRIP ECAC ECRC EEPS EGU EIP EPA EPS ERISA ERL Community-based renewable energy Decision and order from the PUC State of Hawaii Department of Business Economic Development and Tourism State of Hawaii Department of Budget and Finance Distributed generation Distributed energy resources Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 State of Hawaii Department of Health HEI Dividend Reinvestment and Stock Purchase Plan Energy cost adjustment clause Energy cost recovery clause Energy Efficiency Portfolio Standards Electrical generating unit 2010 Executive Incentive Plan, as amended Environmental Protection Agency - federal Earnings per share Employee Retirement Income Security Act of 1974, as amended Environmental Response Law of the State of Hawaii ii Terms Definitions GLOSSARY OF TERMS (continued) ERP/EAM Exchange Act FASB FDIC FDICIA federal FERC FHLB FHLMC FICO Fitch FNMA FRB GAAP GHG GNMA Gramm Act Hamakua Energy Enterprise Resource Planning/Enterprise Asset Management Securities Exchange Act of 1934 Financial Accounting Standards Board Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation Improvement Act of 1991 U.S. Government Federal Energy Regulatory Commission Federal Home Loan Bank Federal Home Loan Mortgage Corporation Fair Isaac Corporation Fitch Ratings, Inc. Federal National Mortgage Association Federal Reserve Board Accounting principles generally accepted in the United States of America Greenhouse gas Government National Mortgage Association Gramm-Leach-Bliley Act of 1999 Hamakua Energy, LLC, an indirect subsidiary of Pacific Current and successor in interest to Hamakua Energy Partners, L.P., an affiliate of Arclight Capital Partners (a Boston based private equity firm focused on energy infrastructure investments) and successor in interest to Encogen Hawaii, L.P. Hawaii Electric Light Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc. Hawaiian Electric Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp. Hawaiian Electric’s MD&A Hawaiian Electric Company, Inc.’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K HEI HEI’s 2019 Proxy Statement Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., Pacific Current, LLC, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and HEI Properties, Inc. (dissolved in 2015 and wound up in 2017) Selected sections of Proxy Statement for the 2019 Annual Meeting of Shareholders of Hawaiian Electric Industries, Inc. to be filed after the date of this Form 10-K and not later than 120 days after December 31, 2018, which are incorporated in this Form 10-K by reference HEI’s MD&A Hawaiian Electric Industries, Inc.’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K HEIPI HEIRSP HELOC HPOWER HTB HTM IPP IRP IRR Island Energy Kalaeloa kV kW kWh LNG LSFO HEI Properties, Inc. (dissolved in 2015 and wound up in 2017), a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. Hawaiian Electric Industries Retirement Savings Plan Home equity line of credit City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets and the stock of its subsidiary, Young Brothers, Limited, and changed its name to The Old Oahu Tug Services, Inc. Held-to-maturity Independent power producer Integrated resource plan Interest rate risk Island Energy Services, LLC (a fuel oil supplier and subsidiary of One Rock Capital Partners, L.P.), who purchased Chevron’s Hawaii assets on November 1, 2016 and was assigned Chevron’s fuel oil supply contracts with the Utilities. Kalaeloa Partners, L.P. Kilovolt Kilowatt/s (as applicable) Kilowatthour/s (as applicable) Liquefied natural gas Low sulfur fuel oil iii Terms Definitions GLOSSARY OF TERMS (continued) LTIP MATS Maui Electric Mauo MBtu MD&A Merger Long-term incentive plan Mercury and Air Toxics Standards Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc. Mauo, LLC, an indirect subsidiary of Pacific Current Million British thermal unit Management’s Discussion and Analysis of Financial Condition and Results of Operations As provided in the Merger Agreement (see below), merger of NEE Acquisition Sub II, Inc. with and into HEI, with HEI surviving, and then merger of HEI with and into NEE Acquisition Sub I, LLC, with NEE Acquisition Sub I, LLC surviving as a wholly owned subsidiary of NextEra Energy, Inc. Merger Agreement Agreement and Plan of Merger by and among HEI, NextEra Energy, Inc., NEE Acquisition Sub II, Inc. and NEE Acquisition Sub I, LLC, dated December 3, 2014 and terminated July 16, 2016 Moody’s MOU MPIR MSFO MSR MW MWh NA NAAQS NEE NEM NII NM NPBC NPPC O&M OCC OPEB OTS OTTI Pacific Current PBO PCB PGV PIMs PPA PPAC PSD PSIPs PUC PURPA PV QF QTL RAM RBA Registrant REIP RFP RHI ROA ROACE Moody’s Investors Service’s Memorandum of Understanding Major Project Interim Recovery Medium sulfur fuel oil Mortgage servicing right Megawatt/s (as applicable) Megawatthour/s (as applicable) Not applicable National Ambient Air Quality Standard NextEra Energy, Inc. Net energy metering Net interest income Not meaningful Net periodic benefits costs Net periodic pension costs 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 Pacific Current, LLC, a wholly owned subsidiary of HEI and indirect parent company of Hamakua Energy and Mauo Projected benefit obligation Polychlorinated biphenyls Puna Geothermal Venture Performance incentive mechanisms Power purchase agreement Purchased power adjustment clause Prevention of Significant Deterioration Power Supply Improvement Plans Public Utilities Commission of the State of Hawaii Public Utility Regulatory Policies Act of 1978 Photovoltaic Qualifying Facility under the Public Utility Regulatory Policies Act of 1978 Qualified Thrift Lender Rate adjustment mechanism Revenue balancing account Each of Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Renewable Energy Infrastructure Program Request for proposals Renewable Hawaii, Inc., a wholly-owned nonregulated subsidiary of Hawaiian Electric Company, Inc. Return on assets Return on average common equity iv Terms RORB RPS S&P SEC See SLHCs SOIP Spin-Off SPRBs ST state Tax Act TDR Tesoro TOOTS Trust III UBC Utilities VIE GLOSSARY OF TERMS (continued) Definitions Return on rate base Renewable portfolio standards Standard & Poor’s Securities and Exchange Commission Means the referenced material is incorporated by reference (or means refer to the referenced section in this document or the referenced exhibit or other document) Savings & Loan Holding Companies 1987 Stock Option and Incentive Plan, as amended. Shares of HEI common stock reserved for issuance under the SOIP were deregistered and delisted in 2015. The previously planned distribution to HEI shareholders of all of the common stock of ASB Hawaii immediately prior to the Merger, which was terminated Special Purpose Revenue Bonds Steam turbine State of Hawaii 2017 Tax Cuts and Jobs Act (H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018) Troubled debt restructuring Tesoro Hawaii Corporation dba BHP Petroleum Americas Refining Inc., a fuel oil supplier The Old Oahu Tug Service, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. HECO Capital Trust III Uluwehiokama Biofuels Corp., a wholly-owned nonregulated subsidiary of Hawaiian Electric Company, Inc. Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited Variable interest entity v Cautionary Note Regarding Forward-Looking Statements This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic, political and market factors, among other things. These forward-looking statements are not guarantees of future performance. Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following: • • international, national and local economic and political conditions—including the state of the Hawaii tourism, defense and construction industries; the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by ASB, which could result in higher loan loss provisions and write-offs); decisions concerning the extent of the presence of the federal government and military in Hawaii; the implications and potential impacts of the Federal government partial shutdown, including the impact to our customers to pay their electric bills and/or bank loans and the impact on the state of Hawaii economy; 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; conflicts or other crisis; the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade; terrorist acts; 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 or budget funding, monetary policy, trade policy and tariffs, and other policy and regulation changes advanced or proposed by President Trump and his administration; • • • • • • • • weather, natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of climate change, such as more severe storms, droughts, heat waves, and rising sea levels) and wildfires, including their impact on the Company’s and Utilities’ operations and the economy; the timing, speed and extent of changes in interest rates and the shape of the yield curve; the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile and challenging market conditions, and the cost of such financings, if available; the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale; changes in laws, regulations (including tax regulations), market conditions and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated, as amended by the Economic Growth, Regulatory Relief and Consumer Protection Act; increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds); the potential delay by the Public Utilities Commission of the State of Hawaii (PUC) in considering (and potential disapproval of actual or proposed) renewable energy proposals and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; and uncertainties surrounding technologies, solar power, wind power, biofuels, environmental assessments required to meet renewable portfolio standards (RPS) goals and the impacts of implementation of the renewable energy proposals on future costs of electricity; the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans included in their updated Power Supply Improvement Plans (PSIPs), Demand Response Portfolio Plan, Distributed Generation Interconnection Plan, Grid Modernization Plans, and business model changes, which have been and are continuing to be developed and updated in response to the orders issued by the PUC, the PUC’s April 2014 statement of its inclinations on the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and the state’s public policy goals, and subsequent orders of the PUC; capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand- side management, distributed generation (DG), combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand; fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs) and energy cost recovery clauses (ECRC); the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales; the ability of the Utilities to achieve performance incentive goals currently in place; the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Act 005, Session Laws 2018, including the potential addition of new performance incentive mechanisms, third party proposals adopted by the PUC in its implementation of PBR, and the implications of not achieving performance incentive goals; the impact of fuel price levels and volatility on customer satisfaction and political and regulatory support for the Utilities; • • • • • • • vi • • • • • the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid; the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities’ electric systems and as customers reduce their energy usage; the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs); the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units; the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements; • new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors such as the • • • • commercial development of energy storage and microgrids and banking through alternative channels; cyber security risks and the potential for cyber incidents, including potential incidents at HEI, its third-party vendors, and its subsidiaries (including at ASB branches and electric utility plants) and incidents at data processing centers used, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general IT controls; failure in addressing issues in the stabilization of the Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) (ERP/ EAM) system implementation could adversely affect the Utilities’ ability to timely and accurately report financial information and make payments to vendors and employees; failure to achieve cost savings consistent with the minimum $244 million in ERP/EAM project-related benefits (including $141 million in operation and maintenance (O&M) benefits) to be delivered to customers over its 12-year estimated useful life; federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), the regulation of greenhouse gas emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation); • developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies; • discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight; • decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise); • decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS); • • • potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy); the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs; the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers); changes in accounting principles applicable to HEI and its subsidiaries, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting, the effects of potentially required consolidation of variable interest entities (VIEs), or required capital/finance lease or on-balance-sheet operating lease accounting for PPAs with IPPs; • • downgrades by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and their impact on 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 and/or mix which may increase or decrease the required level of provision for loan losses, allowance for loan losses and charge-offs; changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds; the final outcome of tax positions taken by HEI and its subsidiaries; the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits); the ability of the Company’s non-regulated subsidiary, Pacific Current, LLC, to achieve its performance and growth objectives, which in turn could affect its ability to service its non-recourse debt; the Company’s reliance on third parties and the risk of their non-performance; and • • other risks or uncertainties described elsewhere in this report (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, Pacific Current and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise. vii ITEM 1. BUSINESS HEI Consolidated PART I HEI and subsidiaries and lines of business. HEI is a holding company with its subsidiaries principally engaged in electric utility, banking, and renewable/sustainable infrastructure investment businesses operating in the State of Hawaii. HEI was incorporated in 1981 under the laws of 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. As a holding company with no significant operations of its own, HEI’s sources of funds are dividends or other distributions from its operating subsidiaries, borrowings, and sales of equity. The rights of HEI and its creditors and shareholders to participate in any distribution of the assets of any of HEI’s 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 (see Note 13 of the Consolidated Financial Statements). HEI is headquartered in Honolulu, Hawaii and has three reportable segments—Electric utility, Bank, and Other. Electric Utility. 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 that provide essential electric service to approximately 95% of Hawaii’s population through the operation of five separate grids that serve communities on the islands of Oahu, Hawaii, and Maui, Lanai and Molokai. Hawaiian Electric’s mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources (such as private rooftop solar and battery storage), demand response, and grid- scale resources to achieve the statutory goal of 100% renewable energy by 2045. See also “Electric utility” section below. Bank. HEI acquired American Savings Bank, F.S.B. (ASB) in 1988. ASB is one of the largest financial institutions in the State of Hawaii (based on total assets), with assets totaling approximately $7.0 billion as of December 31, 2018. ASB provides a wide array of banking and other financial services to consumers and businesses. See also “Bank” section below. Other. The “Other” segment comprises HEI’s corporate-level operating, general and administrative expenses and the results of Pacific Current, LLC (Pacific Current). Pacific Current was formed in September 2017 to focus on investing in non- regulated renewable energy and sustainable infrastructure in the State of Hawaii to help reach the state’s sustainability goals. See also “Electric utility - Hawaii Electric Light firm capacity PPAs” section below and Note 2 of the Consolidated Financial Statements for additional information on Pacific Current activities. The “Other” segment also includes ASB Hawaii, Inc. (ASB Hawaii) (a holding company, formerly known as American Savings Holdings, Inc.), which owns ASB, and The Old Oahu Tug Service, Inc. (TOOTS), which administers certain employee and retiree-related benefit programs and monitors matters related to its predecessor’s former maritime freight transportation operations. Termination of proposed Merger. For information concerning the termination of HEI’s Merger Agreement with NextEra Energy, Inc., see Note 16 of the Consolidated Financial Statements. Additional information. For additional information about HEI, see HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk” and HEI’s Consolidated Financial Statements. The Company’s website address is www.hei.com, where annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports (last 10 years) are made available free of charge in the Investor Relations section as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC (and available at the SEC’s website at www.sec.gov). 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 intend to continue to use HEI’s website as a means of disclosing additional information. 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. 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 1 granted HEI and Hawaiian Electric a waiver from its record retention, accounting and reporting requirements, effective May 2006. HEI is subject to an agreement entered into with the PUC (the PUC Agreement) which, among other things, requires PUC approval of any change in control of HEI. The PUC Agreement also requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It also prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See also Note 13 of the Consolidated Financial Statements and “Electric utility—Regulation” below. HEI and ASB Hawaii are subject to Federal Reserve Board (FRB) regulation, supervision and reporting requirements as savings and loan holding companies. As a result of the enactment of the Dodd-Frank Act, supervision and regulation of HEI and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally chartered savings bank, moved to the Office of the Comptroller of the Currency (OCC) in July 2011. In the event the OCC has reasonable cause to believe that any activity of HEI or ASB Hawaii constitutes a serious risk to the financial safety, soundness or stability of ASB, the OCC is authorized to impose certain restrictions on HEI, ASB Hawaii and/or any of their subsidiaries. Possible restrictions include precluding or limiting: (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or ASB Hawaii, and their subsidiaries or affiliates; and (iii) any activities of ASB that might expose ASB to the liabilities of HEI and/or ASB Hawaii and their other affiliates. See also Note 13 of the Consolidated Financial Statements. 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 qualified thrift lender (QTL) status test discussed under “Bank—Regulation—Qualified thrift lender test.” ASB met the QTL test at all times during 2018; however, the failure of ASB to satisfy the QTL test in the future could result in a need for HEI to divest ASB. 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. 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. 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. Employees. The Company had full-time employees as follows: December 31 HEI Hawaiian Electric and its subsidiaries ASB 2018 46 2,704 1,148 3,898 2017 41 2,724 1,115 3,880 2016 41 2,662 1,093 3,796 2015 39 2,727 1,152 3,918 2014 44 2,759 1,162 3,965 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, 2021. Properties. HEI leases office space from nonaffiliated lessors in downtown Honolulu under leases that expire in December 2022. See “Electric Utility” and “Bank” sections for a description of properties they own and lease. Hamakua Energy, LLC owns a total of approximately 93 acres located on the Hamakua coast on the island of Hawaii. Its power plant is situated on approximately 59 acres and the remaining 34 acres includes surrounding parcels of which 30 acres are located on the ocean front. 2 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. In 2018, the electric utilities’ revenues and net income amounted to approximately 89% and 71% respectively, of HEI’s consolidated revenues and net income, compared to approximately 88% and 73% in 2017 and approximately 88% and 57% (impacted by a merger termination fee and other impacts at HEI corporate) in 2016, respectively. The islands of Oahu, Hawaii, Maui, Lanai and Molokai have a combined population estimated at 1.4 million, or approximately 95% of the total population of the State of Hawaii, and comprise a service area of 5,815 square miles. The principal communities served include Honolulu (on Oahu), Hilo and Kona (on Hawaii) and Wailuku and Kahului (on Maui). The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural operations. The state has granted Hawaiian Electric, Hawaii Electric Light and Maui Electric nonexclusive franchises, which authorize the Utilities to construct, operate and maintain facilities over and under public streets and sidewalks. Each of these franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed. Sales of electricity. Years ended December 31 2018 2017 2016 (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 305,456 $ 1,789,527 304,948 $ 1,592,016 304,261 $ 1,466,225 85,758 71,875 371,713 364,967 85,925 71,352 331,697 323,882 85,029 70,872 309,521 306,767 463,089 $ 2,526,207 462,225 $ 2,247,595 460,162 $ 2,082,513 Regulatory mechanisms. Each of the three utilities’ rates is reset on a triennial cycle. The regulatory framework includes a number of mechanisms designed to provide utility financial stability during the transition toward the state’s 100% renewable energy goals. For example, under the sales decoupling mechanism, the utilities are allowed to recover from customers, target test year revenues, independent of the level of kilowatt-hour (kWh) sales, which have declined as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. A summary of these regulatory mechanisms is as follows: Mechanism Sales decoupling Description Provides predictable revenue stream by fixing net revenues at the level approved in last rate case (revenues not linked to kWh sales) Revenue adjustment mechanism (RAM) Annually adjusts revenue to recover general inflation of operations and maintenance expenses and baseline plant additions between rate cases Major Projects Interim Recovery adjustment mechanism (MPIR) Reduces regulatory lag and permits recovery through the revenue balancing account (RBA) of costs (net of benefits) for major capital projects including, but not restricted to, projects to advance renewable energy Energy cost and purchased power recovery/ adjustment clauses Allows for timely recovery of fuel and purchased power costs to reduce earnings volatility. Symmetrical fossil fuel cost risk sharing (98% customer/2% utility) mechanism established for Hawaiian Electric (Oahu) and utility upside/downside capped at $2.5 million (beginning in 2019) Pension and post-employment benefit trackers Allow tracking of pension and post-employment benefit costs and contributions above or below the cost included in rates in a separate regulatory asset/liability account Renewable energy infrastructure program Permits recovery of renewable energy infrastructure projects through a surcharge Seasonality. kWh sales of the Utilities follow a seasonal pattern, but they do not experience extreme seasonal variations due to extreme weather variations experienced by some electric utilities on the U.S. mainland. kWh sales in Hawaii tend to increase in the warmer, more humid months as a result of increased demand for air conditioning, and with cloudy and rainy weather due to lower production by privately owned customer generated PV systems. Significant customers. The Utilities derived approximately 11% of their operating revenues in 2018, 2017 and 2016 from the sale of electricity to various federal government 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. 3 Selected consolidated electric utility operating statistics. Years ended December 31 kWh sales (millions) Residential Commercial Large light and power Other kWh net generated and purchased (millions) Net generated Purchased Losses and system uses (%) Energy supply (December 31) Net generating capability—MW Firm and other purchased capability—MW1 Net peak demand—MW2 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 2018 2017 2016 2015 2014 2,410.8 2,810.8 3,425.1 42.1 8,688.8 4,966.4 4,139.3 9,105.7 4.4 1,739 517 2,256 1,598 10,826 1,420.2 407,505 54,075 696 813 2,334.5 2,867.9 3,443.3 44.7 8,690.4 4,888.4 4,247.1 9,135.5 4.7 1,673 551 2,224 1,584 10,812 1,114.3 406,241 53,732 656 1,596 2,332.7 2,911.5 3,555.1 46.0 8,845.3 4,940.4 4,349.1 9,289.5 4.6 1,669 551 2,220 1,593 10,710 862.3 402,818 55,089 670 1,585 2,396.5 2,977.8 3,532.9 49.3 8,956.5 5,124.5 4,308.3 9,432.8 4.8 1,669 555 2,224 1,610 10,632 1,206.5 400,655 54,878 659 1,608 2,379.7 3,022.0 3,524.5 50.0 8,976.2 5,131.3 4,306.7 9,438.0 4.7 1,787 575 2,362 1,554 10,613 2,087.6 398,256 54,924 596 1,640 463,089 462,225 460,162 457,800 455,416 $ 788,028 $ 691,857 $ 638,776 $ 709,886 $ 879,605 843,326 882,443 12,410 766,921 776,808 12,009 711,553 720,878 11,306 798,202 802,366 13,356 1,027,588 1,051,119 17,163 $ 2,526,207 $ 2,247,595 $ 2,082,513 $ 2,323,810 $ 2,975,475 29.07 32.69 30.00 25.76 29.47 25.86 29.64 26.74 22.56 26.82 23.54 27.38 24.44 20.28 24.61 25.90 29.62 26.81 22.71 27.05 33.15 36.96 34.00 29.82 34.36 6,000 2,218 Average annual use per customer account (kWh) 5,923 5,779 5,806 5,996 Average annual revenue per customer account $ 1,936 $ 1,713 $ 1,590 $ 1,776 $ Average number of customer accounts 407,044 403,983 401,796 399,674 396,640 1 Since May 2018, PGV has been offline due to lava flow on Hawaii Island; therefore, PGV’s capability has not been incorporated into the utility’s firm contract power capability as of December 31, 2018. 2 Sum of the net peak demands on all islands served, noncoincident and nonintegrated. 4 Generation statistics. The following table contains certain generation statistics as of and for the year ended December 31, 2018. The net generating and firm purchased capability available for operation at any given time may be more or less than shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances. Hawaiian Electric Island of Oahu Hawaii Electric Light Island of Hawaii Maui Electric Island of Maui Island of Lanai Island of Molokai Total 999.5 — 231.8 — — 57.4 456.5 1,745.2 50.1 29.5 — 46.3 56.3 — 60.0 35.9 96.8 — — 113.6 — — — 10.2 — — — — — — 9.8 — 2.2 — — — 1,085.5 146.3 231.8 48.5 169.9 57.4 516.5 242.2 246.3 10.2 12.0 2,255.9 Net generating and firm purchased capability (MW) as of December 31, 20181 Conventional oil-fired steam units Diesel Combustion turbines (peaking units) Other combustion turbines Combined-cycle unit Biodiesel Firm contract power2 Net peak demand (MW)3 Reserve margin Annual load factor kWh net generated and purchased (millions) 6,807.8 1,138.2 1,096.9 1,190.0 190.8 206.2 45.7% 63.5% 26.9% 68.1% 19.4% 60.7% 5.4 88.9% 65.4% 30.9 6.0 100.0% 60.7% 31.9 1,598.4 42.0% 65.0% 9,105.7 1 Hawaiian Electric units at normal ratings; Hawaii Electric Light and Maui Electric units at reserve ratings. 2 Nonutility generators - Hawaiian Electric: 208 MW (Kalaeloa Partners, L.P., oil-fired), 180 MW (AES Hawaii, Inc., coal-fired) and 68.5 MW (HPOWER, refuse-fired); Hawaii Electric Light: 60 MW (Hamakua Energy, LLC, oil-fired). Hawaii Electric Light also has a firm capacity PPA with PGV for 34.6 MW. However, since May 2018, PGV has been offline due to lava flow on Hawaii Island; therefore, PGV’s capability has not been incorporated into the utility’s firm contract power capability as of December 31, 2018. 3 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 and cost structure 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. Nonutility generation. The Utilities have supported state and federal energy policies which encourage the development of renewable energy sources that reduce the use of fuel oil as well as the development of qualifying facilities. The Utilities’ renewable energy sources and potential sources range from wind, solar, photovoltaic, geothermal, wave and hydroelectric power to energy produced by the municipal waste and other biofuels. The rate schedules of the electric utilities contain ECACs (replaced with the ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019) and PPACs that allow them to recover costs of fuel and purchase power expenses. In addition to the firm capacity PPAs described below, the electric utilities also purchase energy on an as-available basis directly from nonutility generators and through its Feed-In Tariff programs. The electric utilities also receive renewable energy from customers under its Net Energy Metering and Customer Grid Supply programs. The PUC has allowed rate recovery for the firm capacity and purchased energy costs for the electric utilities’ approved firm capacity and as-available energy PPAs. 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 the Island of Oahu as of December 31, 2018. 5 In March 1988, Hawaiian Electric entered into a PPA with AES Hawaii, Inc. (AES Hawaii), a Hawaii-based, indirect subsidiary of The AES Corporation. The agreement with AES Hawaii, as amended (through Amendment No. 2), provides that, for a period of 30 years beginning September 1992, Hawaiian Electric will purchase 180 megawatts (MW) of firm capacity. The AES Hawaii coal-fired cogeneration plant utilizes a “clean coal” technology and is designed to sell sufficient steam to be a “Qualifying Facility” (QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA). See “Commitments and contingencies–Power purchase agreements–AES Hawaii, Inc.” in Note 3 of the Consolidated Financial Statements for an update regarding this PPA. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa Partners, L.P. (Kalaeloa). The Kalaeloa facility, which is a QF, 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. Hawaiian Electric and Kalaeloa are currently in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith, but would end 60 days after either party notifies the other in writing that negotiations have terminated. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA prior to October 31, 2019. This agreement contemplates continued negotiations between the parties and accounts for time needed for PUC approval of a negotiated resolution. Hawaiian Electric also entered into a PPA in March 1986 and a firm capacity amendment in April 1991 with the City and County of Honolulu with respect to a refuse-fired plant (HPOWER). Under the PPA, as amended and restated, Hawaiian Electric is committed to purchase 68.5 MW of firm capacity annually through April 2033. Hawaii Electric Light firm capacity PPAs. Hawaii Electric Light has two major PPAs that provide a total of 94.6 MW of firm capacity, representing 34% of Hawaii Electric Light’s total net generating and firm purchased capacity on the Island of Hawaii as of December 31, 2018. Hawaii Electric Light has a 35-year PPA, as amended, with Puna Geothermal Venture (PGV) for 34.6 MW of firm capacity from its geothermal steam facility, which will expire on December 31, 2027. Since May 2018, PGV facility has been offline due to lava flow on Hawaii Island. PGV is committed to restoring their facility to commercial operation and is currently in discussion with Hawaii Electric Light to rebuild the Pohoiki substation and transmission lines affected by the lava flow. In October 1997, Hawaii Electric Light entered into an agreement with Encogen, which was succeeded by Hamakua Energy Partners, L. P. (HEP). The agreement requires Hawaii Electric Light to purchase up to 60 MW (net) of firm capacity for a period of 30 years, expiring on December 31, 2030. The dual-train combined-cycle (DTCC) facility, which primarily burns naphtha (a mixture of liquid hydrocarbons), consists of two oil-fired combustion turbines and a steam turbine that utilizes waste heat from the combustion turbines. In November 2017, Hamakua Energy, LLC, an indirect subsidiary of HEI, purchased the plant from HEP. In May 2012, Hawaii Electric Light signed a PPA with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass on the island of Hawaii. This PPA was approved by the PUC in December 2013. See “Commitments and contingencies–Power purchase agreements–Hu Honua Bioenergy, LLC” in Note 3 of the Consolidated Financial Statements for an update regarding this PPA. Maui Electric firm capacity PPAs. Maui Electric has no firm capacity PPAs. Fuel oil usage and supply. The rate schedules of the Utilities include ECACs (replaced with ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019) under which electric rates (and consequently the revenues of the electric utility subsidiaries generally) are adjusted for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. See discussion of rates and issues relating to the ECAC below under “Rates,” and “Electric utility—Material estimates and critical accounting policies–Revenues” in HEI’s MD&A. Hawaiian Electric’s steam generating units consume low sulfur fuel oil (LSFO) and Hawaiian Electric’s combustion turbine peaking units consume diesel, including Hawaiian Electric’s Campbell Industrial Park generating facility which recently converted from B99 grade biodiesel to diesel. Hawaii Electric Light’s and Maui Electric’s steam generating units burn industrial fuel oil (IFO) and Hawaii Electric Light’s and Maui Electric’s Maui combustion turbine generating units burn diesel. Hawaii Electric Light’s and Maui Electric’s Maui, Molokai, and Lanai diesel engine generating units burn ultra-low-sulfur diesel. See the fuel oil commitments information set forth in the “Fuel contracts” section in Note 3 of the Consolidated Financial Statements. 6 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 2018, 2017 and 2016: 2018 2017 2016 Hawaiian Electric $/Barrel ¢/MBtu Hawaii Electric Light ¢/MBtu $/Barrel Maui Electric Consolidated $/Barrel ¢/MBtu $/Barrel ¢/MBtu 86.11 67.96 51.30 1,371.8 1,087.1 815.2 89.81 68.02 53.27 1,489.5 1,125.2 876.9 93.60 72.29 62.21 1,573.6 1,214.6 1,048.6 87.90 68.78 53.49 1,420.2 1,114.3 862.3 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: 2018 2017 2016 Hawaiian Electric Hawaii Electric Light % LSFO % Biodiesel/Diesel 4 5 3 96 95 97 % IFO 39 43 49 % Diesel 61 57 51 Maui Electric % IFO 23 23 19 % Diesel 77 77 81 The prices that Hawaiian Electric, Hawaii Electric Light and Maui Electric pay for purchased energy from certain older nonutility generators are generally linked to the price of oil. The AES Hawaii energy prices vary primarily with an inflation index. The energy prices for Kalaeloa, which purchases LSFO from Par Hawaii Refining, LLC (PAR), vary primarily with the price of Asian crude oil. A portion of PGV energy prices are based on the electric utilities’ respective short-run avoided energy cost rates (which vary with their composite fuel costs), subject to minimum floor rates specified in their approved PPA. Hamakua Energy energy prices vary primarily with the cost of naphtha. The Utilities estimate that 66% of the net energy they generate will come from fossil fuel oil in 2019 compared to 68% in 2018. 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 IFO and diesel. The PPAs with AES Hawaii and Hamakua Energy require that they maintain certain minimum fuel inventory levels. Since the Hawaii Clean Energy initiative was launched in 2008, liquid fuel consumption has continued to steadily decline. The liquid fuel consumption in 2018 was about 2.1 million barrels less than that consumed in 2008. Rates. Hawaiian Electric, Hawaii Electric Light and Maui Electric are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See “Regulation” below. General rate increases require the prior approval of the PUC after public and contested case hearings. Rates for Hawaiian Electric and its subsidiaries include ECACs (replaced with the ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019), and PPACs. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. PURPA requires the PUC to periodically review the adjustment clauses related to energy cost of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change. PUC approval is also required for all surcharges and adjustments before they are reflected in rates. See “Electric utility–Most recent rate proceedings,” and “Electric utility–Material estimates and critical accounting policies–Revenues” in HEI’s MD&A and “Interim increases” and “Utility projects” under “Commitments and contingencies” in Note 3 of the Consolidated Financial Statements. Competition. See “Electric utility–Competition” in HEI’s MD&A. 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.” 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 its vast renewable energy potential and allow Hawaii to push forward in three main areas: the power sector, transportation and energy efficiency. This next phase is focused on stimulating deployment of clean energy infrastructure as a catalyst for economic growth, energy system innovation and test bed investments. 7 Energy efficiency. The PUC issued an order on January 3, 2012 approving a framework for Energy Efficiency Portfolio Standards (EEPS) that set 2008 as the initial base year for evaluation and linearly allocated the 2030 goal to interim incremental reduction goals of 1,375 GWH by 2015 and 975 GWH by each of the years 2020, 2025 and 2030. Pursuant to the PUC’s EEPS framework, the PUC has contracted with a public benefits fee administrator to operate and manage energy efficiency programs, and any incentive and/or penalty mechanisms related to the achievement of the goals are at the discretion of the PUC. The Division of Consumer Advocacy’s 2018 Compliance Resolution Fund Report states that Hawaii continues to progress towards its 2020 Renewable Portfolio Standards and EEPS goals. The EEPS has contributed to lower kWh sales; however, the implementation of sales decoupling has delinked sales and revenues. See “Regulatory mechanisms” above. Electrification of Transportation. In June 2018, the PUC initiated a proceeding to review the Utilities’ Electrification of Transportation (EoT) Strategic Roadmap, which provided an economic analysis for light duty electric vehicles on the island of Oahu, Maui and Hawaii. In December 2018, the Utilities filed proposed tariffs for: (1) a commercial electric bus charging facility service pilot program; and (2) the assumed ownership and operation of certain fast charging stations on the island of Maui. Renewable Portfolio Standards. In 2015, Hawaii’s RPS law was amended to require electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045, respectively. Energy savings resulting from energy efficiency programs do not count toward the RPS since 2014 (only electrical generation using renewable energy as a source counts). Affiliate transactions. 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. In December 1996, the PUC issued an order in a docket to review the relationship between HEI and Hawaiian Electric and the effects of that relationship on the operations of Hawaiian Electric. The order required 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. In December 2018, the PUC established a set of requirements governing transactions and sharing of information between the Utilities and its affiliates (Affiliate Transaction Requirements, ATRs), which was subsequently modified and clarified in January 2019 following the Utilities’ motion for reconsideration. The PUC stated the intent of the ATRs is to establish safeguards to avoid potential market power benefits, cross-subsidization between regulated and unregulated activities. The requirements include rules on interactions with affiliates, information handling, business development, political activities, promotional activities, sales of products and services, and employee sharing restrictions. The ATRs include implementing an internal code of conduct, a compliance plan including policies and procedures to comply with the requirements, and having an audit conducted every three years that examines the compliance with the requirements. Penalties for non-compliance depend on the severity of the violation, and can range from daily fines to divestiture of the Utilities by the holding company. Other regulations. The Utilities are not subject to regulation by the FERC under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit the FERC to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities, and Title VII of the Energy Policy Act of 1992, which addresses transmission access, also apply to the Utilities. The Utilities are also required to file various operational reports with the FERC. Because they are located in the State of Hawaii, Hawaiian Electric and its subsidiaries are exempt by statute from limitations set forth in the Powerplant and Industrial Fuel Use Act of 1978 on the use of petroleum as a primary energy source. See also “HEI–Regulation” above. Environmental regulation. Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, are subject to periodic inspections by federal, state and, in some cases, local environmental regulatory agencies, including agencies responsible for the regulation of water quality, air quality, hazardous and other waste and hazardous materials. These 8 inspections may result in the identification of items needing corrective or other action. Except as otherwise disclosed in this report (see “Risk Factors” in Item 1A and Note 3 of the Consolidated Financial Statements, which are incorporated herein by reference), the Company believes that each subsidiary has appropriately responded to environmental conditions requiring action and that, as a result of such actions, such environmental conditions will not have a material adverse effect on the Company or Hawaiian Electric. Water quality controls. The generating stations, substations and other utility facilities operate under federal and state water quality regulations and permits, including, but not limited to, the Clean Water Act National Pollution Discharge Elimination System (governing point source discharges, including wastewater and storm water discharges) and the Safe Drinking Water Act Underground Injection Control (regulating disposal of wastewater into the subsurface). On February 1, 2018, the Ninth Circuit Court of Appeals ruled that under certain circumstances, discharges from underground injection control wells may require National Pollution Discharge Elimination System permits. This case is currently pending before the U.S. Supreme Court. Oil pollution controls. The Oil Pollution Act of 1990 (OPA) establishes programs that govern actual or threatened oil releases and imposes strict liability on responsible parties for clean-up costs and damages to natural resources and property. The federal Environmental Protection Agency (EPA) regulations under OPA require certain facilities that use or store oil to prepare and implement Spill Prevention, Control and Countermeasures (SPCC) Plans in order to prevent releases of oil to navigable waters of the U.S. Certain facilities are also required to prepare and implement Facility Response Plans (FRPs) to ensure prompt and proper response to releases of oil. The utility facilities that are subject to SPCC Plan and FRP requirements have prepared and implemented SPCC Plans and FRPs. Air quality controls. The Clean Air Act (CAA) establishes permitting programs to reduce air pollution. The CAA amendments of 1990, established the federal Title V Operating Permit Program (in Hawaii known as the Covered Source Permit program) to ensure compliance with all applicable federal and state air pollution control requirements. The 1977 CAA Amendments established the New Source Review (NSR) permitting program, which affect new or modified generating units by requiring a permit to construct under the CAA and the controls necessary to meet the National Ambient Air Quality Standards (NAAQS). Title V operating permits have been issued for all of the Utilities’ affected generating units. Hazardous waste and toxic substances controls. The operations of the electric utility are subject to EPA regulations that implement provisions of the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund), the Superfund Amendments and Reauthorization Act (SARA), and the Toxic Substances Control Act (TSCA). RCRA underground storage tank (UST) regulations require all facilities that use USTs for storing petroleum products to comply with established leak detection, spill prevention, standards for tank design and retrofits, financial assurance, operator training, and tank decommissioning and closure requirements. All of the Utilities’ USTs currently meet the applicable requirements. The Emergency Planning and Community Right-to-Know Act under SARA Title III requires the Utilities to report potentially hazardous chemicals present in their facilities in order to provide the public with information so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. Since January 1, 1998, the steam electric industry category has been subject to Toxics Release Inventory (TRI) reporting requirements. The TSCA regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCBs), a compound found in some transformer and capacitor dielectric fluids. The TSCA regulations also apply to responses to releases of PCBs to the environment. The Utilities have instituted procedures to monitor compliance with these regulations and have implemented a program to identify and replace PCB transformers and capacitors in their systems. In April 2010, the EPA issued an Advance Notice of Proposed Rule Making announcing its intent to reassess PCB regulations. The EPA has ceased activity on the PCB reassessment. Hawaii’s Environmental Response Law (ERL), as amended, governs releases of hazardous substances, including oil, to the environment in areas within the state’s jurisdiction. Responsible parties under the ERL are jointly, severally, and strictly liable for a release of a hazardous substance. Responsible parties include owners or operators of a facility where a hazardous substance is located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The Utilities periodically discover leaking oil-containing equipment such as USTs, piping, and transformers. Each subsidiary reports releases from such equipment when and as required by applicable law and addresses the releases in compliance with applicable regulatory requirements. 9 Additional information. For additional information about Hawaiian Electric, see Hawaiian Electric’s MD&A, Hawaiian Electric’s “Quantitative and Qualitative Disclosures about Market Risk” and Hawaiian Electric’s Consolidated Financial Statements, including the Notes thereto. Properties. As of December 31, 2018, the Utilities’ ownership in generating assets was as follows: Property Hawaiian Electric: Waiau1 Kahe1 Campbell Industrial Park (CIP)1 Honolulu Power Plant1 Schofield Generating Station2 West Loch PV Project3 Hawaii Electric Light4: Shipman Waimea Keahole Puna Kanoelehua Distributed generators at substation sites Maui Electric5: Kahului Maalaea Miki Basin Palaau Location (island) Principal Fuel Type Generating Capacity (MW) Oahu Oahu Oahu Oahu Oahu Oahu Hawaii Hawaii Hawaii Hawaii Hawaii Hawaii Maui Maui Lanai LSFO / Diesel LSFO Diesel N/A Biodiesel / Ultra low sulfur diesel Renewable N/A Ultra low sulfur diesel Diesel / Ultra low sulfur diesel MSFO / Diesel MSFO / Ultra low sulfur diesel Ultra low sulfur diesel MSFO Diesel Ultra low sulfur diesel Molokai Ultra low sulfur diesel 480.8 620.5 130.0 — 49.4 20.0 — 7.5 77.6 36.7 55.4 5.0 35.9 210.4 9.4 12.0 Status Active Active Active Deactivated in 2014 Active Under construction Retired in 2015 Active Active Active Active Active Active Active Active Active 1 The four plants are situated on Hawaiian Electric-owned land having a combined area of 542 acres and three parcels of land totaling 5.7 acres under leases expiring between December 31, 2018 and June 30, 2021, with options to extend to June 30, 2026. 2 Hawaiian Electric has a 35-year lease on 8.13 acres, effective September 1, 2016 (with an option to extend an additional 10 years), with the Department of the Army. 3 Hawaiian Electric has a 37-year lease, effective July 1, 2017, with the Secretary of the Navy to install, operate and maintain a 20 MW renewable generation site on 102 acres. 4 The plants (including a baseyard on the same parcel as the Hilo plant) are situated on Hawaii Electric Light-owned land having a combined area of approximately 44 acres. The distributed generators are located within Hawaii Electric Light-owned substation sites having a combined area of approximately four acres. 5 The four plants are situated on Maui Electric-owned land having a combined area of 60.7 acres. 10 As of December 31, 2018, the Utilities ownership in fuel storage facilities was as follows: Facility Hawaiian Electric: Barbers Point Tank Farm Generation sites - various (in aggregate) Generation sites - various (in aggregate) Generation sites - various (in aggregate) Hawaii Electric Light1: Generation sites - various (in aggregate) Generation sites - various (in aggregate) Maui Electric2: Generation sites - various (in aggregate) Generation sites - various (in aggregate) Location (island) Fuel Type Capacity (barrels in thousands) Generation Serviced Oahu Oahu Oahu Oahu Hawaii Hawaii Maui Maui Low sulfur fuel oil Low sulfur fuel oil 1,000 770 Diesel Biodiesel Medium sulfur fuel oil Diesel Medium sulfur fuel oil Diesel 44 88 48 82 81 95 Kahe, Waiau Various Various Various Various Various Various Various 1 There are an additional 19,200 barrels of diesel and 22,770 barrels of MSFO storage capacity for Hawaii Electric Light-owned fuel off-site at Island Energy Services, LLC (Island Energy)-owned terminalling facilities (previously Chevron-owned). 2 There are an additional 56,358 barrels of diesel oil storage capacity off-site at Aloha Petroleum, Ltd. (Aloha Petroleum)-owned terminalling facilities. Other properties. The Utilities own overhead transmission and distribution lines, underground cables, pole (some jointly) and metal high voltage towers. Electric lines are located over or under public and nonpublic properties. 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 also owns buildings and approximately 11.6 acres of land located in Honolulu which house its operating and engineering departments. It also leases an office building and certain office spaces in Honolulu, and a warehousing center in Kapolei. Hawaii Electric Light owns 6 acres of land in Kona, which is used for a baseyard, and one acre of land in Hilo, which houses its accounting, customer services and administrative offices. Hawaii Electric Light also leases 3.7 acres of land for its baseyard in Hilo under a lease expiring in 2030. In addition, Hawaii Electric Light owns a total of approximately 100 acres of land, and leases a total of approximately 8.5 acres of land, on which hydro facilities, substations and switching stations, microwave facilities and transmission lines are located. The deeds to the sites located in Hilo contain certain restrictions, but the restrictions do not materially interfere with the use of the sites for public utility purposes. Maui Electric’s administrative offices, as well as its engineering and distribution departments, are situated on 9.1 acres of Maui Electric-owned land in Kahului. Maui Electric also owns approximately 18 acres of land which house some of its substations, leases approximately 3,600 square feet of land for its telecommunication and microwave facilities, leases approximately 6,000 square feet of land at Kahului Harbor for pipeline purposes, and leases 17,958 square feet of land at Puunene for the Puunene Substation. Maui Electric also owns approximately 89 acres of undeveloped land at Waena, Palaau, and Kahului. Fuel storage facilities are located on Maui Electric-owned properties at Kahului Baseyard, Kahului Power Plant, Maalaea Power Plant, Miki Basin, Palaau, and Hana. Two, 1-MW stand-by diesel generators are located within the Maui Electric-owned land at Hana Substation. See “Hawaiian Electric and subsidiaries and service areas” above for a discussion of the nonexclusive franchises of Hawaiian Electric and subsidiaries. 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 is one of the largest financial institutions headquartered in the State of Hawaii with assets of $7.0 billion and deposits of $6.2 billion, as of December 31, 2018. ASB is a full-service community bank serving both consumer and commercial customers and operates 49 branches on the islands of Oahu (34), Maui (6), Hawaii (5), Kauai (3), and Molokai (1). ASB was acquired by HEI in 1988, and prior to its acquisition, 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. 11 In 2018, ASB’s revenues and net income amounted to approximately 11% and 41% of HEI’s consolidated revenues and net income, respectively, compared to approximately 12% and 41% in 2017 and approximately 12% and 23% in 2016 (impacted by the merger termination fee). At the time of HEI’s acquisition of ASB, HEI agreed with the Office of Thrift Supervision, Department of Treasury’s (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, 2018, as a result of certain HEI contributions of capital to ASB over the years, HEI’s maximum obligation under the agreement to contribute additional capital has been reduced to approximately $28.3 million. ASB is subject to OCC regulations on dividends and other distributions and ASB must receive a letter from the FRB communicating the OCC’s and FRB’s non-objection to the payment of any dividend ASB proposes to declare and pay to ASB Hawaii and HEI. The following table sets forth selected data for ASB (average balances calculated using the average daily balances): Years ended December 31 Equity to assets ratio Average equity divided by average total assets Return on assets Net income divided by average total assets Return on equity Net income divided by average equity 2018 2017 2016 8.86% 9.10% 9.34% 1.20 1.02 13.51 11.20 0.92 9.90 Lending activities. See Note 4 of the Consolidated Financial Statements for the composition of ASB’s loan portfolio. 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-backed securities portfolio and the geographic concentration of credit risk, see Note 14 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 non-owner-occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. Construction and development lending. ASB provides fixed rate loans for the construction of one-to-four unit residential and commercial properties. Construction loan projects are typically short term in nature. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, construction and development loans are generally priced higher than loans collateralized by completed structures. ASB’s underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. See “Bank—Loan portfolio risk elements” in HEI’s MD&A 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. 12 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. ASB charges the borrower at loan settlement a loan origination fee. See “Loans” in Note 1 of the Consolidated Financial Statements. Deposits and sources of funds. Deposits continue to be the largest source of funds for ASB for use in lending, meeting liquidity requirements and making investments, 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. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB may borrow on a longer-term basis to support expanded lending or investment activities. Advances from the FHLB of Des Moines and securities sold under agreements to repurchase continue to be additional sources of funds, but they are a higher cost source than deposits. Competition. The banking industry in Hawaii is highly competitive. At December 31, 2018, there were 8 financial institutions insured by the FDIC headquartered in the State of Hawaii. While ASB is one of the largest financial institutions in Hawaii, based on total assets, ASB faces vigorous competition for deposits and loans from two larger banking institutions based in Hawaii and from smaller institutions that heavily promote their services in niche areas, such as providing financial services to small and medium-sized businesses, as well as national financial services organizations. Competition for loans and deposits comes primarily from other savings institutions, commercial banks, credit unions, securities brokerage firms, money market and mutual funds and other investment alternatives. ASB faces additional competition in seeking deposit funds from various types of corporate and government borrowers, including insurance companies. Competition for origination of mortgage loans comes primarily from mortgage banking and brokerage firms, commercial banks, other savings institutions, insurance companies and real estate investment trusts. See also “Bank—Executive overview and strategy” in HEI’s MD&A. 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. 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. 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. The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing, convenience of locations, hours of operation, other non-branch channels such as online and mobile banking and perceptions of the institution’s financial soundness and safety. To meet competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each branch, convenient automated teller machines and an upgrade of the ASB’s electronic banking platform. ASB also conducts advertising and promotional campaigns. ASB has been diversifying its loan portfolio from single-family home mortgages to higher-spread, shorter-duration consumer, commercial and commercial real estate loans. The origination of consumer, commercial and commercial real estate loans involves risks and other considerations different from those associated with originating residential real estate loans. For example, the sources and level of competition may be different and credit risk is generally higher than for residential mortgage loans. These different risk factors are considered in the underwriting and pricing standards and in the allowance for loan losses established by ASB for its consumer, commercial and commercial real estate loans. Regulation. ASB, a federally chartered saving bank, 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. In addition, ASB’s holding companies are subject to the regulatory supervision of the FRB. See “HEI Consolidated–Regulation” above. Capital requirements. The OCC, 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, 2018, 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: 13 • ASB met applicable minimum regulatory capital requirements (noted in parentheses) as of December 31, 2018 with a Tier 1 leverage ratio of 8.7% (4.0%), a common equity Tier 1 capital ratio of 12.8% (4.5%), a Tier 1 capital ratio of 12.8% (6.0%) and a total capital ratio of 13.9% (8.0%). • ASB met the capital requirements to be generally considered “well-capitalized” (noted in parentheses) as of December 31, 2018 with a Tier 1 leverage ratio of 8.7% (5.0%), a common equity Tier 1 capital ratio of 12.8% (6.5%), a Tier 1 capital ratio of 12.8% (8.0%) and a total capital ratio of 13.9% (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. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, a financial institution must hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer) which is phased-in through 2019. As of December 31, 2018, ASB met the applicable capital requirements, including the fully phased-in capital conservation buffer. See “Bank-Legislation and regulation” in HEI’s MD&A for the final capital rules under the Basel III regulatory capital framework. Examinations. ASB is subject to periodic “safety and soundness” examinations and other examinations by the OCC. In conducting its examinations, the OCC utilizes the Uniform Financial Institutions Rating System adopted by the Federal Financial Institutions Examination Council, which system utilizes the “CAMELS” criteria for rating financial institutions. The six components in the rating system are: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The OCC examines and rates each CAMELS component. An overall CAMELS rating is also given, after taking into account all of the component ratings. A financial institution may be subject to formal regulatory or administrative direction or supervision such as a “memorandum of understanding” or a “cease and desist” order following an examination if its CAMELS rating is not satisfactory. An institution is prohibited from disclosing the OCC’s report of its safety and soundness examination or the component and overall CAMELS rating to any person or organization not officially connected with the institution as an officer, director, employee, attorney or auditor, except as provided by regulation. The OCC also regularly examines ASB’s information technology practices and its performance under Community Reinvestment Act measurement criteria. The Federal Deposit Insurance Act, as amended, addresses the safety and soundness of the deposit insurance system, supervision of depository institutions and improvement of accounting standards. Pursuant to this Act, federal banking agencies have promulgated regulations that affect the operations of ASB and its holding companies (e.g., standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates and loans to insiders). FDIC regulations restrict the ability of financial institutions that fail to meet relevant capital measures to engage in certain activities, such as offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of December 31, 2018, ASB was “well-capitalized” and thus not subject to these restrictions. 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 4 of the Consolidated Financial Statements for a discussion of FDIC deposit insurance assessment rates. Financing Corporation will continue to impose an assessment on average total assets minus average tangible equity to service the interest on Financing Corporation bond obligations. As of December 31, 2018, ASB’s annual Financing Corporation assessment was 0.31 cents per $100 of average total assets minus average tangible equity. Recent legislation and issuances. See “Bank–Legislation and regulation” in HEI’s MD&A. 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 14 entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the FRB has determined to be permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB. Financial derivatives and interest rate risk. ASB is subject to OCC rules relating to derivatives activities, such as interest rate swaps, interest rate lock commitments and forward commitments. See “Derivative financial instruments” in Note 4 of the Consolidated Financial Statements for a description of interest rate lock commitments and forward commitments used by ASB. Currently ASB does not use interest rate swaps to manage interest rate risk (IRR), but may do so in the future. Generally speaking, the OCC rules permit financial institutions to engage in transactions involving financial derivatives to the extent these transactions are otherwise authorized under applicable law and are safe and sound. The rules require ASB to have certain internal procedures for handling financial derivative transactions, including involvement of the ASB Board of Directors. With the transfer of the regulatory jurisdiction from the OTS to the OCC, ASB has adopted terminology and IRR assessment, measurement and management practices consistent with OCC guidelines. Management believes ASB’s IRR processes are aligned with the Interagency Advisory on Interest Rate Risk Management and appropriate with earnings and capital levels, balance sheet complexity, business model and risk tolerance. Liquidity. OCC regulations require ASB to maintain sufficient liquidity to ensure safe and sound operations. ASB’s principal sources of liquidity are customer deposits, borrowings, the maturity and repayment of portfolio loans and securities and the sale of loans into secondary market channels. ASB’s principal sources of borrowings are advances from the FHLB of Des Moines and securities sold under agreements to repurchase from broker/dealers. ASB is approved by the FHLB of Des Moines to borrow an amount of up to 35% of assets to the extent it provides qualifying collateral and holds sufficient FHLB of Des Moines stock. As of December 31, 2018, ASB’s unused FHLB of Des Moines borrowing capacity was approximately $2.0 billion. ASB utilizes growth in deposits, advances from the FHLB of Des Moines and securities sold under agreements to repurchase to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and make investments. As of December 31, 2018, ASB had loan commitments, undisbursed loan funds and unused lines and letters of credit of $1.9 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels. Supervision. The Federal Deposit Insurance Corporation Improvement Act of 1991 (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.” As of December 31, 2018, 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, 2018, ASB was “well capitalized” and thus not subject to these interest rate restrictions. Qualified thrift lender test. 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,” measured on a monthly average basis in 9 out of the previous 12 months, which include housing-related loans (including mortgage-backed 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, 2018, and at all times during 2018, ASB was a qualified thrift lender. Federal Home Loan Bank System. ASB is a member of the FHLB System, which consists of 11 regional FHLBs, and ASB’s regional bank is the FHLB of Des Moines. The FHLB System provides a central credit facility for member institutions. Historically, the FHLBs have served as the central liquidity facilities for savings associations and sources of long-term funds for financing housing. At such time as an advance is made to ASB or renewed, it must be collateralized by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances collateralized by such other real estate-related collateral may not exceed 300% of ASB’s capital. 15  ASB’s required holding in the stock of the FHLB is both membership and activity-based. Membership is based on a percentage of total assets (0.12%) while the portion related to activity is based on a percentage of outstanding activity, mainly advances (4%). As of December 31, 2018, ASB was required and owned capital stock in the FHLB of Des Moines in the amount of $10 million. Community Reinvestment. The Community Reinvestment Act (CRA) requires financial institutions to help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OCC will consider ASB’s CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank. ASB currently holds an “outstanding” CRA rating. Other laws. ASB is subject to federal and state consumer protection laws which affect deposit and lending activities, such as the Truth in Lending Act (TILA), the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act (RESPA), the Home Mortgage Disclosure Act and several federal and state financial privacy acts intended to protect consumers’ personal information and prevent identity theft, such as the Gramm Act and the Fair and Accurate Transactions Act. ASB is also subject to federal laws regulating certain of its lending practices, such as the Flood Disaster Protection Act, and laws requiring reports to regulators of certain customer transactions, such as the Currency and Foreign Transactions Reporting Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act. ASB’s relationship with Cetera Investment Services LLC and Cetera Investment Advisers LLC is also governed by regulations adopted by the FRB under the Gramm Act, which regulate “networking” relationships under which a financial institution refers customers to a broker-dealer for securities services and employees of the financial institution are permitted to receive a nominal fee for the referrals. These laws may provide for substantial penalties in the event of noncompliance. 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. Additional information. For additional information about ASB, see the sections under “Bank” in HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk” and HEI’s Consolidated Financial Statements, including Note 4 thereto. Properties. ASB owns or leases several office buildings in downtown Honolulu, owns land and an operations center in the Mililani Technology Park on the island of Oahu and owns land on which a number of its branches are located. The following table sets forth the number of bank branches owned and leased by ASB by island: December 31, 2018 Oahu Maui Hawaii Kauai Molokai Number of branches Leased Owned Total 8 3 3 2 — 16 26 3 2 1 1 33 34 6 5 3 1 49 As of December 31, 2018, the net book value (NBV) of branches and office facilities was $190 million ($184 million NBV of the land and improvements for the branches and office facilities owned by ASB and $6 million represents the NBV of ASB’s leasehold improvements). The increase as of December 31, 2018 is primarily due to the construction costs of the new headquarters. As of December 31, 2017, the NBV of branches and office facilities of $75 million ($68 million NBV of the land and improvements for the branches and office facilities owned by ASB and $7 million represents the NBV of ASB’s leasehold improvements). The leases expire on various dates through December 2040, but many of the leases have extension provisions. As of December 31, 2018, ASB owned 113 automated teller machines. Construction of New Headquarters. In the first quarter of 2017, ASB began construction of its new headquarters in downtown Honolulu. The project will cost an estimated $115 million and ASB expects to move into the facility in the first half of 2019. The headquarters will have approximately 370,000 square feet of space on eleven floors and consolidate five separate 16 offices into one building where approximately 600 employees will work. In January 2019, ASB signed an agreement with a real estate broker to list two office facilities for sale as a result of the consolidation of employees into the new headquarters. ITEM 1A. RISK FACTORS The businesses of HEI and its subsidiaries involve numerous risks which, if realized, could have a material and adverse effect on the Company’s financial statements. For additional information for certain risk factors enumerated below and other risks of the Company and its operations, see “Cautionary Note Regarding Forward-Looking Statements” above and HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk,” the Notes to the Consolidated Financial Statements, Hawaiian Electric’s MD&A and Hawaiian Electric’s “Quantitative and Qualitative Disclosures About Market Risk.” Holding company and company-wide risks. HEI is a holding company that derives its income from its operating subsidiaries and depends on the ability of those subsidiaries to pay dividends or make other distributions to HEI and on its own ability to raise capital. HEI is a legal entity separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, HEI’s cash flows and consequent ability to service its obligations and pay dividends on its common stock is dependent upon its receipt of dividends or other distributions from its operating subsidiaries and its ability to issue common stock or other equity securities and to incur additional debt. The ability of HEI’s subsidiaries to pay dividends or make other distributions to HEI, in turn, is subject to the risks associated with their operations and to contractual and regulatory restrictions, including: • • • • • the provisions of an HEI agreement with the PUC, which could limit the ability of HEI’s principal electric public utility subsidiary, Hawaiian Electric, to pay dividends to HEI in the event that the consolidated common stock equity of the Utilities falls below 35% of total capitalization of the electric utilities; the provisions of an HEI agreement entered into with federal bank regulators in connection with its acquisition of its bank subsidiary, ASB, which require HEI to contribute additional capital to ASB (up to a maximum amount of additional capital of $28.3 million as of December 31, 2018 under the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation) upon request of the regulators in order to maintain ASB’s regulatory capital at the level required by regulation; the minimum capital and capital distribution regulations of the OCC that are applicable to ASB and capital regulations that become applicable to HEI and ASB Hawaii; the receipt of a letter from the FRB communicating the OCC’s and FRB’s non-objection to the payment of any dividend ASB proposes to declare and pay to ASB Hawaii and HEI; and the provisions of preferred stock resolutions and debt instruments of HEI and its subsidiaries. The Company, and its credit rating, 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 or could result in higher retirement benefit plan funding requirements, declines in ASB’s interest rate margins and investment values, higher delinquencies and charge-offs in ASB’s loan portfolio and restrictions on the ability of HEI or its subsidiaries to borrow money or issue securities. The two largest components of Hawaii’s economy are tourism and the federal government (including the military). Because the core businesses of HEI’s subsidiaries are providing local public electric utility services (through Hawaiian Electric and its subsidiaries) and banking services (through ASB) in Hawaii, the Company’s operating results are significantly influenced by Hawaii’s economy, which in turn is influenced by economic conditions in the mainland U.S. (particularly California) and Asia (particularly Japan) as a result of the impact of those conditions on tourism, by the impact of interest rates on the construction and real estate industries and by the impact of federal government spending in Hawaii, which can be affected by world conditions and, from time to time, the expiration of federal government appropriations bills. HEI’s and Hawaiian Electric’s securities ratings only reflect the view, at the time the ratings are issued, of the applicable rating agency. 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, such as current, past or future effects or events so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the availability of capital to the Company or 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 such increased costs, including interest charges, under HEI’s and/or Hawaiian Electric’s debt securities and credit facilities, would result in 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. 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. 17 Changes in the U.S. capital markets can also have significant effects on the Company. For example, pension funding requirements are affected by the market performance of the assets in the master pension trust maintained for pension plans, and by the discount rate used to estimate the service and interest cost components of net periodic pension cost and value obligations. The Utilities’ pension tracking mechanisms help moderate pension expense; however, the significant decline in 2008 in the value of the Company’s defined benefit pension plan assets resulted in a substantial gap between the projected benefit obligations under the plans and the value of plan assets, resulting in increases in funding requirements. The increases have moderated in recent years as investment performance has improved. Because the earnings of ASB depend primarily on net interest income, interest rate risk is a significant risk of ASB’s operations. HEI and the Utilities are also exposed to interest rate risk primarily due to their periodic borrowing requirements, the discount rate used to determine pension funding requirements and the possible effect of interest rates on the electric utilities’ rates of return. Interest rates are sensitive to many factors, including general economic conditions and the policies of government and regulatory authorities. HEI cannot predict future changes in interest rates, nor be certain that interest rate risk management strategies it or its subsidiaries have implemented will be successful in managing interest rate risk. 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, 2018, ASB’s investment in U.S. Treasury, federal agency obligations, and mortgage-backed securities have an implicit guarantee from the U.S. government. HEI and Hawaiian Electric and their subsidiaries may incur higher retirement benefits expenses and have and will likely continue to recognize substantial liabilities for retirement benefits. Retirement benefits expenses and cash funding requirements could increase in future years depending on numerous factors, including, but not limited to, the performance of the U.S. equity markets, trends in interest rates and health care costs, plan amendments, mortality improvements, 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 revenues and costs 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 last 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. New or significant advances in technology (e.g., significant advances in internet banking) could render the operations of ASB less competitive or obsolete. • The Utilities face competition from IPPs; customer self-generation, with or without cogeneration; customer energy storage; and the potential formation of community-based, cooperative ownership or municipality structures for 18 electrical service on all islands it serves. With the exception of certain identified projects, the Utilities are required to use competitive bidding to acquire a future generation resource unless the PUC finds competitive bidding to be unsuitable. The PUC set policies for distributed generation (DG) interconnection agreements and standby rates. The results of competitive bidding, competition from IPPs, customer self-generation, and potential cooperative ownership or municipality structures for electric utility service, and the rate at which technological developments facilitating nonutility generation of electricity, combined heat and power technology, off-grid microgrids, and customer energy storage may render the operations of the Utilities less competitive or outdated and adversely affect the Utilities and the results of their operations. The Company may be subject to information technology and operational system failures, network disruptions, cyber attacks and breaches in data security that could adversely affect its businesses and reputation. The Company and its subsidiaries rely on information technology systems, some of which are managed or hosted by third party service providers, to manage its business data, communications, and other business processes. Such information technology systems may be vulnerable to cyberattacks or other security incidents, which could result in unauthorized access to confidential data or disruptions to operations. If the Company is unable to prevent or adequately respond to and resolve an incident, it may have a material impact on the Company’s operations or business reputation. Utilities. The Utilities rely on evolving and increasingly complex operational and information systems, networks and other technologies, which are interconnected with the systems and network infrastructure owned by third parties to support a variety of business processes and activities, including procurement and supply chain, invoicing and collection of payments, customer relationship management, human resource management, the acquisition, generation and delivery of electrical service to customers, and to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. The Utilities use their systems and infrastructure to create, collect, store, and process sensitive information, including personal information regarding customers, employees and their dependents, retirees, and other individuals. Despite the Utilities security measures, all of their systems are vulnerable to disability, failures or unauthorized access caused by natural disasters, cybersecurity incidents, security breaches, user error, unintentional defects created by system changes, military or terrorist actions, power or communication failures or similar events. Any such failure could have a material adverse impact on the Utilities ability to process transactions and provide service, as well the Utilities’ financial condition and results of operations. Further, a data breach involving theft, improper disclosure, or other unauthorized access to or acquisition of confidential information could subject the Utilities to penalties for violation of applicable privacy laws, claims by third parties, and enforcement actions by government agencies. It could also reduce the value of proprietary information, and harm the reputation of the Utilities. As noted by the U.S. Department of Homeland Security, the utility industry is continuing to experience an increase in the frequency and sophistication of cybersecurity incidents. The Utilities’ systems have been, and will likely continue to be, a target of attacks. Further, the Utilities’ operational networks may be subject to new cybersecurity risks due to modernizing and interconnecting existing infrastructure with new technologies and control systems, including those owned by third parties. Although the Utilities have not experienced a material cybersecurity breach to date, such incidents may occur and may have a material adverse effect on the Utilities in the future. In order to address cybersecurity risks to their information systems, the Utilities maintain security measures designed to protect their information technology systems, network infrastructure and other assets. The Utilities actively monitor developments in the area of cybersecurity and are involved in various related government and industry groups, and brief the Board quarterly on relevant cybersecurity issues. Although the Utilities continue to make investments in their cybersecurity program, including personnel, technologies, cyber insurance and training of Utilities personnel, there can be no assurance that these systems or their expected functionality will be implemented, maintained, or expanded effectively; nor can security measures completely eliminate the possibility of a cybersecurity breach. The Utility maintains cyber liability insurance that covers certain damages caused by cyber incidents. However, there is no guarantee that adequate insurance will continue to be available at rates the Utility believes are reasonable or that the costs of responding to and recovering from a cyber incident will be covered by insurance or recoverable in rates. If the Utilities’ cybersecurity measures were to be breached, the Utilities could suffer financial loss, business disruptions, liability to customers, regulatory intervention or damage to their reputation. Due to the size, scope and complexity of the Utilities’ business, the development and maintenance of information technology systems to process and track information is critical and challenging. The Utilities often rely on third-party vendors to host, maintain, modify, and update its systems and these third-party vendors could cease to exist, fail to establish adequate processes to protect the Utilities systems and information, or experience internal or external security incidents. In addition, the Utilities are pursuing complex business transformation initiatives, which include establishing common processes across Hawaiian Electric, Hawaii Electric Light and Maui Electric and the upgrade or replacement of existing systems. Significant system changes increase the risk of system interruptions. Although the Utilities maintain change control processes to mitigate this risk, system interruptions may occur. Further, delay or failure to complete the integration of information systems and 19 processes may result in delays in regulatory cost recovery, increased service interruptions of aging legacy systems, or the failure to realize the cost savings anticipated to be derived from these initiatives. In the fourth quarter of 2018, the Utilities’ new ERP/EAM system was placed into service. Any failure in addressing issues in the stabilization of the ERP/EAM system implementation could adversely affect the Utilities’ ability to timely and accurately report financial information and make payments to vendors and employees. Additionally, one of the conditions imposed by the PUC’s approval of the system is the requirement that the Utilities achieve cost savings consistent with a minimum of $244 million in ERP/EAM project-related benefits to be delivered to customers over the system’s 12-year service life. If the Utilities are not able to achieve such minimum savings, the PUC could impose financial penalties, such as a reduction of revenue requirements that could adversely impact the Utilities’ results of operations and financial condition. The Utilities have disaster recovery plans in place to protect their businesses from information technology service interruptions. The disaster recovery plans, however, may not be successful in preventing the loss of customer data, service interruptions and disruptions to operations or damage to important facilities. If any of these systems fail to operate properly or becomes disabled and the Utilities’ disaster recovery plans do not effectively resolve the issues in a timely manner, the Utilities could suffer financial loss, business disruptions, liability to customers, regulatory intervention or damage to their reputations. ASB. ASB is highly dependent on its ability to process, on a daily basis, a large number of transactions and relies heavily on communication and information systems, including those of third party vendors and other service providers. Communication and information system failures can result from a variety of risks including, but not limited to, events that are wholly or partially out of ASB’s control, such as communication line integrity, weather, terrorist acts, natural disasters, accidental disasters, unauthorized breaches of security systems, energy delivery systems, cyberattacks and other events. ASB is under continuous threat of loss due to cyberattacks, especially as ASB continues to expand customer capabilities to utilize the Internet and other remote channels to transact business. Two of the most significant cyberattack risks that ASB faces are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals extract funds directly from customers’ or ASB’s accounts using fraudulent schemes that may include Internet-based funds transfers. ASB has been subject to e-fraud incidents historically. Loss of sensitive customer data are attempts to steal sensitive customer data, such as account numbers and social security numbers, through unauthorized access to computer systems, including computer hacking. Such attacks are less frequent, but could present significant reputational, legal and regulatory costs if successful. Intrusion detection and prevention systems, anti-virus software, firewalls and other general information technology controls have been put in place to detect and prevent cyberattacks or information system breaches. A disaster recovery plan has been developed in the event of a natural disaster, security breach, military or terrorist action, power or communication failure or similar event. The disaster recovery plan, however, may not be successful in preventing the loss of customer data, service interruptions, disruptions to operations or damage to important facilities. Although ASB devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of ASB’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to ASB and its customers, there can be no assurance that such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately corrected by ASB or its vendors. If any of these systems fail to operate properly or become disabled even for a brief period of time, ASB could suffer financial loss, business disruptions, liability to customers, regulatory intervention or damage to its reputation, any of which could have a material adverse effect on ASB’s financial condition and results of operations. HEI’s businesses could suffer losses that are uninsured due to a lack of affordable insurance coverage, unavailability of insurance coverage or limitations on the insurance coverage the Company does have. In the ordinary course of business, HEI and its subsidiaries purchase insurance coverages (e.g., property and liability coverages) to protect against loss of, or damage to, their properties and against claims made by third parties and employees for property damage or personal injuries. However, the protection provided by such insurance is limited in significant respects and, in some instances, there is no coverage. Certain of the insurance has substantial deductibles or has limits on the maximum amounts that may be recovered. For example, the Utilities’ overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at $7 billion and are largely not insured against loss or damage because the amount of transmission and distribution system insurance available is limited and the premiums are cost prohibitive. Similarly, the Utilities have no business interruption insurance as the premiums for such insurance would be cost prohibitive, particularly since the Utilities are not interconnected to other systems. If a hurricane or other uninsured catastrophic natural disaster were to occur, and if the PUC were not to allow the affected Utilities to recover from ratepayers restoration costs and revenues lost from business interruption, the lost revenues and repair expenses could result in a significant decrease in HEI’s consolidated net income or in significant net losses for the affected periods. ASB generally does not obtain credit enhancements, such as mortgagor bankruptcy insurance, but does require standard hazard and hurricane insurance and may require flood insurance for certain properties. ASB is subject to the risks of borrower 20 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. These laws and regulations could result in increased capital, operating, and other costs. 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 cost 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. Adverse tax rulings or developments could result in significant increases in tax payments and/or expense. Governmental taxing authorities could challenge a tax return position taken by HEI or its subsidiaries and, if the taxing authorities prevail, HEI’s consolidated tax payments and/or expense, including applicable penalties and interest, could increase significantly. The Company could be subject to the risk of uninsured losses in excess of its accruals for litigation matters. HEI and its subsidiaries are involved in routine litigation in the ordinary course of their businesses, most of which is covered by insurance (subject to policy limits and deductibles). However, other litigation may arise that is not routine or involves claims that may not be covered by insurance. Because of the uncertainties associated with litigation, there is a risk that litigation against HEI or its subsidiaries, even if vigorously defended, could result in costs of defense and judgment or settlement amounts not covered by insurance and in excess of reserves established in HEI’s consolidated financial statements. Changes in accounting principles and estimates could affect the reported amounts of the Company’s assets and liabilities or revenues and expenses. HEI’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. Changes in accounting principles (including the possible adoption of International Financial Reporting Standards or new U.S. accounting standards), or changes in the Company’s application of existing accounting principles, could materially affect the financial statement presentation of HEI’s or the Utilities’ consolidated results of operations and/or financial condition. Further, in preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the amounts reported for electric utility revenues; allowance for loan losses; income taxes; investment securities, property, plant and equipment; regulatory assets and liabilities; derivatives; goodwill; pension and other postretirement benefit obligations; and contingencies and litigation. The Utilities’ financial statements reflect assets and costs based on cost-based rate-making regulations. Continued accounting in this manner requires that certain criteria relating to the recoverability of such costs through rates be met. If events or circumstances should change such that the criteria are no longer satisfied, the Utilities’ expect that their regulatory assets (amounting to $833 million as of December 31, 2018), net of regulatory liabilities (amounting to $950 million as of December 31, 2018), would be charged to the statement of income in the period of discontinuance. As a result of the 2017 Tax Cuts and Jobs Act (Tax Act), the Utilities were required to adjust their deferred tax assets and liabilities for the lower federal income tax rate, resulting in excess accumulated deferred income tax balances (ADIT). To the extent the ADIT was related to items included in regulatory rate base or ratemaking, the related net excess ADIT was reclassified to a regulatory liability that will be returned to customers through rates. Changes in accounting principles can also impact HEI’s consolidated financial statements. For example, if management determines that a PPA requires the consolidation of the IPP in the financial statements, the consolidation could have a material effect on Hawaiian Electric’s and HEI’s consolidated financial statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. Also, the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, on January 1, 2019, had a 21 significant impact on HEI’s consolidated balance sheet, resulting in the recognition of $257 million in lease liabilities ($215 million related to the Utilities’ PPAs) and $257 million in right-of-use assets. Changes in the accounting principles for expected credit losses were issued by the FASB to replace existing impairment models, including replacing an “incurred loss” model for loans with a “current expected credit loss” model based on historical experience, current conditions and reasonable and supportable forecasts. The changes also require enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The Company plans to adopt the accounting principle changes in the first quarter of 2020 and has not yet determined the impact of the adoption. The new impairment model could have a material adverse impact on ASB’s results of operations. Electric utility risks. Actions of the PUC are outside the control of the Utilities and could result in inadequate or untimely rate increases, in rate reductions or refunds or in unanticipated delays, expenses or writedowns in connection with the construction of new projects. The rates the Utilities are allowed to charge for their services and the timeliness of permitted rate increases are among the most important items influencing the Utilities’ results of operations, financial condition and liquidity. The PUC has broad discretion over the rates that the Utilities charge their customers. As part of the decoupling mechanism that the Utilities have implemented, each of the Utilities will file a rate case once every three years. Any adverse decision by the PUC concerning the level or method of determining electric utility rates, the items and amounts that may be included in rate base, the returns on equity or rate base found to be reasonable, the potential consequences of exceeding or not meeting such returns, or any prolonged delay in rendering a decision in a rate or other proceeding could have a material adverse effect on Hawaiian Electric’s consolidated results of operations, financial condition and liquidity. To improve the timing and certainty of the recovery of their costs, the Utilities have proposed and/or received approval of various cost recovery mechanisms including an ECAC (replaced with the ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019), a PPAC, and pension and OPEB tracking mechanisms, as well as a decoupling mechanism, a major project interim recovery (MPIR) adjustment mechanism, and a renewable energy infrastructure program (REIP) surcharge. A change in, or the elimination of, any of these cost recovery mechanisms, could have a material adverse effect on the Utilities. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). The PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Act 005, Session Laws 2018, could include, but is not limited to, the potential addition of new performance incentive mechanisms, the adoption of third party proposals by the PUC in its implementation of PBR, and penalties for not achieving performance incentive goals. The impacts of the implementation of PBR cannot be predicted and these impacts could have a material adverse effect on the Utilities. The Utilities could be required to refund to their customers, with interest, revenues that have been or may be received under interim rate orders in their rate case proceedings and other proceedings, if and to the extent they exceed the amounts allowed in final orders. Many public utility projects require PUC approval and various permits (e.g., environmental and land use permits) from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits, or any adverse decision or policy made or adopted, or any prolonged delay in rendering a decision, by an agency with respect to such approvals and permits, can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if the PUC disallows cost recovery for all or part of a project, or if project costs exceed caps imposed by the PUC in its approval of the project, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income. Energy cost adjustment/recovery clauses. The rate schedules of each of the Utilities include ECACs (ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019—see below) 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. ECAC/ECRCs are subject to periodic review by the PUC. In recent rate cases, the PUC has approved an additional trigger that would allow a re-establishment of fuel usage efficiency targets under certain conditions and annual automatic adjustments of fuel usage efficiency targets for all Utilities. In the most recent Hawaiian Electric rate case, the PUC ordered an ECRC for Hawaiian Electric, which recovers all fuel and purchased energy expenses, a portion of which had previously been recovered through base rates. The PUC also ordered a scaled down version of a fossil fuel risk sharing mechanism proposed by Blue Planet, which provides for a 98/2% risk-sharing split between ratepayers and Hawaiian Electric, of fossil fuel prices above or below a baseline price and the fuel usage efficiency pass-through within a range, with an annual maximum exposure cap of $2.5 million in either direction and which became effective January 1, 2019. The PUC also approved an expansion of the range of 22 fuel efficiencies for low sulfur fuel oil and a full pass through to customers the costs of diesel fuel and biodiesel fuel that represent the balance of the generation fuel usage subject to the risk sharing split. In Hawaii Electric Light’s 2016 test year rate case, the PUC approved an expansion of the range of diesel fuel usage efficiencies under which fuel cost would be fully passed through to customers that became effective October 1, 2018. In February 2019, Hawaii Electric Light replaced the ECAC with an ECRC, which recovers all fuel and purchased energy expenses, a portion which was previously recovered in base rates. In the interim decision and order in the Maui Electric 2018 test year rate case, the PUC approved the settlements between Maui Electric and the Consumer Advocate on the ECAC, which included retaining the existing range of fuel usage efficiencies at all three islands. The PUC will continue to examine Blue Planet’s proposed fossil fuel cost risk sharing mechanism, similar to what it proposed in the Hawaiian Electric 2017 test year rate case. A final decision and order in the Maui Electric 2018 test year rate case is pending. See “Most recent rate proceedings” in Note 3 of the Consolidated Financial Statements. A change in, or the elimination of, the ECAC/ECRC 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 and natural disasters. Weather conditions, particularly temperature and humidity, directly influence the demand for electricity. In addition, severe weather and natural disasters, such as hurricanes, earthquakes, tsunamis, lava flows and lightning storms, some of which may become more severe or frequent as a result of global climate changes, can cause outages and property damage and require the Utilities to incur significant additional expenses that may not be recoverable. Electric utility operations may be significantly influenced by climate change. While the timing, extent and ultimate effects of climate change cannot be determined with any certainty, climate change is predicted to result in sea level rise, which could potentially impact coastal and other low-lying areas (where much of the Utilities’ electric infrastructure is sited), and could cause erosion of beaches, saltwater intrusion into aquifers and surface ecosystems, higher water tables and increased flooding and storm damage due to heavy rainfall. The effects of climate change on the weather (for example, floods, hurricanes, heat waves or drought conditions, the latter of which could increase wildfire risk), sea levels, and water availability and quality, all have the potential to materially adversely affect the results of operations, financial condition and liquidity of the Utilities. For example, severe weather and its related impacts could cause significant harm to the Utilities’ physical facilities. Electric utility operations depend heavily on third-party suppliers of fuel and purchased power. The Utilities rely on fuel suppliers and shippers, and IPPs to deliver fuel and power, respectively, in accordance with contractual agreements. Approximately 70% of the net energy generated or purchased by the Utilities in 2018 was generated from the burning of fossil fuel oil, and purchases of power by the Utilities provided about 45% of their total net energy generated and purchased for the same period. Failure or delay by fuel 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. The capacity provided by the Utilities’ generating resources and third-party purchased power may not be sufficient to meet customers’ energy requirements . The Utilities rely upon their generating resources and purchased power from third parties to meet their customers’ energy requirements. The Utilities update their generation capacity evaluation each year to determine the Utilities’ ability to meet reasonably expected demands for service and provide reasonable reserves for emergencies. These evaluations are impacted by a variety of factors, including customer energy demand, energy conservation and efficiency initiatives, economic conditions, and weather patterns. If the capacity provided by the Utilities’ generating resources and third- party purchased power is not adequate relative to customer demand, the Utilities may have to contract to buy more power from third parties, invest in additional generating facilities over the long-term, or extend the operating life of existing utility units. Any failure to meet customer energy requirements could negatively impact the satisfaction of the Utilities’ customers, which could have an adverse impact on the Utilities’ business and results of operations. Electric utility generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated and/or increased operation and maintenance expenses and increased power purchase costs. Operation of electric generating facilities involves certain risks which can adversely affect energy output and efficiency levels. Included among these risks are facility shutdowns or power interruptions due to insufficient generation or a breakdown or failure of equipment or processes. In addition, operations could be negatively impacted by interruptions in fuel supply, inability to negotiate satisfactory collective bargaining agreements when existing agreements expire or other labor disputes, inability to comply with regulatory or permit requirements, disruptions in delivery of electricity, operator error and catastrophic events such 23 as earthquakes, tsunamis, hurricanes, fires, explosions, floods or other similar occurrences affecting the Utilities’ generating facilities or transmission and distribution systems. The Utilities may be adversely affected by new legislation or administrative actions. Congress, the Hawaii legislature and governmental agencies periodically consider legislation and other initiatives that could have uncertain or negative effects on the Utilities and their customers. Congress, the Hawaii legislature and governmental agencies have adopted, or are considering adopting, a number of measures that will significantly affect the Utilities, as described below. Renewable Portfolio Standards law. In 2015, Hawaii’s RPS law was amended to require electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045 respectively. Energy savings resulting from energy efficiency programs do not count toward the RPS after 2014. The Utilities are committed to achieving these goals and met the 2015 RPS; however, due to the exclusion of energy savings in calculating RPS after 2014 and risks such as potential delays in IPPs being able to deliver contracted renewable energy, it is possible the Utilities may not attain the required renewable percentages in the future, and management cannot predict the future consequences of failure to do so (including potential penalties to be assessed by the PUC). On December 19, 2008, the PUC approved a penalty of $20 for every MWh that an electric utility is deficient under Hawaii’s RPS law. The PUC noted, however, that this penalty may be reduced, in the PUC’s discretion, due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated, as described in the RPS law and in an RPS framework adopted by the PUC. In addition, the PUC ordered that the Utilities will be prohibited from recovering any RPS penalty costs through rates. Renewable energy. In 2007, a measure was passed by the Hawaii legislature stating that the PUC may consider the need for increased renewable energy in rendering decisions on utility matters. Due to this measure, it is possible that, if energy from a renewable source is more expensive than energy from fossil fuel, the PUC may still approve the purchase of energy from the renewable source, resulting in higher costs. Global climate change and greenhouse gas emissions reduction. National and international concern about climate change and the contribution of GHG emissions (including carbon dioxide emissions from the combustion of fossil fuels) to climate change have led to federal legislative and regulatory proposals and action by the state of Hawaii to reduce GHG emissions. In July 2007, the State Legislature passed Act 234, which requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the statewide GHG emission levels in 1990. On June 20, 2014, the Governor signed the final rules required to implement Act 234 and these rules went into effect on June 30, 2014. In general, Act 234 and the GHG rule require affected sources that have the potential to emit GHGs in excess of established thresholds to reduce their GHG emissions by 16% below 2010 emission levels by 2020. In accordance with State requirements, the Utilities submitted an Emissions Reduction Plan (EmRP) to the DOH on June 30, 2015. The Utilities submitted a revised EmRP on October 15, 2018, to reflect the partnership established between the Utilities and several IPPs. In this plan, the partnership has committed to a 16% reduction in GHG emissions in accordance with the rule. 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 demand-side management programs that foster energy efficiency, using renewable resources for energy production and purchasing power from IPPs generated by renewable resources, and burning renewable biodiesel at selected Hawaiian Electric and Maui Electric generating units. On April 24, 2018, Act 005, Session Laws 2018 was signed into law, which establishes performance metrics that the PUC shall consider while establishing performance incentives and penalty mechanisms under a performance-based ratemaking model. The law requires that the PUC establish these performance-based ratemaking mechanisms on or before January 1, 2020. The PUC opened a proceeding on April 18, 2018. 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 and/or energy 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 24 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, programs to enable more customer-sited generation (but studying distributed generation interconnections on a per-circuit basis). The implementation of these or other programs may adversely impact the results of operations, financial condition and liquidity of the Utilities. Bank risks. Fluctuations in interest rates could result in lower net interest income, impair ASB’s ability to originate new loans or impair the ability of ASB’s adjustable-rate borrowers to make increased payments or cause such borrowers to repay their adjustable-rate loans. Interest rate risk is a significant risk of ASB’s operations. ASB’s net interest income consists primarily of interest income received on fixed-rate and adjustable-rate loans, mortgage-backed securities and investments, less interest expense consisting primarily of interest paid on deposits and other borrowings. Interest rate risk arises when earning assets mature or when their interest rates change in a time frame different from that of the costing liabilities. Changes in market interest rates, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact ASB’s net interest margin. See “Quantitative and Qualitative Disclosures about Market Risk.” 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 41% of ASB’s loan portfolio as of December 31, 2018 and do not re-price with movements in interest rates. ASB continues to face a challenging interest rate environment. The Federal Open Market Committee increased the federal funds rate in 2016, 2017 and 2018, which has caused the yield curve to flatten. Increases in market interest rates could have an adverse impact on ASB’s cost of funds. Higher market interest rates could lead to higher interest rates paid on deposits and other borrowings. Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect ASB’s ability to originate new loans and grow. An increase in market interest rates, especially a sudden increase, could also adversely affect the ability of ASB’s adjustable-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs. Conversely, a decrease in interest rates or a mismatching of maturities of interest sensitive financial instruments could result in an acceleration in the prepayment of loans and mortgage-backed securities and impact ASB’s ability to reinvest its liquidity in similar yielding assets. Changes in the method for determining London Interbank Offered Rate (LIBOR) and the potential replacement of LIBOR may affect our loan portfolio and interest income on loans. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether or not LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (SOFR). The potential effect of the elimination of LIBOR on ASB’s LIBOR-indexed loan portfolio and interest income on loans cannot yet be determined. ASB’s operations are affected by factors that are beyond its control, that could result in lower revenues, higher expenses or decreased demand for its products and services. ASB’s results of operations depend primarily on the income generated by the supply of and demand for its products and services, which primarily consist of loans and deposit services. ASB’s revenues and expenses may be adversely affected by various factors, including: • • • • • • local, regional, national and other economic and political conditions that could result in declines in employment and real estate values, which in turn could adversely affect the ability of borrowers to make loan payments and the ability of ASB to recover the full amounts owing to it under defaulted loans; the ability of borrowers to obtain insurance and the ability of ASB to place insurance where borrowers fail to do so, particularly in the event of catastrophic damage to collateral securing loans made by ASB; faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage servicing assets of ASB; changes in ASB’s loan portfolio credit profiles and asset quality, which may increase or decrease the required level of allowance for loan losses; technological disruptions affecting ASB’s operations or financial or operational difficulties experienced by any outside vendor on whom ASB relies to provide key components of its business operations, such as business processing, network access or internet connections; events of default and foreclosure of loans whereby ASB becomes the owner of a mortgage properties that presents environmental risk or potential clean up liability; 25 • • • • • the impact of legislative and regulatory changes, including changes affecting capital requirements, increasing oversight of and reporting by banks, or affecting the lending programs or other business activities of ASB; additional legislative changes regulating the assessment of overdraft, interchange and credit card fees, which can have a negative impact on noninterest income; public opinion about ASB and financial institutions in general, which, if negative, could impact the public’s trust and confidence in ASB and adversely affect ASB’s ability to attract and retain customers and expose ASB to adverse legal and regulatory consequences; increases in operating costs (including employee compensation expense and benefits and regulatory compliance costs), inflation and other factors, that exceed increases in ASB’s net interest, fee and other income; and the ability of ASB to maintain or increase the level of deposits, ASB’s lowest costing funds. Banking and related regulations could result in significant restrictions being imposed on ASB’s business or in a requirement that HEI divest ASB. ASB is subject to examination and comprehensive regulation by the Department of Treasury, the OCC and the FDIC, and is subject to reserve requirements established by the Board of Governors of the Federal Reserve System. In addition, the FRB is responsible for regulating ASB’s holding companies, HEI and ASB Hawaii. The regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities and examination policies to address not only ASB’s compliance with applicable banking laws and regulations, but also capital adequacy, asset quality, management ability and performance, earnings, liquidity and various other factors. Under certain circumstances, including any determination that ASB’s relationship with HEI results in an unsafe and unsound banking practice, these regulatory authorities have the authority to restrict the ability of ASB to transfer assets and to make distributions to its shareholders (including payment of dividends to HEI), or they could seek to require HEI to sever its relationship with or divest its ownership of ASB. Payment by ASB of dividends to HEI may also be restricted by the OCC and FRB under its prompt corrective action regulations or its capital distribution regulations if ASB’s capital position deteriorates. In order to maintain its status as a QTL, ASB is required to maintain at least 65% of its assets in “qualified thrift investments.” Institutions that fail to maintain QTL status are subject to various penalties, including limitations on their activities. In ASB’s case, the activities of HEI and HEI’s other subsidiaries would also be subject to restrictions, and a failure or inability to comply with those restrictions could effectively result in the required divestiture of ASB. Federal legislation has also been proposed in the past that could operate to eliminate the thrift charter or the grandfathered status of HEI as a unitary thrift holding company, which in turn would 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, 2018 approximately 82% of ASB’s loan portfolio was comprised of loans primarily collateralized by real estate, most of which was concentrated in the State of Hawaii. During 2018, ASB’s HELOC and residential 1-4 family portfolios grew by 7% and 1%, respectively, and now comprise 78% of total real estate loans. ASB’s financial results may be adversely affected by changes in prevailing economic conditions, either nationally or in the state of Hawaii, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. Adverse changes in the economy may have a negative effect on the ability of borrowers to make timely repayments of their loans. A deterioration of the economic environment in Hawaii, including a material decline in the real estate market, further declines in home resales, a material external shock, or any environmental clean-up obligation, may also significantly impair the value of ASB’s collateral and ASB’s ability to sell the collateral upon foreclosure. In the event of a default, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest. In addition, if poor economic conditions result in decreased demand for real estate loans, ASB’s profits may decrease if its alternative investments earn less income than real estate loans. Expanding commercial, commercial real estate and consumer lending activities may result in higher costs and greater credit risk than residential lending activities due to the unique characteristics of these markets. ASB had been aggressively pursuing a strategy that included expanding its commercial, commercial real estate and consumer lines of business. If ASB 26 elects to pursue commercial and commercial real estate loans in the future, such loans have a higher risk profile than residential loans. Though both commercial and commercial real estate loans have shorter terms and earn higher spreads than residential mortgage loans, these loan types generally entail higher underwriting and other service costs and present greater credit risks than traditional residential mortgages. Commercial loans are secured by the assets of the business and, upon default, any collateral repossessed may not be sufficient to repay the outstanding loan balance. In addition, loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be affected by current economic conditions and adverse business developments. Commercial real estate properties tend to be unique and are more difficult to value than residential real estate properties. Commercial real estate loans may not be fully amortizing, meaning that they have a significant principal balance or “balloon” payment due at maturity. In addition, commercial real estate properties, particularly industrial and warehouse properties, are generally subject to relatively greater environmental risks than noncommercial properties and to the corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be costs and delays involved in enforcing rights of a property owner against tenants in default under terms of leases with respect to commercial properties. For example, a tenant may seek protection under bankruptcy laws, which could result in termination of the tenant’s lease. ASB also has a national syndicated lending portfolio where ASB is a participant in credit facilities agented by established and reputable national lenders. Management selectively chooses each deal based on conservative credit criteria to ensure a high-quality, well diversified portfolio. In the event the borrower encounters financial difficulties and ASB is unable to sell its participation interest in the loan in the secondary market, the bank is typically reliant on the originating lender for managing any loan workout or foreclosure proceedings that may become necessary. Accordingly, ASB has less control over such proceedings than loans it originates and may be required to accommodate the interests of other participating lenders in resolving delinquencies or defaults on participated loans, which could result in outcomes that are not fully consistent with ASB’s preferred strategies. In addition, a significant proportion of ASB’s syndicated loans are originated in states other than Hawaii and are subject to the local regional and regulatory risks specific to those states. Similar to the national syndicated lending portfolio, ASB does not service commercial loans in which it has participation interests rather than being the lead or agent lender and is subject to the policies and practices of the agent lender, who is the loan servicer, in resolving delinquencies or defaults on participated loans. The consumer loan portfolio primarily consists of personal unsecured loans with risk-based pricing. Repayment is based on the borrower’s financial stability as these loans have no collateral and there is less assurance that ASB will be able to collect all payments due under these loans or have sufficient collateral to cover all outstanding loan balances. ASB’s allowance for loan losses may not cover actual loan losses. ASB’s allowance for loan losses is the bank’s estimate of probable losses inherent in its loan portfolio and is based on a continuing assessment of: • • • • existing risks in the loan portfolio; historical loss experience with ASB’s loans; changes in collateral value; and current conditions (for example, economic conditions, real estate market conditions and interest rate environment). If ASB’s actual loan losses exceed its allowance for loan losses, it may incur losses, its financial condition may be materially and adversely affected, and additional capital may be required to enhance its capital position. In addition, various regulatory agencies, as an integral part of their examination process, regularly review the adequacy of ASB’s allowance. These agencies may require ASB to establish additional allowances based on their judgment of the information available at the time of their examinations. No assurance can be given that ASB will not sustain loan losses in excess of present or future levels of its allowance for loan losses. The Tax Act may impact the financial services industry with respect to the marketability of residential loans and home equity indebtedness. The Tax Act limits the deduction available for mortgage interest by reducing the amount of debt that can be treated as acquisition indebtedness from the current level of $1 million to $750,000. The Tax Act also suspends the deduction for interest on home equity indebtedness. The impact of these tax law changes on residential mortgage and home equity line of credit loan production cannot yet be determined. ITEM 1B. UNRESOLVED STAFF COMMENTS HEI: None. Hawaiian Electric: Not applicable. 27 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 and Hawaiian Electric (including their direct and indirect subsidiaries) may be involved in ordinary routine PUC proceedings, environmental proceedings and/or litigation incidental to their respective businesses. See the descriptions of legal proceedings (including judicial proceedings and proceedings before the PUC and environmental and other administrative agencies) in “Item 1. Business,” in HEI’s MD&A and in the Notes 3 and 4 of the Consolidated Financial Statements. The outcomes of litigation and administrative proceedings are necessarily uncertain and there is a risk that the outcome of such matters could have a material adverse effect on the financial position, results of operations or liquidity of HEI or one or more of its subsidiaries for a particular period in the future. ITEM 4. MINE SAFETY DISCLOSURES HEI and Hawaiian Electric: Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT (HEI) The executive officers of HEI are listed below. Messrs. Oshima and Wacker are officers of HEI subsidiaries rather than of HEI, but are deemed to be executive officers of HEI under SEC Rule 3b-7 promulgated under the 1934 Exchange Act. HEI executive officers serve from the date of their initial appointment and are reappointed annually by the HEI Board (or annually by the applicable HEI subsidiary board), and thereafter are appointed for one-year terms or until their successors have been duly appointed and qualified or until their earlier resignation or removal. HEI executive officers may also hold offices with HEI subsidiaries and affiliates in addition to their current positions listed below. Name Constance H. Lau Age 66 Gregory C. Hazelton 54 Business experience for last 5 years and prior positions with the Company HEI President and Chief Executive Officer since 5/06 HEI Director, 6/01 to 12/04 and since 5/06 Hawaiian Electric Chairman of the Board since 5/06 ASB Hawaii Director since 5/06 ASB Chairman of the Board since 5/06, Risk Committee member since 2012 and Director since 1999 · ASB Chief Executive Officer, 6/01 to 11/10, and President, 6/01 to 1/08 · ASB Senior Executive Vice President and Chief Operating Officer and Director, 12/99 to 5/01 · HEI Power Corp. Financial Vice President and Treasurer, 5/97 to 8/99 · HEI Treasurer, 4/89 to 10/99, and HEI Assistant Treasurer, 12/87 to 4/89 · Hawaiian Electric Treasurer 12/87 to 4/89 and Assistant Corporate Counsel, 9/84 to 12/87 HEI Executive Vice President, Chief Financial Officer and Treasurer since 3/18 HEI Executive Vice President and Chief Financial Officer, 4/17 to 3/18 HEI Senior Vice President, Finance, 10/16 to 4/17 · Prior to rejoining the Company in 2016: Northwest Natural Gas Company, Senior Vice President, Chief Financial Officer and Treasurer, 2/16 to 9/16, and Northwest Natural Gas Company, Senior Vice President and Chief Financial Officer, 6/15 to 2/16 · HEI Vice President, Finance, Treasurer and Controller, 8/13 to 6/15 · Prior to joining the Company in 2013: UBS Investment Bank, Managing Director, Global Power & Utilities Group 3/11 to 5/13 Alan M. Oshima 71 Hawaiian Electric President and Chief Executive Officer since 10/14 Hawaiian Electric Director, 2008 to 10/11 and since 10/14 HEI Charitable Foundation President since 10/11 · Hawaiian Electric Senior Executive Officer on loan from HEI, 5/14 to 9/14 · HEI Executive Vice President, Corporate and Community Advancement, 10/11 to 5/14 Richard F. Wacker 56 ASB President and Chief Executive Officer since 11/10 ASB Director since 11/10 Family relationships; executive arrangements There are no family relationships between any HEI executive officer and any other HEI executive officer or any HEI director or director nominee. There are no arrangements or understandings between any HEI executive officer and any other person pursuant to which such executive officer was selected. 28 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 13, “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. HEI’s common stock is traded on the New York Stock Exchange under the ticker symbol “HE.” The total number of holders of record of HEI common stock (i.e., registered holders) as of February 13, 2019, was 5,840. On February 14, 2019, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.31 per share to $0.32 per share, starting with the dividend in the first quarter of 2019. Purchases of HEI common shares were made during the fourth quarter to satisfy the requirements of certain plans as follows: ISSUER PURCHASES OF EQUITY SECURITIES Period* October 1 to 31, 2018 November 1 to 30, 2018 December 1 to 31, 2018 Total Number of Shares Purchased ** Average Price Paid per Share ** Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs 33,983 14,796 181,966 $ $ $ 36.11 37.49 38.73 — — — NA NA NA NA Not applicable. * Trades (total number of shares purchased) are reflected in the month in which the order is placed. ** The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the DRIP, the HEIRSP and the ASB 401(k) Plan. Of the “Total number of shares purchased,” 198,345 of the 230,745 shares were purchased for the DRIP; 27,000 of the 230,745 shares were purchased for the HEIRSP; and 5,400 of the 230,745 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. 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 2018 and 2017 were as follows: Quarters ended (in thousands) March 31 June 30 September 30 December 31 $ 2018 2017 $ 25,826 25,826 25,827 25,826 21,942 21,942 21,941 21,942 Also, see “Liquidity and capital resources” in HEI’s MD&A. See the discussion of regulatory and other restrictions on dividends or other distributions in Note 13 of the Consolidated Financial Statements. 29 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) 2018 2017 2016 2015 2014 Results of operations Revenues Net income for common stock Basic earnings per common share Diluted earnings per common share Return on average common equity Financial position * Total assets Deposit liabilities Other bank borrowings Long-term debt, net—other than bank Preferred stock of subsidiaries – not subject to mandatory redemption Common stock equity Common equity ratio Common stock $ 2,860,849 $ 2,555,625 $ 2,380,654 $ 2,602,982 $ 3,239,542 201,774 165,297 248,256 159,877 168,129 1.85 1.85 9.5% 1.52 1.52 7.9% 2.30 2.29 12.4% 1.50 1.50 8.6% 1.65 1.63 9.6% $ 13,104,051 $ 12,534,160 $ 11,881,981 $ 11,275,931 $ 10,710,711 6,158,852 110,040 1,879,641 5,890,597 190,859 1,683,797 5,548,929 192,618 1,619,019 5,025,254 328,582 1,578,368 4,623,415 290,656 1,498,547 34,293 34,293 34,293 34,293 34,293 2,162,280 2,097,386 2,066,753 1,927,640 1,790,573 52% 53% 56% 53% 52% Book value per common share * $ 19.86 $ 19.28 $ 19.03 $ 17.94 $ Dividends declared per common share Dividend payout ratio Market price to book value per common share * Price earnings ratio ** Common shares outstanding (thousands) * Weighted-average-basic Shareholders *** Employees * 1.24 67% 184% 19.8x 108,879 108,855 25,369 3,898 1.24 82% 188% 23.8x 108,788 108,749 26,064 3,880 1.24 54% 174% 14.4x 108,583 108,102 26,831 3,796 1.24 82% 161% 19.3x 107,460 106,418 27,927 3,918 17.46 1.24 75% 192% 20.3x 102,565 101,968 29,415 3,965 At December 31. * ** Calculated using December 31 market price per common share divided by basic earnings per common share. *** 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, 2019, HEI had 5,840 registered shareholders (i.e., holders of record of HEI common stock), 22,601 DRIP participants and total shareholders of 25,318. 2018 results include the impact of the lower federal corporate tax rate as a result of the Tax Act, as well as certain tax return adjustments, such as an increased pension deduction made in conjunction with the filing of the Company’s 2017 tax returns, which resulted in a net income tax benefit of $5 million that lowered the effective tax rate due to the additional tax benefits realized that were associated with the rate differential. The lower tax rate was partially offset by other Tax Act changes, including the non-deductibility of excess executive compensation and various fringe benefit costs. 2017 results include a $14 million adjustment, primarily to reduce deferred tax net asset balances (not accounted for under Utility regulatory ratemaking) to reflect the lower rates enacted by the Tax Act (see Note 11 of the Consolidated Financial Statements) and $20 million ($11 million, net of tax impacts) lower in RAM revenues than the prior year due to expiration of a 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric. Results for 2016, 2015 and 2014 include merger- and spin-off-related income/(expenses), net of tax impacts, of $60 million, ($16 million), and ($5 million), respectively (see Note 16 of the Consolidated Financial Statements). In 2018, the Company reclassified “Contributions in aid of construction” to “Property, plant and equipment, net,” which affects “Total assets” in the above table. Financial data for all prior periods have been updated to reflect the reclassification. For 2014, under the two-class method of computing basic earnings per share, distributed earnings was $1.24 per share and undistributed earnings (loss) was $0.41 per share, for both unvested restricted stock awards and unrestricted common stock. For 2014, under the two-class method of computing diluted earnings per share, distributed earnings was $1.24 per share and undistributed earnings (loss) was $0.40 per share, respectively, for both unvested restricted stock awards and unrestricted common stock. There were no restricted stock awards outstanding during 2018, 2017, 2016 and 2015. 30 Hawaiian Electric: Selected Financial Data Hawaiian Electric Company, Inc. and Subsidiaries Years ended December 31 (in thousands) Results of operations Revenues Net income for common stock Financial position * Utility plant Accumulated depreciation Net utility plant Total assets Current portion of long-term debt Short-term borrowings from non-affiliates Long-term debt, net Common stock equity Cumulative preferred stock-not subject to mandatory redemption Capital structure Capital structure ratios (%) Debt (short-term borrowings, and long-term debt, net, including current portion) Cumulative preferred stock Common stock equity * At December 31. 2018 2017 2016 2015 2014 $ 2,546,525 $ 2,257,566 $ 2,094,368 $ 2,335,166 $ 2,987,323 143,653 119,951 142,317 135,714 137,641 $ 7,092,483 $ 6,717,311 $ 6,327,102 $ 6,037,712 $ 5,753,965 (2,175,510) (2,369,282) (2,476,352) (2,266,004) (2,577,342) $ 4,515,141 $ 4,240,959 $ 3,957,820 $ 3,771,708 $ 3,578,455 $ 5,967,503 $ 5,630,613 $ 5,431,903 $ 5,166,123 $ 5,083,589 $ — $ 49,963 $ 25,000 4,999 — $ — — $ — — — 1,418,802 1,318,516 1,319,260 1,278,702 1,199,025 1,957,641 1,845,283 1,799,787 1,728,325 1,682,144 34,293 34,293 34,293 34,293 34,293 $ 3,435,736 $ 3,253,054 $ 3,153,340 $ 3,041,320 $ 2,915,462 42.0 1.0 57.0 42.2 1.1 56.7 41.8 1.1 57.1 42.1 1.1 56.8 41.1 1.2 57.7 HEI owns all of Hawaiian Electric’s common stock. Therefore, per share data is not meaningful. 2018 results include the impact of the lower federal corporate tax rate as a result of the Tax Act, the benefits of which were returned to customers through a reduction in revenue requirements, as well as certain tax return adjustments, such as an increased pension deduction made in conjunction with the filing of the Company’s 2017 tax returns, which resulted in a net income tax benefit of $5 million that lowered the effective tax rate due to the additional tax benefits realized that were associated with the rate differential. The lower tax rate was partially offset by other Tax Act changes, including the non-deductibility of excess executive compensation and various fringe benefit costs. 2017 results include $20 million ($11 million, net of tax impacts) lower in RAM revenues than prior year due to expiration of 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric, and a $9 million adjustment, primarily to reduce deferred tax net asset balances (not accounted for under regulatory ratemaking) to reflect the lower rates enacted by Tax Act (see Note 11 of the Consolidated Financial Statements). In 2018, the Utilities reclassified “Contributions in aid of construction” to “Total property, plant and equipment, net,” which affects “Utility plant” and “Total assets” in the above table. Financial data for all prior periods have been updated to reflect the reclassification. Financial data for periods prior to January 1, 2016 has been updated to reflect the retrospective application of ASU No. 2015-03 (Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs). See “Cautionary Note Regarding Forward-Looking Statements” above, the “electric utility” sections and all information related to, or including, Hawaiian Electric and its subsidiaries in HEI’s MD&A and “Commitments and contingencies” in Note 3 of the Consolidated Financial Statements for discussions of certain contingencies that could adversely affect future results of operations, financial condition and cash flows. 31 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 and the related Notes that appear in Item 8 of this report. For information on factors that may cause HEI’s and Hawaiian Electric’s actual future results to differ from those currently contemplated by the relevant forward-looking statements, see “Forward-Looking Statements” at the front of this report and “Risk Factors” in Item 1A. The general discussion of HEI’s consolidated results should be read in conjunction with the Electric utility and Bank segment discussions that follow. HEI Consolidated Executive overview and strategy. HEI is a holding company with operations primarily focused on Hawaii’s electric utility and banking sectors. In 2017, HEI formed Pacific Current to make investments in non-regulated renewable energy and sustainable infrastructure projects. HEI has three reportable segments—Electric utility, Bank, and Other. Electric utility. 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. Bank. ASB is a full-service community bank serving both consumer and commercial customers in the State of Hawaii and has 49 branches on branches on the islands of Oahu (34), Maui (6), Hawaii (5), Kauai (3), and Molokai (1). Other. The Other segment comprises HEI’s corporate-level operating, general and administrative expenses and the results of Pacific Current. A major focus of HEI’s financial strategy is to grow core earnings/profitability of its Utilities and Bank in a controlled risk manner and improve operating, capital and tax efficiencies in order to support its dividend and deliver shareholder value, while at the same time, serving as a catalyst for change to improve the Hawaii economy, environment and community. Together, HEI’s unique combination of power and financial services companies provides 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. HEI is fully committed to a 100 percent renewable future for Hawaii. The Company’s electric utility is on track to achieve the next RPS milestone of 30% in 2020—having achieved an RPS of 27% for 2018, with approximately 475 MW of additional renewable generation contracted under PPAs (subject to PUC approval). Since 2011, the Company’s electric utility reduced the oil used to generate electricity by 1.58 million barrels and have cut greenhouse gas emissions by 18.9% compared to a 2010 baseline. Reports on the Company’s sustainability efforts can be found at: www.hawaiianelectric.com/clean-energy-hawaii/ sustainability-report. HEI consolidated results of operations. (dollars in millions, except per share amounts) Revenues Operating income Merger termination fee Net income for common stock Net income (loss) by segment: Electric utility Bank Other Net income for common stock Basic earnings per share Diluted earnings per share Dividends per share Weighted-average number of common shares outstanding (millions) Dividend payout ratio NM Not meaningful. $ $ $ $ $ $ 32 2018 % change 12 (4) — 22 2,861 333 — 202 $ 2017 % change 7 (3) (100) (33) 2,556 346 — 165 $ 144 83 (24) 202 1.85 1.85 1.24 108.9 67% $ 20 23 (13) $ 20 $ 22 22 $ — $ — 120 67 (22) 165 1.52 1.52 1.24 108.7 82% (16) $ 17 NM (33) $ (34) $ (34) $ — $ 1 2016 2,381 356 90 248 142 57 49 248 2.30 2.29 1.24 108.1 54% In 2018, net income for HEI common stock increased 20% to $202 million ($1.85 diluted earnings per share), compared to $165 million ($1.52 diluted earnings per share) in 2017, due to $24 million and $16 million higher net income at the Utilities and the Bank, respectively, partially offset by $3 million higher net loss at the “other” segment. The increase in the Utilities’ 2018 net income compared to 2017 was principally due to higher RAM/MPIR revenues, rate relief, the 2017 reduction of non- regulated deferred tax balances to reflect lower tax rates enacted by the Tax Act, partially offset by higher expenses. The increase in the Bank’s net income was primarily due to higher net interest income as a result of an increase in earning asset balances and yields and lower income tax expense as a result of the lower federal corporate tax rates from the Tax Act, partially offset by higher compensation and provision for loans losses. The “other” segment’s net loss was higher primarily due to higher interest and compensation expenses and lower tax benefits on expenses as a result of tax reform, partially offset by higher operating income from a full year of Pacific Current results. See “Electric utility,” “Bank,” and “HEI Consolidated—Other segment” sections below for additional information on year-to-year fluctuations. In 2017, net income for HEI common stock was $165 million ($1.52 diluted earnings per common share), down (34)% from $248 million ($2.29 diluted earnings per common share) in 2016, primarily due to the merger termination fee paid in 2016 by NEE. Excluding NEE-related income and expenses ($60 million after-tax), the decrease in net income from 2016 to 2017 was composed of the Utilities’ $22 million lower net income and the “other” segment’s $10 million higher net loss, partly offset by ASB’s $10 million higher net income. Impacting these results were $14.2 million ($9.2 million at the Utilities; $(1.0) million at ASB; $6.0 million at the “other” segment) of net loss, primarily composed of tax expenses/(benefits) to reduce deferred tax balances to reflect the lower rates enacted by the Tax Act and an ASB special employee bonus awarded after the passing of the Tax Act lowered corporate income taxes in the future. The Company’s effective tax rate was lower in 2018 compared to 2017, primarily due to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21% and the related amortization of excess deferred income taxes. In addition, the rate was further lowered by certain adjustments made in conjunction with the filing of the Company’s 2017 tax returns, including an increased pension deduction taken resulting in a net income tax benefit of $5 million associated with the rate differential. The lower tax rate was partially offset by other Tax Act changes, including the non-deductibility of excess executive compensation and various fringe benefit costs. The Company’s effective tax rate was higher in 2017 compared to 2016 primarily due to the (1) 2017 adjustment to accumulated deferred income tax balances (ADIT) (exclusive of ADIT related to the regulated rate base of the Utilities) for the new federal corporate tax rate of 21%, (2) 2016 deductibility of previously non-tax-deductible merger costs and (3) higher tax benefits recognized in 2016 for the domestic production activities deduction (DPAD) related to the Utilities’ generation activities. Other segment. The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI, ASB Hawaii, Inc. (ASB Hawaii), and Pacific Current, LLC. (in millions) Operating loss1 2018 2017 Increase (decrease) Primary reason(s) (16) (17) 1 Higher 2018 corporate operating, general and administrative expenses Interest expense & other (16) (10) (6) ($19 million in 2018 vs $17 million in 2017) related to higher compensation, offset by higher Pacific Current (Hamakua Energy) operating income. Increase due to higher average borrowings and higher average interest rates. Average borrowings increased due to $67 million of secured debt at Hamakua Energy (drawn in December 2017), higher commercial paper balances (primarily related to Mauo project construction), and a $100 million tranche B private placement drawn in December 2018 to fund a contribution of utility equity. Income tax benefit 8 5 3 Higher tax benefit due to an increase in pretax operating losses and interest expense, partially offset by a lower tax rate due to the Tax Act, excluding a one-time charge for the remeasurement of deferred tax assets ($5.7 million) related to the Tax Act in 2017. Net loss (24) (22) (2) 1 Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation. 33 (in millions) Operating loss 2017 2016 (17) (22) Merger termination Interest expense & other — (10) 90 (10) Increase (decrease) Primary reason(s) 5 Lower operating, general and administrative expenses ($17 million in 2017 vs $18 million in 2016) as in 2016, HEI had approximately $1 million (expenses, net of reimbursements of expenses from NEE and insurance) of expenses related to the previously proposed merger with NEE. (90) — Lower average borrowings in 2017 compared to 2016. In November 2017, a 2.99% $150 million term loan was used to retire term loans with resetting interest periods based on LIBOR rates. In 2016, a 4.41% senior note was refinanced to a lower rate Eurodollar term loan. In late December 2017, Hamakua Energy closed on $67 million of 4.02% senior secured notes. Income tax benefit (expense) 5 (9) 14 In 2017, HEI’s other segment included $5.7 million of tax reform-related tax expense, primarily to reduce net deferred tax asset balances to reflect the lower federal tax rate. In 2016, HEI’s other segment included $25 million of tax expense relating to the previously proposed merger and spin-off (net of taxes), comprised of taxes on merger termination fee and reimbursements of expenses from NEE and insurance ($34 million), partly offset by additional tax benefits on the previously non-tax- deductible merger- and spin-off-related expenses incurred in previous years ($6 million) and tax on 2016 merger-related expenses ($3 million). In 2016, HEI’s results also included other tax benefits recognized as a result of moving out of a federal net operating loss position. Net income (loss) (22) 49 (71) Economic conditions. The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers). Hawaii’s tourism industry, a significant driver of Hawaii’s economy, ended 2018 with growth in both visitor spending and arrivals. Visitor expenditures increased 6.8% and arrivals increased 5.9% in 2018 compared to 2017. Hawaii’s unemployment rate increased to 2.5% for December 2018, which was higher than the rate for December 2017 and lower than the national unemployment rate of 3.9%. It is also the second lowest unemployment rate in the nation. Hawaii real estate activity, as indicated by the home resale market, experienced a growth in median sales prices for single family homes and condominiums in 2018. Median sales prices for single family residential homes and condominiums on Oahu through December 2018 were higher by 4.6% and 3.7%, respectively, over the same time period in 2017. The number of closed sales for single family residential homes and condominiums were down by -7.7% and -2.5%, respectively, through December of 2018, compared to same time period of 2017. Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Although the price of crude oil fluctuates month to month, the recent trend over the last quarter has been a decreasing one which followed a 2.5-year stretch of general increases. At its December 2018 meeting, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate from 2.25% to 2.50% in view of realized and expected labor market conditions and inflation. At its meeting in January 2019, Hawaii’s Council on Revenues lowered its forecast for growth in the State General Fund tax revenue in fiscal year 2019 from 5.0% to 4.2%. While the economy is still performing well, the Council's decision to lower the estimate was based on the expectation of slower economic growth than in the past year and uncertainty about the future. The hotel employee strike, which started in early October 2018 and impacted thousands of hotel workers, ended after nearly two months. The partial Federal government shutdown then took effect in late December 2018 until January 25, 2019 when a stopgap bill was passed and signed to temporarily reopen the government through February 15, 2019. Most of the state’s federal employees are defense-related and were not impacted by the shutdown. The two most popular visitor attractions, Hawaii Volcanoes National Park on the island of Hawaii and the USS Arizona Memorial at Pearl Harbor, remained open during the shutdown with the support of alternative funding sources. Potential risks to the Hawaii economy include visitor infrastructure constraints, tight labor markets paired with moderate income gain and high housing costs, creating inflationary pressures. International trade tariffs and natural disasters also remain a source of great uncertainty. Liquidity and capital resources. As a result of the Tax Act, utility property is no longer eligible for bonus depreciation. Consequently, the initial cash requirement for future capital projects will generally increase approximately 10% because of the 34 loss of the immediate tax benefit from bonus depreciation. The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements for the foreseeable future. The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows: 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 2018 2017 $ $ 74 1,880 34 2,162 4,150 2% $ 45 1 52 100% $ 118 1,684 34 2,097 3,933 3% 43 1 53 100% HEI’s commercial paper borrowings and line of credit facility were as follows: (in millions) Commercial paper Line of credit draws Undrawn capacity under HEI’s line of credit facility Year ended December 31, 2018 Average balance End-of-period balance December 31, 2017 $ $ 50 — — $ 49 — 150 63 — 150 Note: This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s short-term borrowings in 2018 was $74.5 million. HEI utilizes short-term debt, typically commercial paper, to support normal operations, to refinance commercial paper, to retire long-term debt, to pay dividends and for other temporary requirements, including short-term financing needs of its subsidiaries. HEI also periodically makes short-term loans to Hawaiian Electric to meet Hawaiian Electric’s cash requirements, including the funding of loans by Hawaiian Electric to Hawaii Electric Light and Maui Electric, but no such short-term loans to Hawaiian Electric were outstanding as of December 31, 2018. HEI periodically utilizes long-term debt, historically unsecured indebtedness, to fund investments in and loans to its subsidiaries to support their capital improvement or other requirements, to repay long-term and short-term indebtedness and for other corporate purposes. See Notes 5 and 6 of the Consolidated Financial Statements for a brief description of the Company’s loans. HEI has a $150 million line of credit facility with no amounts outstanding as of December 31, 2018. See Note 5 of the Consolidated Financial Statements. The rating of HEI’s commercial paper and debt securities could significantly impact the ability of HEI to sell its commercial paper and issue debt securities and/or the cost of such debt. As of February 13, 2019, the Fitch, Moody’s and S&P ratings of HEI were as follows: Long-term issuer default and senior unsecured; long-term rating; corporate credit; respectively Commercial paper Outlook Fitch Moody’s WR* BBB P-3 F3 Stable Stable S&P BBB- A-3 Stable * Moody’s long-term debt rating was withdrawn because HEI does not currently have any outstanding, publicly traded debt. Moody’s continues to rate Hawaiian Electric’s long-term debt. See Electric utility MD&A. Note: The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. Issuances of common stock through the Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan (DRIP), Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan provided new capital of $30 million (approximately 1 million shares) in 2016. From January 1, 2016 through January 5, 2016, and from December 7, 2016 to date, HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market 35 purchases of its common stock rather than new issuances. Also, from June 2, 2016 through August 9, 2016, HEI satisfied the share purchase requirements of the HEIRSP and ASB 401(k) Plan through open market purchases of its common stock. Operating activities provided net cash of $499 million in 2018, $420 million in 2017 and $496 million in 2016. Investing activities used net cash of $792 million in 2018, $815 million in 2017 and $736 million in 2016. In 2018, net cash used in investing activities was primarily due to capital expenditures, purchases of available-for-sale investment securities, net increase in loans held for investment, purchases of held-to-maturity investment securities, purchase of stock from Federal Home Loan Bank and contributions to low-income housing investments, partly offset by receipt of repayments from available-for-sale investment securities, contributions in aid of construction, proceeds from the sale of commercial loans, redemption of stock from Federal Home Loan Bank and repayments from held-to-maturity investment securities. In 2017, net cash used in investing activities was primarily due to a Hawaiian Electric’s consolidated capital expenditures (net of contributions in aid of construction), Hamakua Energy’s acquisition of a power plant and ASB’s purchases of investment securities, partly offset by the repayments of investment securities, proceeds from sale of commercial loans and a net decrease in loans held for investment. Financing activities provided net cash of $200 million in 2018, $378 million in 2017 and $219 million in 2016. In 2018, net cash provided by financing activities included proceeds from issuance of long-term debt, net increases in deposits and retail repurchase agreements, partly offset by payment of common and preferred stock dividends, long-term debt maturities and net decreases in short-term debt and other bank borrowings. In 2017, net cash provided by financing activities included net increases in deposits and long-term debt and net increases in short-term borrowings and ASB’s retail repurchase agreements, partly offset by a net decrease in ASB’s other borrowings and payment of common and preferred stock dividends. Other than capital contributions from their parent company, intercompany services (and related intercompany payables and receivables), Hawaiian Electric’s periodic short-term borrowings from HEI (and related interest) and the payment of dividends to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank segments’ discussions of their cash flows in their respective “Financial condition-Liquidity and capital resources” sections below.) During 2018, Hawaiian Electric, ASB (through ASB Hawaii) and Pacific Current paid cash dividends to HEI of $103 million, $50 million and $1 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. 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 13 of the Consolidated Financial Statements. Forecasted HEI consolidated “net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2019 through 2021 consists primarily of the net capital expenditures of the Utilities, estimated to range from $1.2 billion to $1.4 billion over the next three years. In addition to the funds required for the Utilities’ construction programs and debt maturities (see “Electric utility–Liquidity and capital resources”), approximately $50 million will be required in 2021 to repay HEI’s $50 million private placement note maturing in March 2021, which is expected to be repaid with the proceeds from the issuance of commercial paper, bank borrowings, other medium- or long-term debt, common stock and/or dividends from subsidiaries. Additional debt and/or equity financing may be utilized to invest in the Utilities, bank or Pacific Current; to pay down commercial paper or other short-term borrowings; or to fund unanticipated expenditures not included in the 2019 through 2021 forecast, such as increases in the costs of or an acceleration of the construction of capital projects of the Utilities or unanticipated utility capital expenditures. In addition, existing debt may be refinanced prior to maturity with additional debt or equity financing (or both). 36 Selected contractual obligations and commitments. Information about payments under the specified contractual obligations and commercial commitments of HEI and its subsidiaries was as follows: December 31, 2018 (in millions) Contractual obligations Investment in qualifying affordable housing projects Time certificates Other bank borrowings Short-term borrowings Long-term debt Interest on CDs, other bank borrowings, short-term loan and long-term debt Operating leases, service bureau contract, and maintenance agreements Hawaiian Electric open purchase order obligations1 Hawaiian Electric fuel oil purchase obligations (estimate based on December 31, 2018 fuel oil prices) Hawaiian Electric power purchase–minimum fixed capacity obligations Liabilities for uncertain tax positions Total (estimated) Less than 1 year 1-3 years 3-5 years More than 5 years Total $ $ 6 509 110 74 4 95 24 75 140 119 — 1,156 $ $ 11 236 — — 154 170 34 7 16 195 2 825 $ — $ 80 — — 360 150 15 3 — 118 — 726 $ $ 1 3 — — 1,372 797 11 — — 279 — 2,463 $ $ 18 828 110 74 1,890 1,212 84 85 156 711 2 5,170 1 Includes contractual obligations and commitments for capital expenditures and expense amounts. 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, 2018, the fair value of the assets held in trusts to satisfy the obligations of the Company’s retirement benefit plans did not exceed the retirement benefit plans’ benefit obligation. Minimum funding requirements for retirement benefit plans have not been included in the tables above; however, see Note 9 of the Consolidated Financial Statements for 2019 estimated contributions. See Note 3 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments. See Note 4 of the Consolidated Financial Statements for a further discussion of ASB’s commitments. The Company adopted ASU No. 2016-02 on January 1, 2019, which had a material effect on its balance sheet as of January 1, 2019 due to the recognition of lease liabilities and right-of-use assets. See Note 1, “Summary of Significant Accounting Policies—Recent accounting pronouncements—Leases,” of the Consolidated Financial Statements. Off-balance sheet arrangements. Although the Company and the Utilities have off-balance sheet arrangements, management has determined that it has no off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the Company’s and the Utilities’ financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, including the following types of off-balance sheet arrangements: 1. obligations under guarantee contracts, 2. retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as credit, liquidity or market risk support to that entity for such assets, 3. obligations under derivative instruments, and 4. obligations under a material variable interest held by the Company or the Utilities in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company or the Utilities, or engages in leasing, hedging or research and development services with the Company or the Utilities. 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; regulatory assets and liabilities; electric utility unbilled revenues; allowance for loan losses; and fair value. Management considers an accounting estimate to be material if it 37 requires assumptions to be made that were uncertain at the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on the Company’s results of operations or financial condition. In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements--that is, management believes that the policies discussed below are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments. The policies affecting both of the Company’s two principal segments are discussed below and the policies affecting just one segment are discussed in the respective segment’s section of “Material estimates and critical accounting policies.” Management has reviewed the material estimates and critical accounting policies with the HEI Audit Committee and, as applicable, the Hawaiian Electric Audit Committee. For additional discussion of the Company’s accounting policies, see Note 1 of the Consolidated Financial Statements and for additional discussion of material estimates and critical accounting policies, see the electric utility and bank segment discussions below under the same heading. Pension and other postretirement benefits obligations. The Company’s reported costs of providing retirement benefits are dependent upon numerous factors resulting from actual plan experience and assumptions about future experience. For example, retirement benefits costs are impacted by actual employee demographics (including age and compensation levels), the level of contributions to the plans, earnings and realized and unrealized gains and losses on plan assets, and changes made to the provisions of the plans. Costs may also be significantly affected by changes in key actuarial assumptions, including the expected return on plan assets, the discount rate and mortality. The Company’s accounting for retirement benefits under the plans in which the employees of the Utilities participate is also adjusted to account for the impact of decisions by the PUC. Changes in obligations associated with the factors noted above may not be immediately recognized as costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. Based on various assumptions in Note 9 of the Consolidated Financial Statements, sensitivities of the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO) as of December 31, 2018, 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 (147)/166 (137)/156 ‘+/- 50 ‘+/- 100 (12)/13 3/(3) (11)/12 3/(3) Also, see Notes 1 and 9 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 3 and 4 of the Consolidated Financial Statements. Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities using tax rates expected to be in effect when such 38 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 11 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. Electric utility Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, to approximately 95% of the state’s population, and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, flexible, and dynamic electric grid that enables an optimal mix of distributed energy resources, such as private rooftop solar, demand response, and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045. Transition to renewable energy. The Utilities are fully committed to a 100 percent renewable future for Hawaii and are partnering with the State of Hawaii in achieving its Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law requires electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045, respectively. The regulatory framework includes a number of mechanisms designed to provide utility financial stability during the transition toward the state’s 100% renewable energy future. Under the sales decoupling mechanism, the utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have declined as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the major project interim recovery mechanism, which allow the utilities to recover and earn on certain approved major capital projects placed into service in between rate cases. See “Item 1. Business—HEI Consolidated” and “Decoupling” in Note 3 of the Consolidated Financial Statements. The Utilities have made significant progress on the path to clean energy and have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal. The Utilities’ RPS for 2018 was approximately 27% and is on track to achieve the 2020 RPS goal of 30%. (See “Developments in renewable energy efforts” below). Also, compared to 2011, the Utilities have reduced the use of oil to produce electricity by 1.58 million barrels. The combination of replacing fossil fuel generation with renewables, customer conservation efforts, and energy efficiency actions has allowed the Utilities to achieve its 2020 greenhouse gas emissions reduction target of 16% (compared to a 2010 baseline) ahead of schedule in 2014. As of the end of 2018, the Utilities have achieved a 18.9% decrease in greenhouse gas emissions compared to 2010. Power Supply Improvement Plans and Integrated Grid Planning. The December 2016 PSIP Update Report accepted by the PUC in July 2017 includes the continued growth of private rooftop solar and describes the grid and generation modernization work needed to reliably integrate an estimated total of 165,000 private systems by 2030, and additional grid-scale renewable energy resources. In addition, the plans forecast the addition of 360 MW of grid-scale solar and 157 MW of grid-scale wind, with 8 MW derived from the first phase of the community-based renewable energy (CBRE) program. The plans also include 115 MW from Demand Response (DR) programs, which can shift customer use of electricity to times when more renewable energy is available, potentially increasing the capacity to add even more renewable resources. The December 2016 Update Report emphasizes work that is in progress or planned through 2021 on each of the five islands the Utilities serve. Achieving 100% renewable energy will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities filed its Integrated Grid Planning (IGP) Report with the PUC on March 1, 2018, which provides an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy pathways that incorporates customer and stakeholder input. 39 The PUC opened a docket for the IGP process that the Utilities had proposed. As required, the Utilities filed an IGP Work plan on December 14, 2018, describing the timing and scope of major activities that will occur in the IGP process. Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated DR Portfolio Plan that will enhance system operations and reduce costs to customers. The reduction in cost for the customer will take the form of either rates or incentive-based programs that will compensate customers for their participation individually, or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets. In October 2017, the PUC approved the Utilities request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of AFUDC, through the Renewable Energy Infrastructure Program Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. In 2019, the Utilities are expected to sign a number of multi-year Grid Services Purchase Agreements with third party aggregators. These contracts pay service providers to aggregate grid-supporting capabilities from customer-sited Distributed Energy Resources. The first of these five-year contracts in a not-to-exceed amount of $21 million has been executed and is expected to not only deliver benefit through efficient grid operations and avoided fuel costs over that 5-year period, but as the PUC considers Performance-based Regulation, demonstrated savings resulting from these contracts could results in shared savings for the Utilities. This complements the Utilities’ transformation and supports customer choice. On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio, and ordered the Utilities to complete contracting by June 2018 and initiate first implementation by the third quarter of 2018. The Utilities have selected the aggregators and commenced negotiations in July 2018, with many technical requirements discussions held throughout 2018. The aggregator contracts will be finalized in the first quarter of 2019. Grid modernization. The overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. Under the Grid Modernization Strategy, new technology will help triple private rooftop solar and make use of rapidly evolving products including storage and advanced inverters. The Utilities have begun work to implement the Grid Modernization Strategy by issuing solicitations for advanced meters, a meter data management system, and a communications network. The Utilities filed an application with the PUC on June 21, 2018, for the first implementation phase, estimated to cost approximately $86 million and expected to be incurred over five years. Additional applications will be filed later to implement subsequent phases of the strategy. Community-Based Renewable Energy. In December 2017, the PUC adopted a CBRE program framework which allows customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. The program has two phases. The first phase, which commenced in July 2018, totals 8 MW of solar PV only with one credit rate for each island. The Utilities’ role is limited to administrative only during the first phase. As administrators, the Utilities will work with subscriber organizations to allocate capacity, answer general program questions, verify subscriber eligibility and process bill credits for subscribers. The Utilities are in the process of verifying the projects and awarding the capacity to interested subscriber organizations. The response has been positive; four of the five islands that the Utilities serve have received applications that equal or exceed what is allowed in phase 1. The second phase will commence after review of the first full year of the first phase. The second phase is contemplated to be a larger capacity and include multiple credit rates (e.g., time of day) and various technologies. The Utilities will have the opportunity to develop self-build projects; however 50% of utility capacity will be reserved for low to moderate income customers. Microgrid services tariff proceeding. On July 10, 2018, the PUC issued an order instituting a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 (July 10, 2018 Act). The PUC will issue subsequent order(s) establishing a statement of issues to be addressed in the order, and issue a procedural schedule to govern this proceeding, after the deadline for the filing of motions to intervene or participate. Decoupling. See “Decoupling” in “Item 1. Business—HEI Consolidation” and Note 3 of the Consolidated Financial Statements for a discussion of decoupling. As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility’s rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings 40 of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2018, 2017 and 2016 did not trigger the earnings sharing mechanism for the Utilities. Regulated returns. Actual and PUC-allowed returns, as of December 31, 2018, were as follows: % Rate-making Return on rate base (RORB)* Year ended December 31, 2018 Utility returns PUC-allowed returns Difference Hawaiian Electric 6.55 7.57 Hawaii Electric Light 6.98 7.80 Maui Electric Hawaiian Electric Maui Electric Hawaiian Electric 6.26 7.43 7.36 9.50 8.41 9.50 7.59 9.50 7.89 9.50 ROACE** Hawaii Electric Light Rate-making ROACE*** Hawaii Electric Light 8.08 9.50 Maui Electric 7.38 9.50 (2.12) (1.02) (0.82) (1.17) (2.14) (1.09) (1.91) (1.61) (1.42) * Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates. ** Recorded net income divided by average common equity. *** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation. The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, the low RBA interest rate (currently a short-term debt rate rather than the actual cost of capital), O&M increases and return on capital additions since the last rate case in excess of indexed escalations, and the first-year averaging convention for MPIR investments for rate base purposes. 41 Results of operations. • 2018 vs. 2017 2018 2,547 $ 2017 2,258 $ Increase (decrease) (dollars in millions, except per barrel amounts) $ 289 Revenues. Net increase largely due to: $ 180 70 46 39 higher fuel prices1 higher purchased power energy costs2 higher rate relief higher RAM and MPIR revenues (46) Tax reform adjustment 761 639 588 587 173 52 Fuel oil expense. Increase due to higher fuel oil prices and higher kWh generated Purchased power expense. Net increase due to: 63 (9) (3) higher purchased power energy price lower kWh purchased lower PGV capacity charges 461 412 49 Operation and maintenance expense. Increase largely due to: 24 reset of pension costs included in rates as part of rate case decisions 4 3 3 2 2 2 2 2 2 2 1 higher ERP costs related to outside consultants 25KV underground circuit repair work higher operation and maintenance expense for generation plants higher corrective maintenance for transmission and distribution facilities write-off of preliminary engineering costs for LNG projects write-off of smart grid costs higher medical premium costs higher workers’ compensation claims operation expense for Schofield Generating Station placed in service in June Increased IT and cyber security costs one-time rent expense adjustment for existing substation land Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2017 Operating income. Decrease due to higher operation and maintenance and other expenses, and tax reform revenue adjustment, offset in part by higher RAM and MPIR revenues and rate relief Net income for common stock. Increase due to higher RAM and MPIR revenues, rate relief and lower taxes, offset in part by higher expenses. See below for discussion on effective tax rate Return on average common equity Average fuel oil cost per barrel 1 Kilowatthour sales (millions) Number of employees (at December 31) 444 242 144 408 264 120 36 (22) 24 7.6% 6.6% 1% 87.90 8,689 2,704 68.78 8,690 2,724 19.12 (1) (20) 1 The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers. 2 The rate schedule of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in purchase power expenses (except purchased energy costs) are passed on to customers. 42 • 2017 vs. 2016 2017 2,258 $ 2016 2,094 $ Increase (decrease) (dollars in millions, except per barrel amounts) $ 164 Revenues. Net increase largely due to: $ 150 40 15 (2) (5) higher fuel prices1 higher purchased power energy costs2 higher RAM revenue and interim rate increase at Hawaii Electric Light lower purchased power non-energy costs2 lower kWh generated (12) lower kWh purchased 588 587 412 408 264 120 455 563 400 387 290 142 133 24 12 21 (26) (22) 6.6% 8.1% (1.5)% 68.78 8,690 2,724 53.49 8,845 2,662 15.29 (155) 62 (20) lower RAM revenues due to expiration of 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower kWh generated Purchased power expense. Increase due to higher purchased power energy prices largely due to higher fuel prices, partly offset by lower kWh purchased2 9 5 3 1 1 (3) (4) Operation and maintenance expense. Net increase due to: higher overhaul costs due to more overhauls being performed in 2017 higher ERP project costs (project commenced in 2017) higher transmission and distribution operation and maintenance costs higher Grid modernization consultant cost (none in 2016) write off of portion of deferred Geothermal RFP costs higher LNG consulting costs to negotiate LNG contract in 2016, which was subsequently terminated following HEI/Nextera merger termination higher PSIP consulting costs incurred in 2016, in order to complete the PSIP update in April 2016 and December 2016 Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2016 Operating income. Decrease due to lower RAM revenues and higher operation and maintenance and other expenses Net income for common stock. Decrease due to lower operating income and higher income taxes due to write-down of deferred tax assets to reflect the lower tax rates enacted by the Tax Act Return on average common equity Average fuel oil cost per barrel 1 Kilowatthour sales (millions) 3 Number of employees (at December 31) 1 The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers. 2 The rate schedule of the electric utilities currently contains purchase power adjustment clauses (PPACs) through which changes in purchase power expenses (except purchased energy costs) are passed on to customers. 3 kWh sales were lower in 2017 when compared to the prior year due largely to continued energy efficiency and conservation efforts by customers and increasing levels of private customer-sited renewable generation. Hawaiian Electric’s effective tax rate (combined federal and state income tax rates) was lower in 2018 compared to 2017, primarily due to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21% and the related amortization of excess deferred income taxes. In addition, the rate was further lowered by certain adjustments made in conjunction with the filing of the Company’s 2017 tax returns, including an increased pension deduction taken resulting in a net income tax benefit of $5.3 million associated with the rate differential. The lower tax rate was partially offset by other Tax Act changes, including the non-deductibility of excess executive compensation and various fringe benefit costs. Hawaiian Electric’s effective tax rate (combined federal and state income tax rates) was higher for 2017 compared to 2016, primarily due to the impact of the 2017 adjustment to accumulated deferred income tax balances (exclusive of accumulated deferred income tax balances related to the regulated rate base of the Utilities) for the new federal corporate tax rate of 21%. 43 Most recent rate proceedings. Unless otherwise agreed or ordered, each electric utility is currently required by PUC order to initiate a rate proceeding every third year (on a staggered basis) to allow the PUC and the Consumer Advocate to regularly evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability and integrate more renewable energy. The PUC may grant an interim increase within 10 to 11 months following the filing of an application, but there is no guarantee of such an interim increase and interim amounts collected are refundable, with interest, to the extent they exceed the amount approved in the PUC’s final D&O. The timing and amount of any final increase is determined at the discretion of the PUC. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE and RORB) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O. In 2018, final D&Os were issued by the PUC for the Hawaiian Electric 2017 rate case and the Hawaii Electric Light 2016 rate case. Interim rates for Maui Electric’s 2018 rate case were effective on August 23, 2018, with a final D&O pending. In December 2018, Hawaii Electric Light filed its 2019 rate case. Test year (dollars in millions) Hawaiian Electric 20171 Request Interim increase Interim increase with Tax Act Final increase Hawaii Electric Light 20162 Request Interim increase Interim increase with Tax Act Final increase 2019 Request Maui Electric 2018 Request Interim increase Date (filed/ implemented) Amount % over rates in effect ROACE (%) RORB (%) Rate base Stipulated agreement reached with Consumer Advocate Common equity % 12/16/16 $ 106.4 2/16/18 4/13/18 9/1/18 9/19/16 8/31/17 5/1/18 10/1/18 36.0 (0.6) (0.6) $ 19.3 9.9 1.5 — 6.9 2.3 — — 6.5 3.4 0.5 — 10.60 9.50 9.50 9.50 10.60 9.50 9.50 9.50 8.28 7.57 7.57 7.57 $ 2,002 1,980 1,993 1,993 $ 8.44 7.80 7.80 7.80 479 482 481 481 57.36 57.10 57.10 57.10 57.12 56.69 56.69 56.69 Yes Yes 12/14/18 $ 13.4 3.4 10.50 8.30 $ 537 56.91 10/12/17 $ 8/23/18 30.1 12.5 9.3 3.82 10.60 9.50 8.05 $ 7.43 473 462 56.94 57.02 Yes Note: The “Request” date reflects the application filing date for the rate proceeding. The “Interim increase” and “Final increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase. 1 Final decision and order was issued on June 22, 2018. 2 Final decision and order was issued on June 29, 2018. See also “Most recent rate proceedings” in Note 3 of the Consolidated Financial Statements. The effects of the Tax Act on the Utilities’ regulated operations accrued to the benefit of customers from the effective date of January 1, 2018 and were addressed in the Utilities’ rate cases summarized above. Generally, the lower corporate income tax rate lowers the Utilities’ revenue requirements through lower income tax expense and through the amortization of a regulatory liability for excess accumulated deferred income taxes (ADIT) resulting from the recording of ADIT in prior years at the higher income tax rate. The revenues collected in the first and a portion of the second quarters of 2018 reflected income taxes at the old 35% rate and consequently, the Utilities reduced revenues to the extent the income taxes collected in 2018 revenue exceeded the taxes accrued at the new 21% rate. This reduction was recorded to a regulatory liability and electric rates were adjusted in the second quarter to initiate the return of the 2018 excess to customers over various amortization periods. In addition, rates have been adjusted to begin returning the excess ADIT that was accumulated as of December 31, 2017. The Tax Act also excludes the Utilities’ asset additions from qualifying for bonus depreciation (other than certain grandfathered utility property), which has the offsetting effect of increasing revenue requirement by lowering ADIT and thereby increasing rate base on a prospective basis. 44 Performance-based regulation and ratemaking legislation. See “Performance incentive mechanisms” and “Performance- based regulation proceeding” in Note 3 of the Consolidated Financial Statements. Depreciation docket. In December 2016, the Utilities filed an application with the PUC for approval of changes in the depreciation and amortization rates and amortization period for CIAC, based on a 2015 Book Depreciation Study. In July 2018, the PUC approved the stipulated agreement between the Utilities and the Consumer Advocate, which among other things: • Authorized the use of consolidated depreciation and amortization rates rather than separate depreciation and amortization rates for the three utilities • Established revised depreciation and amortization rates for the three utilities • Approved the implementation of the new depreciation and amortization rates and other changes to coincide with the effective date of the interim or final base rates approved in the subsequent rate case for each utility, beginning with Maui Electric’s ongoing 2018 test year rate case Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Consolidated Financial Statements and the following: New renewable PPAs. • • • • South Maui Renewable Resources (2.87 MW solar) reached commercial operations on May 5, 2018, and Kuia Solar (2.87 MW solar) reached commercial operations on October 4, 2018. Each project’s PPA with Maui Electric was approved by the PUC in February 2016, subject to certain modifications and conditions. In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 between Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM) for a proposed 24-MW wind farm on Oahu. The NPM wind farm was expected to be placed into service by August 31, 2019, but has been delayed due to an appeal of the decision in the Habitat Conservation Permit contested case. In July 2017, the PUC approved, with certain modifications and conditions, three PPAs for solar energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for 14.7 MW and Kawailoa Solar, LLC for 49.0 MW. The three projects are now owned by Clearway Energy Group LLC, which is an investment of Global Infrastructure Partners. The three projects are expected to be in service by the end of 2019. In July 2018, the PUC approved Maui Electric’s PPA with Molokai New Energy Partners to purchase solar energy from a PV plus battery storage project. The 4.88 MW project will deliver no more than 2.64 MW at any time to the Molokai system and is expected to be in service by January 2020. Tariffed renewable resources. • As of December 31, 2018, there were approximately 461 MW, 98 MW and 108 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely Standard Interconnection Agreement, Net Energy Metering, Net Energy Metering Plus, Customer Grid Supply, Customer Self Supply, Customer Grid Supply Plus and Interim Smart Export. As of December 31, 2018, an estimated 28% of single-family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 17% of the Utilities’ total customers have solar systems. • The Utilities began accepting energy from feed-in tariff projects in 2011. As of December 31, 2018, there were 33 MW, 3 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively. Biofuel sources. • In July 2018, the PUC approved Hawaiian Electric’s 3-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 4 million gallons of biodiesel at Hawaiian Electric’s Schofield Generating Station and the Honolulu International Airport Emergency Power Facility (HIA Facility) and any other generating unit on Oahu, as necessary. The PBT contract became effective on November 1, 2018. Hawaiian Electric also has a spot buy contract with PBT to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was recently extended through June 2019. 45 • Hawaiian Electric has a contingency supply contract with REG Marketing & Logistics Group, LLC to also supply biodiesel to any generating unit on Oahu in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2019, and will continue with no volume purchase requirements. Requests for renewable proposals, expressions of interest, and information. • Under a request for proposal process governed by the PUC and monitored by independent observers, in February 2018, the Utilities issued RFPs for 220 MW of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 60 MW of renewable generation on Maui. The Utilities selected a final award group for Hawaii Island in August 2018 and for Maui and Oahu in September 2018. The Utilities executed in December 2018, a total of seven renewable generation PPAs utilizing photovoltaic technology paired with a battery storage system, subject to PUC approval, as follows: Number of contracts Total photovoltaic size (MW) BESS Size (MW/MWh) Guaranteed commercial operation dates Contract term (years) Total projected annual payment (in millions) 3 2 2 7 127 60 75 262 127 / 508 60 / 240 75 / 300 262 / 1048 12/31/2021 7/20/2021 & 6/30/2022 7/20/2021 & 6/30/2022 20 $ 25 25 $ 27.9 14.1 17.6 59.6 Utilities Hawaiian Electric Hawaii Electric Light Maui Electric Total The Utilities are requesting PUC approval to recover the total projected annual payment of $59.6 million through the PPAC to the extent such costs are not included in base rates. • • In October 2017, the Utilities filed a draft request for proposal with the PUC for 40 MW of firm renewable generation on Maui (Maui Firm RFP) to be in service by the end of 2022. The Utilities are currently working with the independent observer for the Maui Firm RFP to update and revise the draft Maui Firm RFP for filing with the PUC for approval. In January 2017, Hawaiian Electric issued requests for Onshore Wind Expression of Interest to developers that are capable of developing utility scale onshore wind projects that are eligible to capture the federal Investment Tax Credit for Large Wind on the island of Oahu. In October 2018, Hawaiian Electric entered into a power purchase agreement with Eurus for a 46.8 MW onshore wind project, subject to PUC approval. Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 and “Recent tax developments” in Note 11 of the Consolidated Financial Statements. Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the Federal Register the final regulations required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian Electric submitted the final site-specific studies to the DOH in December 2016 for the Honolulu and Waiau power plants and in September 2017 for the Kahe power plant. Hawaiian Electric will work with the DOH to identify the appropriate compliance methods for the 316(b) rule. Until new permits are issued by DOH, Hawaiian Electric is operating the facilities under administrative extensions under the prior permit. Final compliance costs may vary depending on the outcome of the final permit. Impact of lava flows. In May 2018, a lava eruption occurred within the Leilani Estates subdivision, located along the lower East Rift Zone of Kilauea Volcano in the Puna district on the island of Hawaii, and affected approximately 3,000 of the 86,000 Hawaii Electric Light customers. As of December 31, 2018, there was no active flow. The flow damaged some of Hawaii Electric Light’s property in the affected area and also resulted in the shutdown of independent power producer PGV’s facilities. Hawaii Electric Light continues to serve the load of Hawaii Island without capacity from PGV. Hawaii Electric Light and PGV are in discussions on the requirements for PGV to return to service, however, the Utilities expect to meet its 2020 RPS goals without the return of PGV to service. The financial impact to Hawaii Electric Light has not been material. 46 Liquidity and capital resources. As a result of the Tax Act, utility property is no longer eligible for bonus depreciation. Consequently, the initial cash requirement for future capital projects will generally increase approximately 10% because of the loss of the immediate tax benefit from bonus depreciation. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures, investments, debt repayments, retirement benefit plan contributions and other cash requirements in the foreseeable future. Hawaiian Electric’s consolidated capital structure was as follows: December 31 (dollars in millions) Short-term borrowings Long-term debt, net Preferred stock Common stock equity 2018 2017 $ $ 25 1,419 34 1,958 3,436 1% $ 41 1 57 100% $ 5 1,369 34 1,845 3,253 —% 42 1 57 100% Hawaiian Electric’s commercial paper borrowings, borrowings from HEI, 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, 2018 Average balance End-of-period balance December 31, 2017 $ $ 85 — — — — $ — — 200 5 — — 200 1 The maximum amount of external short-term borrowings by Hawaiian Electric during 2018 was $157 million. At December 31, 2018, Hawaiian Electric had no short-term borrowings from Hawaii Electric Light or Maui Electric. 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 on a short-term basis. The intercompany borrowings among the Utilities, but not the borrowings from HEI, are eliminated in the consolidation of Hawaiian Electric’s financial statements. The Utilities periodically utilize long-term debt, borrowings of the proceeds of special purpose revenue bonds (SPRBs) issued by the Department of Budget and Finance of the State of Hawaii (DBF) and the issuance of privately placed unsecured senior notes bearing taxable interest, to finance the Utilities’ capital improvement projects, or to repay short-term borrowings used to finance such projects. The PUC must approve issuances, if any, of equity and long-term debt securities by the Utilities. Hawaiian Electric has a $200 million line of credit facility with no amounts outstanding at December 31, 2018. See Note 5 of the Consolidated Financial Statements. As of February 13, 2019, the Fitch, Moody’s and S&P ratings of Hawaiian Electric were as follows: Long-term issuer default, long-term issuer and corporate credit, respectively Commercial paper Senior unsecured debt/special purpose revenue bonds Hawaiian Electric-obligated preferred securities of trust subsidiary Cumulative preferred stock (selected series) Subordinated debt Outlook * Not rated. Fitch BBB+ F2 A- * * BBB Stable Moody’s Baa2 P-2 Baa2 Baa3 Ba1 * Stable S&P BBB- A-3 BBB- BB * * Stable The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. 47 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. Upon PUC approval received in April 2018 (April 2018 Approval), on May 30, 2018, Hawaiian Electric, Hawaii Electric Light and Maui Electric issued through a private placement, $75 million, $15 million and $10 million, respectively, of unsecured senior notes bearing taxable interest. The April 2018 Approval also authorized the use of the expedited approval procedure to request for the remaining additional taxable debt to be issued during 2019 through 2021, with certain conditions, for up to $205 million and $15 million for Hawaiian Electric and Hawaii Electric Light, respectively. Maui Electric does not have authorization to issue additional taxable debt beyond 2018. See Note 6 of the Consolidated Financial Statements. On February 26, 2019, the PUC approved Hawaiian Electric and Hawaii Electric Light’s request to issue refunding special purpose revenue bonds (SPRBs) prior to December 31, 2020 to refinance their outstanding Series 2009 SPRBs in the amount of up to $90 million and $60 million, respectively. On October 26, 2018, the Utilities requested PUC approval to issue SPRBs in the amounts of up to $70 million, $2.5 million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities’ capital improvement programs. On November 29, 2018, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures on November 28, 2019. Hawaiian Electric drew the first $25 million on November 29, 2018 and the second $25 million on January 31, 2019. See Note 5 of the Consolidated Financial Statements. On January 31, 2019, the Utilities received PUC approval to issue the remaining authorized amounts under the April 2018 Approval in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures prior to maturity. In addition, the Utilities received approval to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively. On October 22, 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 million for Hawaiian Electric and up to $100 million each for Hawaii Electric Light and Maui Electric, with the new total “up to” amounts of $430 million for Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021 to December 31, 2022. In December 2018, Hawaiian Electric sold $70.7 million of its common stock to HEI and Maui Electric sold $1.5 million of its common stock to Hawaiian Electric. Hawaii Electric Light did not issue common stock in 2018. Cash flows. (in thousands) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities $ 2018 393,613 (405,182) 34,929 2018 Cash Flows Compared to 2017: Years ended December 31 2017 335,186 (372,287) (24,668) Change $ 58,427 (32,895) 59,597 $ Change $ (34,731) $ (84,088) 7,213 2016 369,917 (288,199) (31,881) Net cash provided by operating activities: The increase in net cash provided by operating activities in 2018 over 2017 was impacted by the following: • Higher cash receipts from customers due to increased customer bills as a result of higher rates and higher fuel prices; • Lower cash contributions made to retirement benefit plans in 2018 due to the application of the 2011 contributions in excess of NPPC to reduce the 2018 contributions to an amount less than NPPC; and • Offset by higher revenue taxes paid due to higher revenues resulting from higher rates and higher fuel prices, and higher income taxes paid due to lower deductions recognized in 2018. Net cash used in investing activities: The increase in net cash used in investing activities in 2018 over 2017 was primarily driven by increased capital expenditures for construction activities and lower proceeds from contributions in aid of construction. 48 Net cash provided by financing activities: The increase in net cash provided by financing activities in 2018 over 2017 was primarily driven by higher proceeds from issuance of common stock and other bank borrowings, partially offset by higher common stock dividends paid in 2018. 2017 Cash Flows Compared to 2016: Net cash provided by operating activities: The decrease in net cash provided by operating activities in 2017 over 2016 was impacted by the following: • Lower cash from an increase in fuel oil stock due to an increase in fuel prices; • Lower cash from an increase in unbilled revenues due to higher fuel prices; and • Lower cash due to refund of federal income taxes in 2016 based on bonus depreciation enacted in the fourth quarter of 2015 (similar treatment was not granted in the fourth quarter of 2016). Net cash used in investing activities: The increase in net cash used in investing activities in 2017 over 2016 was driven primarily by an increase in capital expenditures related to construction activities, offset by higher contributions in aid of construction and capital goods tax credit. Net cash used in financing activities: The decrease in net cash used in financing activities in 2017 over 2016 was driven primarily by lower common stock dividends paid in 2017. Forecast capital expenditures. For the five-year period 2019 through 2023, the Utilities forecast up to $2.2 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2019 to 2023 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations). Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities. 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, 2018 (in millions) Less than 1 year Payments due by period 3-5 years 1-3 years More than 5 years Short-term borrowings Long-term debt Interest on long-term debt Operating leases Open purchase order obligations ¹ Fuel oil purchase obligations (estimate based on December 31, 2018 fuel oil prices) Purchase power obligations-minimum fixed capacity charges Liabilities for uncertain tax positions Total (estimated) $ $ 25 — 68 6 75 140 119 — 433 $ $ — $ 96 128 11 7 16 195 2 455 $ — $ 152 125 4 3 — 118 — 402 $ — $ 1,179 761 3 — — 279 — 2,222 $ ¹ Includes contractual obligations and commitments for capital expenditures and expense amounts. Total 25 1,427 1,082 24 85 156 711 2 3,512 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, 2018, 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 49 retirement benefit plans have not been included in the table above. See Note 9 of the Consolidated Financial Statements for retirement benefit plan obligations and estimated contributions for 2019. See Note 3 of the Consolidated Financial Statements for a discussion of fuel and power purchase commitments. Competition. Although competition in the generation sector in Hawaii is moderated by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities, the PUC has promoted a more competitive electric industry environment through its decisions concerning competitive bidding and distributed generation (DG). An increasing amount of generation is provided by IPPs and customer distributed generation. Competitive bidding. In December 2006, the PUC issued a decision that included a final competitive bidding framework, which became effective immediately. The final framework states, among other things, that: (1) a utility is required to use competitive bidding to acquire a future generation resource or a block of generation resources unless the PUC finds bidding to be unsuitable; (2) the framework does not apply in certain situations identified in the framework; (3) waivers from competitive bidding for certain circumstances will be considered; (4) the utility is required to select an independent observer from a list approved by the PUC whenever the utility or its affiliate seeks to advance a project proposal (i.e., in competition with those offered by bidders); (5) the utility may consider its own self-bid proposals in response to generation needs identified in its RFP; and (6) for any resource to which competitive bidding does not apply (due to waiver or exemption), the utility retains its traditional obligation to offer to purchase capacity and energy from a Qualifying Facility (QF) at avoided cost upon reasonable terms and conditions approved by the PUC. Technological developments. New emerging and breakthrough technological developments (e.g., the commercial development of energy storage, grid support utility interactive inverters, fuel cells, DG, grid modernization, electrification of transportation, and generation from renewable sources) may impact the Utilities’ future competitive position, results of operations, financial condition and liquidity. The Utilities continue to seek prudent opportunities to develop and implement advanced technologies that align with its technical and business plans. Environmental matters. See “Electric utility—Regulation—Environmental regulation” under “Item 1. Business” and “Environmental regulation” in Note 3 of the Consolidated Financial Statements. Commitments and contingencies. See Item 1A. Risk Factors, and Note 3 of the Consolidated Financial Statements for a discussion of important commitments and contingencies. Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” for Consolidated HEI above. Property, plant and equipment. The Utilities believe that the PUC will allow recovery of property, plant and equipment in its electric rates. If the PUC does not allow recovery of any such costs, the electric utility would be required to write off the disallowed costs at that time. See the discussion under “Utility projects” in Note 3 of the Consolidated Financial Statements concerning costs of major projects that have not yet been approved for inclusion in the applicable utility’s rate base. Regulatory assets and liabilities. The Utilities are regulated by the PUC. In accordance with accounting standards for regulatory operations, the Company’s and the Utilities’ financial statements reflect assets, liabilities, revenues and costs of the Utilities based on current cost-based rate-making regulations. The actions of regulators can affect the timing of recognition of revenues, expenses, assets and liabilities. Regulatory liabilities represent amounts collected from customers for costs that are expected to be incurred in the future, or amounts collected in excess of costs incurred that are refundable to customers. Regulatory assets represent incurred costs that have been deferred because their recovery in future customer rates is probable. As of December 31, 2018, the consolidated regulatory liabilities and regulatory assets of the Utilities amounted to $950 million and $833 million, respectively, compared to $881 million and $869 million as of December 31, 2017, respectively. Regulatory liabilities and regulatory assets are itemized in Note 3 of the Consolidated Financial Statements. Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory environment. Because current rates include the recovery of regulatory assets existing as of the last rate case and rates in effect allow the Utilities to earn a reasonable rate of return, management believes that the recovery of the regulatory assets as of December 31, 2018 is probable. This determination assumes continuation of the current political and regulatory climate in Hawaii and is subject to change in the future. Management believes that the operations of the Utilities currently satisfy the criteria for regulatory accounting. If events or circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory assets, net of regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may result in a material adverse effect on the Company’s and the Utilities’ results of operations, financial condition and liquidity. 50 Revenues. Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to estimated energy consumed in the accounting period, but not yet billed to customers (Unbilled revenues), and RBA revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kWh sales. Unbilled revenues represent an estimate of energy consumed by customers subsequent to the date of the last meter reading to the end of the current reporting period. As of December 31, 2018, Unbilled revenues amounted to $122 million and the RBA revenues recognized in 2018 amounted to $46 million. The rate schedules of the Utilities include ECACs (replaced with ECRCs for Hawaiian Electric and Hawaii Electric Light in 2019) 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. If the ECAC/ECRCs, PPACs or RBAs were lost or adversely modified, it could result in a material adverse effect on the Company’s and the Utilities’ results of operations, financial condition and liquidity. Consolidation of variable interest entities. A business enterprise must evaluate whether it should consolidate a variable interest entity (VIE). The Utilities evaluate the impact of applying accounting standards for consolidation to its relationships with IPPs with whom the Utilities execute new PPAs or execute amendments of existing PPAs. A possible outcome of the analysis is that Hawaiian Electric or its subsidiaries may be found to meet the definition of a primary beneficiary of a VIE, which finding may result in the consolidation of the IPP in the Consolidated Financial Statements. The consolidation of IPPs could have a material effect on the Consolidated Financial Statements, including the recognition of a significant amount of assets and liabilities, and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. The Utilities do not know how the consolidation of IPPs would be treated for regulatory or credit ratings purposes. See Notes 1 and 3 of the Consolidated Financial Statements. 51 Bank Executive overview and strategy. ASB, headquartered in Honolulu, Hawaii, is a full-service community bank serving both consumer and commercial customers. ASB is one of the largest financial institutions in Hawaii and ended 2018 with assets of $7.0 billion and net income of $83 million, compared to assets of $6.8 billion as of December 31, 2017 and net income of $67 million in 2017. ASB provides a wide range of financial products and services, and in order to remain competitive and continue building core franchise value, ASB is focused on deepening customer relationships and developing and introducing new products and services in order to meet market needs. Additionally, the banking industry is constantly changing and ASB is making the investments in people and technology necessary to adapt and remain competitive, facilitate process improvements in order to deliver a continuously better experience for its customers, and be a more efficient bank. ASB’s continued focus has been on efficient growth to maximize profitability and capital efficiency, as well as control expenses. Key strategies to drive organic growth include: 1. deepening customer relationships; 2. building out product and service offerings to open new segments; 3. fully deploying online and remotely-assisted account opening capabilities; and 4. prioritizing efficiency actions to gain earnings leverage on organic growth. The interest rate environment and the quality of ASB’s assets will continue to influence its financial results. A flattened yield curve as a result of an increase in short-term interest rates and excess liquidity in the financial system have made it challenging to grow the bank’s loan portfolio and find investments with adequate risk-adjusted returns. The potential for compression of ASB’s margin when interest rates rise is a risk that is actively managed. As part of its interest rate risk management process, ASB uses simulation analysis to measure net interest income sensitivity to changes in interest rates (see “Quantitative and Qualitative Disclosures about Market Risk”). ASB then employs strategies to limit the impact of changes in interest rates on net interest income. ASB’s key strategies to manage interest rate risk include: 1. attracting and retaining low-cost deposits, particularly those in non-interest bearing transaction accounts; 2. diversifying the loan portfolio with higher-spread, shorter-maturity loans and/or variable rate loans; 3. focusing investment growth in securities that exhibit less extension risk (i.e., risk of longer average lives) as rates rise. ASB’s loan quality benefited in 2018 from increasing property values, more financial flexibility of borrowers, and overall general economic improvement in the state of Hawaii. ASB’s net charge-offs as a percentage of total average loans was 0.34% for 2018 compared to 0.27% for 2017. The higher net charge-off ratio was primarily due to charge offs of consumer loans. ASB’s provision for loan losses increased from $10.9 million for 2017 to $14.7 million for 2018, primarily due to additional reserves for the consumer loan portfolio, partly offset by lower reserves required for the commercial and commercial real estate loan portfolios as a result of improved credit quality in those loan portfolios. 52 Results of operations. • 2018 vs. 2017 (in millions) Interest income 2018 2017 $ 258 $ 236 Increase (decrease) 22 $ Primary reason(s) Higher interest income was due to higher average earning asset balances and an increase in yields on earning assets. ASB’s average investment and mortgage-backed securities portfolio balance for 2018 increased by $240 million compared to the average balance in 2017 as ASB purchased investments with liquidity not used to fund the loan portfolio. The average loan portfolio balance for 2018 was $54 million higher than 2017 primarily due to increases in the average HELOC, residential and consumer loan portfolio balances of $55 million, $45 million and $35 million, respectively. The growth in these loan portfolios was consistent with ASB’s portfolio mix targets and loan growth strategy. The average commercial and commercial real estate loan portfolio balances decreased by $51 million and $28 million, respectively, primarily due to ASB’s strategic decision to reduce the balances in certain commercial and national loan portfolios to improve credit quality in those portfolios. The yield on earning assets increased 18 basis points as the increase in short-term interest rates during the year repriced the adjustable rate loans upward and increased the yields for the investment securities. Noninterest income 56 62 (6) Noninterest income was lower in 2018 compared to 2017 primarily due to lower fees from other financial services as a result of debit card interchange expenses being netted against income beginning in 2018. Prior year’s debit card interchange expenses were recorded in other noninterest expense. This change was in accordance with the new revenue recognition accounting standard. See Note 8 of the Consolidated Financial Statements for additional information on the new revenue recognition standard. ASB also had lower fee income on deposit products and mortgage banking income. The lower mortgage banking income was due to lower residential loan production and ASB’s decision to portfolio a larger portion of the residential loan production. The increase in revenues was due to higher interest income, partly offset by lower noninterest income. Higher interest expense was due to an increase in term certificate balances and increased rates for term certificates, money market accounts and repurchase agreements, partly offset by the payoff of a matured FHLB advance. Average deposit balances for 2018 increased by $342 million compared to 2017 due to an increase in core deposits and time certificates of $249 million and $93 million, respectively. The other borrowings average balance decreased by $36 million primarily due to the payoff of a matured FHLB advance. The provision for loan losses for 2018 was primarily due to an increase in reserves for the consumer loan portfolio as a result of growth and increased net charge-offs. The provision for loan losses benefited from the release of reserves in the commercial, commercial real estate and HELOC loan portfolios as a result of improving credit trends. The provision for loan losses for 2017 was primarily due to an increase in reserves for the consumer loan portfolio as a result of growth and increased net charge-offs. The commercial and commercial real estate loan portfolios released reserves as a result of lower portfolio balances and improved credit trends. Higher noninterest expense was primarily due to higher compensation and employee benefit costs partly offset by lower other noninterest expenses as a result of debit card interchange expenses for 2018 being netted against debit card interchange income within noninterest income. The increase in expenses was primarily due to increases in interest expense and higher provision for loan losses. Higher interest income was partly offset by lower noninterest income, higher provision for loan losses, higher interest expense and higher noninterest expenses. 16 3 4 1 8 8 Revenues Interest expense 314 15 298 12 Provision for loan losses 15 11 Noninterest expense 176 175 Expenses Operating income 206 108 198 100 Net income 83 67 16 The increase in net income was the result of higher operating income and lower income tax expense due to the Tax Act. Return on average equity 1 13.5% 11.2% 2.3% 53 • 2017 vs. 2016 (in millions) Interest income 2017 2016 $ 236 $ 219 Increase (decrease) 17 $ Primary reason(s) Higher interest income was due to higher average earning asset balances and an increase in yields on earning assets. ASB’s average investment and mortgage-backed securities portfolio balance for 2017 increased by $345 million compared to the average balance in 2016 as ASB purchased investments with liquidity not used to fund the loan portfolio. The average loan portfolio balance for 2017 was $11 million lower than 2016 primarily due to a decrease in the average commercial loan portfolio balance of $112 million. The decrease was due to the strategic reduction of the national syndicated lending portfolio ($88 million decrease in average balance) and paydowns in the commercial portfolio. The average consumer, HELOC and commercial real estate loan balances increased by $56 million, $29 million and $15 million, respectively. The growth in these loan portfolios was consistent with ASB’s portfolio mix targets and loan growth strategy. The yield on earning assets increased 8 basis points as the increase in short-term interest rates during the year repriced the adjustable rate loans upward and increased the yields for the investment securities. Noninterest income 62 67 (5) Noninterest income was lower due to a decrease in mortgage banking income and lower fee income from other financial products. The lower mortgage banking income was due to lower residential loan production and ASB’s decision to portfolio a larger portion of the residential loan production. Revenues Interest expense 298 12 286 13 12 (1) Provision for loan losses 11 17 (6) The increase in revenues was due to higher interest income, partly offset by lower noninterest income. Lower interest expense was due to the payoff of a maturing other borrowing, partly offset by higher interest expense from an increase in average interest-bearing liabilities. Average deposit balances for 2017 increased by $451 million compared to 2016 due to an increase in core deposits and time certificates of $319 million and $132 million, respectively. The other borrowings average balance decreased by $94 million primarily due to a decrease in repurchase agreements. Lower provision for loan losses for 2017 was primarily due to a decrease in reserves for the commercial and commercial real estate loan portfolios as a result of lower portfolio balances and improving credit trends, partly offset by increased provision for loan losses for the consumer loan portfolio as a result of growth and increased charge-offs. The provision for loan losses in 2016 was used primarily to establish loan loss reserves for the growth in the commercial real estate and consumer loan portfolios and additional reserve levels for specific commercial credits. Noninterest expense Expenses Operating income Net income Return on average equity 1 175 198 100 67 168 198 88 57 7 Higher noninterest expense was primarily due to higher compensation and employee benefit costs. — Expenses were flat as higher noninterest expense was offset by lower interest expense and provision for loan losses. 12 10 Higher interest income and lower provision for loan losses, partly offset by lower noninterest income and higher noninterest expenses. The increase in net income was the result of higher operating income and lower income tax expense due to the Tax Act. 11.2% 9.9% 1.3% 1 Calculated using the average daily balances. See Note 4 of the Consolidated Financial Statements for a discussion of guarantees and further information about ASB. 54 Average balance sheet and net interest margin. The following table provides a summary of average balances, including major categories of interest-earning assets and interest-bearing liabilities: (dollars in thousands) Assets: 2018 Interest1 income/ expense Average balance Yield/ rate (%) Average balance 2017 Interest1 income/ expense Yield/ rate (%) Average balance 2016 Interest1 income/ expense Yield/ rate (%) Interest-earning deposits $ 50,658 $ 9,726 940 351 1,503,036 35,862 17,485 771 1.86 3.60 2.39 4.41 $ 79,927 $ 10,770 898 208 1,265,240 27,291 15,427 655 1.12 1.93 2.16 4.24 $ 75,092 $ 11,153 383 191 934,469 18,592 717 28 0.51 1.72 1.99 3.87 FHLB stock Investment securities Taxable Non-taxable Total investment securities 1,520,521 36,633 2.41 1,280,667 27,946 2.18 935,186 18,620 1.99 Loans Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial Consumer Total loans 2,3 2,122,895 860,155 944,065 14,935 579,765 240,414 86,936 39,579 34,634 823 26,689 31,802 4,762,229 220,463 Total interest-earning assets 6,343,134 258,387 Allowance for loan losses Noninterest-earning assets Total Assets (53,593) 606,304 $6,895,845 Liabilities and Shareholder’s Equity: Savings Interest-bearing checking Money market Time certificates $2,334,681 1,639 1,006,839 140,225 789,926 706 602 11,044 13,991 845 703 Total interest-bearing deposits 4,271,671 Advances from Federal Home Loan Bank Securities sold under agreements to repurchase 41,855 99,162 Total interest-bearing liabilities 4,412,688 15,539 4.10 4.60 3.67 5.51 4.60 13.23 4.63 4.07 0.07 0.07 0.43 1.40 0.33 2.02 0.71 0.35 2,077,705 887,890 889,360 16,837 631,170 205,334 86,934 37,806 30,001 1,011 27,405 24,098 4,708,296 207,255 6,079,660 236,307 4.18 4.26 3.37 6.00 4.34 11.74 4.40 3.89 2,074,564 872,694 859,955 18,850 743,586 149,287 88,274 35,940 28,249 1,118 29,743 16,450 4,718,936 199,774 5,740,367 218,968 4.26 4.12 3.28 5.93 4.00 11.02 4.23 3.81 (55,629) 546,523 $ 6,570,554 (54,338) 507,850 $ 6,193,879 $ 2,278,396 1,567 902,678 142,068 696,799 4,019,941 238 168 7,687 9,660 0.07 0.03 0.12 1.10 0.24 $ 2,117,186 1,402 839,339 160,700 565,135 3,682,360 173 202 5,390 7,167 0.07 0.02 0.13 0.95 0.19 79,374 2,245 2.83 101,597 3,160 3.11 97,535 251 4,196,850 12,156 0.26 0.29 169,730 3,953,687 2,428 12,755 1.43 0.32 Noninterest bearing liabilities: Deposits Other Shareholder’s equity Total Liabilities and Shareholder’s Equity Net interest income Net interest margin (%)4 1,763,331 108,976 610,850 $6,895,845 1,672,780 102,789 598,135 $ 6,570,554 1,559,132 102,302 578,758 $ 6,193,879 $ 242,848 $224,151 $206,213 3.83 3.69 3.59 1 2 3 4 Interest income includes taxable equivalent basis adjustments of $0.2 million for 2018 based upon a federal statutory tax rate of 21%, and $0.2 million and $0.01 million for 2017 and 2016, respectively, based upon a federal statutory rate of 35%. Includes loans held for sale, at lower of cost or fair value, of $2.3 million, $7.4 million and $5.4 million as of December 31, 2018, 2017 and 2016, respectively. Includes recognition of net deferred loan fees of $0.1 million, $1.7 million and $2.8 million for 2018, 2017 and 2016 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. 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 55 by prior period weighted-average interest rate). Any remaining change is allocated to the above two categories on a pro rata basis. (in thousands) Interest income Interest-earning deposits FHLB stock Investment securities Taxable Non-taxable Total investment securities Loans Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial Consumer Total loans Total increase in interest income Interest expense Savings Interest-bearing checking Money market Time certificates Advances from Federal Home Loan Bank Securities sold under agreements to repurchase Total decrease (increase) in interest expense Increase in net interest income $ 2018 vs. 2017 Volume Rate Total Rate 2017 vs. 2016 Volume Total $ $ 455 165 (413) $ (22) $ 42 143 $ 488 24 $ 27 (7) 3,100 27 3,127 (1,768) 2,972 2,740 (79) 1,587 3,284 8,736 12,483 — (431) (436) (2,253) 528 (448) (3,040) 9,443 $ 5,471 89 5,560 1,770 (1,199) 1,893 (109) (2,303) 4,420 4,472 9,597 (72) (37) 2 (1,104) 872 (4) (343) 9,254 $ 8,571 116 8,687 2 1,773 4,633 (188) (716) 7,704 13,208 22,080 (72) (468) (434) (3,357) 1,400 (452) (3,383) 18,697 $ 1,691 3 1,694 (1,488) 1,234 781 13 2,395 1,134 4,069 6,275 — (56) 13 (928) 267 1,433 729 7,004 $ 7,008 624 7,632 148 632 971 (120) (4,733) 6,514 3,412 11,064 (165) (9) 21 (1,369) 648 744 (130) 10,934 $ 515 17 8,699 627 9,326 (1,340) 1,866 1,752 (107) (2,338) 7,648 7,481 17,339 (165) (65) 34 (2,297) 915 2,177 599 17,938 Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. These conditions have begun to moderate with the interest rate increases in the past year resulting in an increase in ASB’s net interest income and net interest margin. Loan originations and mortgage-backed 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. The following table sets forth the composition of ASB’s loans held for investment: 56 December 31 2018 2017 2016 2015 2014 (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 $ 2,143,397 44.3 $ 2,118,047 45.3 $ 2,048,051 43.2 $ 2,069,665 44.8 $ 2,044,205 46.0 748,398 15.4 733,106 15.7 800,395 16.9 690,561 14.9 531,917 12.0 978,237 13,138 20.2 0.3 913,052 15,797 19.6 0.3 863,163 18,889 18.2 0.4 846,294 18,229 18.3 0.4 818,815 16,240 18.4 0.4 92,264 1.9 108,273 2.3 126,768 2.7 100,796 2.2 96,438 2.2 14,307 3,989,741 587,891 266,002 0.3 82.4 12.1 5.5 14,910 3,903,185 544,828 223,564 0.3 83.5 11.7 4.8 16,080 3,873,346 692,051 178,222 0.3 81.7 14.6 3.7 14,089 3,739,634 758,659 123,775 0.3 80.9 16.4 2.7 18,961 3,526,576 791,757 122,656 0.4 79.4 17.8 2.8 4,843,634 100.0 4,671,577 100.0 4,743,619 100.0 4,622,068 100.0 4,440,989 100.0 Less: Deferred fees and discounts Allowance for loan losses (613) (52,119) (809) (53,637) (4,926) (55,533) (6,249) (50,038) (6,338) (45,618) Total loans, net $ 4,790,902 $ 4,617,131 $ 4,683,160 $ 4,565,781 $ 4,389,033 1 Includes renegotiated loans. The increase in the loans balance in 2018 was primarily due to growth in the HELOC, consumer, commercial and residential 1-4 family loan portfolios, which were portfolios targeted in ASB’s loan growth strategy. The decrease in the loans balance in 2017 was primarily due to decreases in the commercial, commercial real estate, and commercial construction loan portfolios, partly offset by growth in the residential 1-4 family, HELOC, and consumer loan portfolios. The decrease in the commercial loan portfolio was primarily due to the strategic reductions in the portfolio, including a $75 million reduction in ASB’s nationally syndicated loan portfolio. The decrease in the commercial real estate loan portfolio was primarily due to paydown of a large commercial real estate credit. The growth in the residential 1-4 family, HELOC and consumer loan portfolios were consistent with ASB’s loan growth strategy. The increase in the loans balance in 2016 was primarily due to growth in the commercial real estate, consumer, commercial construction and HELOC loan portfolios as a result of demand for these loan types, partly offset by a decrease in the commercial and residential 1-4 family loan portfolios. The growth in the commercial real estate, consumer, commercial construction and HELOC loan portfolios was consistent with ASB’s loan growth strategy. The decrease in the commercial loan portfolio was due to the strategic reduction of ASB’s nationally syndicated loan portfolio by $93 million. The decrease in the residential loan portfolio was due to ASB’s decision to sell a portion of its loan production with low interest rates to control its interest rate risk. The increase in the loans balance in 2015 was primarily due to growth in commercial real estate, HELOC and residential 1-4 family loan portfolios, partly offset by a decrease in the commercial loan portfolio. The growth in the commercial real estate, HELOC and residential loan portfolios was driven by demand for this loan type and was consistent with ASB’s loan growth strategy. 57 The following table summarizes loans 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 2018 In 1 year or less After 1 year through 5 years After 5 years Total $ 66 $ 157 223 — 28 28 14 — 14 80 185 265 $ $ 111 213 324 — 26 26 — — — 111 239 350 $ $ 23 18 41 — 38 38 — — — 23 56 79 $ $ 200 388 588 — 92 92 14 — 14 214 480 694 Home equity — key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 2% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below. December 31 Outstanding balance of home equity loans (in thousands) Percent of portfolio in first lien position Net charge-off (recovery) ratio Delinquency ratio 2018 2017 $ 978,237 $ 913,052 49.2% 0.01% 0.46% 48.0 % (0.03)% 0.28 % December 31, 2018 Outstanding balance (in thousands) % of total Total Interest only 2019-2020 2021-2023 Thereafter amortizing $ 978,237 $ 740,431 $ 38,912 $ 133,819 $ 567,700 $ 237,806 100% 76% 4% 14% 58% 24% End of draw period – interest only Current The HELOC portfolio makes up 20% of the total loan portfolio and is generally an interest-only revolving loan for a 10- year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20- year amortization period. This product type comprises 76% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of December 31, 2018, approximately 22% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option. Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of real estate secured loans. In a foreclosure action, the property 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, 2018 and 2017, ASB had $0.4 million and $0.1 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 58 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, 2018, 2017, 2016, 2015 and 2014 were immaterial or nil. The following table sets forth certain information with respect to nonaccrual and troubled debt restructured (TDR) loans: December 31 (dollars in thousands) Nonaccrual loans— Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Total real estate Commercial Consumer Total nonaccrual loans Troubled debt restructured loans not included above— Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Total real estate Commercial Consumer Total troubled debt restructured loans 2018 2017 2016 2015 2014 $ $ $ $ 12,037 — 6,348 436 — — 18,821 4,278 4,196 27,295 10,194 915 11,597 1,622 — — 24,328 1,527 62 25,917 $ 12,598 — 4,466 841 — — 17,905 3,069 2,617 $ 23,591 $ 10,982 1,016 6,584 425 — — 19,007 1,741 66 $ 20,814 $ $ $ $ 11,154 223 3,080 878 — — 15,335 6,708 1,282 23,325 14,450 1,346 4,934 2,751 — — 23,481 14,146 10 37,637 $ 20,554 1,188 2,254 970 — — 24,966 20,174 895 $ 46,035 $ 13,962 — 2,467 4,713 — — 21,142 1,104 — $ 22,246 $ $ $ $ 19,253 5,112 1,087 720 — — 26,172 10,053 661 36,886 13,525 — 480 7,130 — — 21,135 2,972 — 24,107 In 2018, nonaccrual loans increased $3.7 million primarily due to increases in HELOC, consumer, and commercial nonaccrual loans of $1.9 million, $1.6 million and $1.2 million, respectively. ASB evaluates a restructured loan transaction to determine if the borrower is in financial difficulty and if the restructured terms are considered concessions—typically terms that are out of market, beyond normal or reasonable standards, or otherwise not available to a non-troubled borrower in the normal marketplace. A loan classified as TDR must meet both criteria of financial difficulty and concession. Accruing TDR loans increased by $5.1 million primarily due to a $5.0 million increase in HELOC loans classified as TDR. In 2017, nonaccrual loans increased slightly by $0.3 million primarily due to higher nonaccrual residential 1-4 family, HELOC and consumer loans of $1.4 million, $1.4 million and $1.3 million, respectively. Nonaccrual commercial loans decreased by $3.6 million. Accruing TDR loans decreased by $16.8 million in 2017 primarily due to decreases of $12.4 million, $3.5 million, and $2.3 million of commercial, residential 1-4 family, and residential land loans, respectively, classified as TDRs. In 2016, nonaccrual loans decreased $22.7 million primarily due to upgrades of specific commercial and commercial real estate loans, payoff of a troubled commercial loan and a segment of residential mortgages transferred to held-for-sale. Nonaccrual commercial and residential loans decreased by $13.5 million and $9.4 million, respectively. Accruing TDR loans increased $15.4 million in 2016 primarily due to increases of $13.0 million and $2.5 million of commercial and HELOC loans, respectively, classified as TDR. The increase in commercial loans classified as TDR was primarily due to two commercial credits being classified as TDR. In 2015, nonaccrual loans increased $9.1 million primarily due to higher nonaccrual commercial loans of $10.1 million. TDR loans decreased $1.9 million in 2015 primarily due to decreases of $2.4 million and $1.9 million of residential land and commercial loans, respectively, classified as TDR. HELOC loans classified as TDR increased by $2.0 million. 59 Impact of nonperforming loans on interest income. The following table presents the gross interest income for both nonaccrual and restructured loans that would have been recognized if such loans had been current in accordance with their original contractual terms, and had been outstanding throughout the period or since origination if held for only part of the period. The table also presents the interest income related to these loans that was actually recognized for the period. (dollars in millions) Gross amount of interest income that would have been recorded if the loans had been current in accordance with original contractual terms, and had been outstanding throughout the period or since origination, if held for only part of the period 1 Interest income actually recognized Total interest income foregone Year ended December 31, 2018 $ $ 2 1 1 1 Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status. See “Allowance for loan losses” in Note 4 of the Consolidated Financial Statements for information with respect to nonperforming assets. Allowance for loan losses. See “Allowance for loan losses” in Note 4 of the Consolidated Financial Statements for the tables which sets forth the allocation of ASB’s allowance for loan losses. The following table presents the changes in the allowance for loan losses: $ 2018 53,637 14,745 $ 2017 55,533 10,901 $ 2016 50,038 16,763 $ 2015 45,618 6,275 $ 2014 40,116 6,126 (dollars in thousands) Allowance for loan losses, January 1 Provision for loan losses Charge-offs Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Total real estate Commercial Consumer Total charge-offs Recoveries Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Total real estate Commercial Consumer Total recoveries Net charge-offs Allowance for loan losses, December 31 Ratio of allowance for loan losses to loans held for investment Ratio of provision for loan losses during the year to average total loans Ratio of net charge-offs during the year to average total loans $ 826 — 14 210 — — 1,050 4,006 11,757 16,813 157 — 308 482 — — 947 1,852 1,217 4,016 12,797 53,637 $ 639 — 112 138 — — 889 5,943 7,413 14,245 421 — 59 461 — — 941 1,093 943 2,977 11,268 55,533 $ 356 — 205 — — — 561 1,074 4,791 6,426 226 — 80 507 — — 813 2,773 985 4,571 1,855 50,038 $ 987 — 196 81 — — 1,264 1,872 2,414 5,550 1,180 — 752 469 — — 2,401 1,636 889 4,926 624 45,618 1.15% 0.23% 0.27% 1.17% 0.36% 0.24% 1.08% 0.14% 0.04% 1.03% 0.14% 0.01% 128 — 353 18 — — 499 2,722 17,296 20,517 74 — 257 179 — — 510 2,136 1,608 4,254 16,263 52,119 1.08% 0.31% 0.34% 60 $ The following table sets forth the allocation of ASB’s allowance for loan losses and the percentage of loans in each category to total loans: December 31 (dollars in thousands) Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Total real estate Commercial Consumer Total allowance for loan losses December 31 Allow- ance balance $ 1,976 14,505 6,371 479 2,790 4 26,125 9,225 16,769 $ 52,119 (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 Total allowance for loan losses 2018 Allowance to loan receivable % Loan receivable % of total Allow- ance balance 2017 Allowance to loan receivable % Loan receivable % of total Allow- ance balance 2016 Allowance to loan receivable % Loan receivable % of total 0.09 1.94 0.65 3.65 3.02 0.03 0.65 1.57 6.30 1.08 44.3 15.4 20.2 0.3 1.9 0.3 82.4 12.1 5.5 $ 2,902 15,796 7,522 896 4,671 12 31,799 10,851 10,987 100.0 $ 53,637 0.14 2.15 0.82 5.67 4.31 0.08 0.81 1.99 4.91 1.15 45.3 15.7 19.6 0.3 2.3 0.3 83.5 11.7 4.8 $ 2,873 16,004 5,039 1,738 6,449 12 32,115 16,618 6,800 100.0 $ 55,533 0.14 2.00 0.58 9.20 5.09 0.07 0.83 2.40 3.82 1.17 43.2 16.9 18.2 0.4 2.7 0.3 81.7 14.6 3.7 100.0 2015 Allowance to loan receivable % Allowance balance Loan receivable % of total Allowance balance 2014 Allowance to loan receivable % Loan receivable % of total $ $ 4,186 11,342 7,260 1,671 4,461 13 28,933 17,208 3,897 50,038 0.20 1.64 0.86 9.17 4.43 0.09 0.77 2.27 3.15 1.08 44.8 14.9 18.3 0.4 2.2 0.3 80.9 16.4 2.7 100.0 $ $ 4,662 8,954 6,982 1,875 5,471 28 27,972 14,017 3,629 45,618 0.23 1.68 0.85 11.55 5.67 0.15 0.79 1.77 2.96 1.03 46.0 12.0 18.4 0.4 2.2 0.4 79.4 17.8 2.8 100.0 In 2018, ASB’s allowance for loan losses decreased by $1.5 million primarily due to lower loan loss reserves required for the commercial, commercial construction, commercial real estate and HELOC loan portfolios as a result of improving credit trends, partly offset by additional loan loss reserves for the consumer loan portfolio. Total delinquencies of $26.0 million at December 31, 2018 was an increase of $2.4 million compared to total delinquencies of $23.6 million at December 31, 2017 primarily due to increases in delinquent consumer, HELOC and residential 1-4 family loans, partly offset by decreases in delinquent commercial loans. The ratio of delinquent loans to total loans increased slightly from 0.51% of total outstanding loans at December 31, 2017 to 0.54% of total outstanding loans at December 31, 2018. Net charge-offs for 2018 were $16.3 million, an increase of $3.5 million compared to $12.8 million at December 31, 2017 primarily due to an increase in consumer loan portfolio charge-offs as a result of ASB’s strategic expansion of its unsecured consumer loan portfolio product offering with risk-based pricing. ASB’s provision for loan losses was $14.7 million, an increase of $3.8 million compared to the provision for loan losses of $10.9 million for 2017. The increase was due to additional reserves for the consumer loan portfolio, partly offset by lower reserves required for the commercial, commercial construction, commercial real estate and HELOC loan portfolios as result of improved credit quality in those loan portfolios. In 2017, ASB’s allowance for loan losses decreased by $1.9 million primarily due to lower loan loss reserves required for the commercial, commercial construction, and commercial real estate loan portfolios as a result of a decrease in the portfolio balances and improving credit trends, partly offset by additional loan loss reserves for the consumer and HELOC loan portfolios. Total delinquencies of $23.6 million at December 31, 2017 was a slight increase of $0.5 million compared to total delinquencies of $23.1 million at December 31, 2016 primarily due to increases in delinquent commercial and consumer loans, offset by decreases in delinquent residential 1-4 family and commercial real estate loans. The ratio of delinquent loans to total loans increased slightly from 0.49% of total loans outstanding at December 31, 2016 to 0.51% of total loans outstanding at 61 December 31, 2017. Net charge-offs for 2017 were $12.8 million, an increase of $1.5 million compared to $11.3 million for 2016 primarily due to an increase in consumer loan portfolio charge-offs as a result of the strategic expansion of ASB’s unsecured consumer loan product offering with risk-based pricing. ASB’s provision for loan losses was $10.9 million, a decrease of $5.9 million compared to the provision for loan losses of $16.8 million for 2016. The decrease was primarily due to the release of reserves for commercial real estate and commercial loan portfolios due to lower outstanding balances and improved credit quality, partly offset by an increase in loss reserves for the consumer loan portfolio. In 2016, ASB’s allowance for loan losses increased by $5.5 million primarily due to growth in the commercial real estate and consumer loan portfolios and increases in reserves for the commercial real estate and unsecured consumer loan portfolios. Total delinquencies of $23.1 million at December 31, 2016 was $3.0 million lower than total delinquencies of $26.1 million at December 31, 2015 primarily due to the movement of $6 million of residential loans to held-for-sale. The ratio of delinquent loans to total loans decreased from 0.57% of total loans outstanding at December 31, 2015 to 0.49% of total loans outstanding at December 31, 2016. Net charge-offs for 2016 were $11.3 million, an increase of $9.4 million compared to $1.9 million for 2015 primarily due to charge-offs of specific commercial loans and an increase in consumer loan charge-offs as a result of the strategic expansion of ASB’s unsecured consumer loan product offering with risk-based pricing. ASB’s provision for loan losses was $16.8 million for 2016, an increase of $10.5 million compared to the provision for loan losses of $6.3 million for 2015. The increase in provision for loan losses was driven by growth in the commercial real estate and consumer loan portfolios as well as specific reserves for a few commercial loans. In 2015, ASB’s allowance for loan losses increased by $4.4 million primarily due to growth in the commercial real estate loan portfolio ($159 million or 29.8% growth in outstanding balances) and increases in reserves for commercial loans. Overall loan quality remained strong as total delinquencies of $26.1 million at December 31, 2015 was a slight increase of $0.6 million compared to total delinquencies of $25.5 million at December 31, 2014 primarily due to an increase in delinquent consumer loans. The ratio of delinquent loans to total loans decreased slightly from 0.58% of total loans outstanding at December 31, 2014 to 0.57% of total loans outstanding at December 31, 2015. Net charge-offs for 2015 were $1.9 million, an increase of $1.3 million compared to $0.6 million for 2014 primarily due to an increase in consumer loan charge-offs as result of the strategic expansion of ASB’s unsecured consumer loan product offering with risk-based pricing. ASB’s provision for loan losses was $6.3 million for 2015, an increase of $0.2 million compared to the provision for loan losses of $6.1 million for 2014. Investment securities. ASB’s investment portfolio was comprised as follows: December 31 2018 2017 2016 (dollars in thousands) U.S. Treasury and federal agency obligations Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Corporate bonds Mortgage revenue bonds Total investment securities Balance % of total Balance % of total Balance % of total $ 154,349 10% $ 184,298 13% $ 192,281 18% 1,303,291 49,132 23,636 85 3 2 1,245,988 — 15,427 86 — 1 897,474 — 15,427 81 — 1 $ 1,530,408 100% $ 1,445,713 100% $ 1,105,182 100% Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by the U.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Small Business Administration (SBA). The weighted-average yield on investments during 2018, 2017 and 2016 was 2.41%, 2.18% and 1.99%, respectively. ASB did not maintain a portfolio of securities held for trading during 2018, 2017 and 2016. As of December 31, 2018 and 2017, ASB had $141.9 million and $44.5 million, respectively, of investment securities that were purchased and classified as held-to-maturity. There were no investment securities classified as held-to-maturity as of December 31, 2016. The investment securities were classified as held-to-maturity to enhance the bank’s capital management in a rising rate environment. ASB considers the held-to-maturity classification of these investment securities to be appropriate as ASB has the positive intent and ability to hold these securities to maturity. Principal and interest on mortgage-backed securities issued by FNMA, FHLMC, GNMA and SBA are guaranteed by the issuer and, in the case of GNMA and SBA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government. The increase in investment securities was due to the purchase of agency mortgage-backed and credit securities, corporate bonds, and a mortgage revenue bond with excess liquidity. The net unrealized losses on ASB’s investment securities were primarily caused by movements in interest rates. All contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Based upon ASB’s evaluation at December 31, 2018, 2017, and 2016 there was no indicated impairment as ASB expects to collect the contractual cash flows 62 for these investments. See “Investment securities” in Note 1 of the Consolidated Financial Statements for a discussion of securities impairment assessment. As of December 31, 2018, 2017, and 2016, ASB did not have any private-issue mortgage-backed securities. ASB does not have any exposure to securities backed by subprime mortgages. See “Investment securities” in Note 4 of the Consolidated Financial Statements for a discussion of other-than-temporarily impaired securities. The following table summarizes the current amortized cost of ASB’s investment portfolio (excluding stock of the FHLB of Des Moines, which has no contractual maturity) and weighted average yields as of December 31, 2018. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years. (dollars in millions) U.S. Treasury and federal agency obligations Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Corporate bonds Mortgage revenue bonds2 Weighted average yield After 1 year through 5 years After 5 years through 10 years $ $ 78 $ 59 — 32 8 118 2.60% $ — 18 — 77 2.67% In 1 year or less 20 $ — — — 20 1.52% $ After 10 years $ — — — 15 15 4.68% $ Mortgage- backed securities $ — 1,334 — — 1,334 $ Total1 $ 157 1,334 50 23 $1,564 2.50% 2.53% 1 As of December 31, 2018, no investment exceeded 10% of ASB’s shareholder’s equity. 2 Weighted average yield on the mortgage revenue bonds is computed on a tax equivalent basis using a federal statutory tax rate of 21%. Stock in FHLB. As of December 31, 2018, 2017 and 2016, ASB’s stock in FHLB of Des Moines ($10 million, $10 million and $11 million, respectively) was carried at cost because it can only be redeemed at par. The amount that ASB is required to invest in FHLB stock is determined by FHLB requirements. In 2018, 2017 and 2016, ASB received cash dividends of $350,000, $208,000 and $191,000, respectively, on its FHLB Stock. Deposits and other borrowings. As of December 31, 2018 ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings, compared to costing liabilities of 97% deposits and 3% other borrowings as of December 31, 2017. 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 $268 million in 2018, compared to an inflow of $342 million in 2017 and $524 million in 2016. The following table presents the average deposits and average rates by type of deposit. Average balances have been calculated using the average daily balances. Years ended December 31 (dollars in thousands) Interest-bearing deposit liabilities Average balance 2018 % of total interest- bearing deposits Weighted average rate % Average balance 2017 % of total interest- bearing deposits Weighted average rate % Average balance 2016 % of total interest- bearing deposits Weighted average rate % Savings Checking Money market Certificate Total interest-bearing deposit liabilities $ 2,334,681 54.6% 0.07% $ 2,278,396 56.7% 0.07% $ 2,117,186 57.5% 0.07% 1,006,839 140,225 789,926 23.6 3.3 18.5 0.07 0.43 1.40 902,678 142,068 696,799 22.5 3.5 17.3 0.03 0.12 1.10 839,339 160,700 565,135 22.8 4.4 15.3 0.02 0.13 0.95 $ 4,271,671 100.0% 0.33% $ 4,019,941 100.0% 0.24% $ 3,682,360 100.0% 0.19% Total noninterest-bearing demand deposit liabilities 1,763,331 Total deposit liabilities $ 6,035,002 1,672,780 $ 5,692,721 1,559,132 $ 5,241,492 63 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 237,347 84,572 41,447 136,861 500,227 $ $ Other borrowings consist of advances from the FHLB and securities sold under agreements to repurchases. See “Other borrowings” in Note 4 of the Consolidated Financial Statements. ASB may obtain advances from the FHLB of Des Moines provided that certain standards related to creditworthiness have been met. Advances are collateralized by a blanket pledge of certain notes held by ASB and the mortgages securing them. To the extent that advances exceed the amount of mortgage loan collateral pledged to the FHLB of Des Moines, the excess must be covered by qualified marketable securities held under the control of and at the FHLB of Des Moines or at an approved third-party custodian. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Des Moines. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The decrease in other borrowings in 2018 was due to the payoff of a maturing FHLB advance and a decrease in business repurchase agreements. The decrease in other borrowings in 2017 was due to the payoff of a maturing FHLB advance, offset by an increase in business repurchase agreements. The decrease in other borrowings in 2016 was due to a decrease in public and business repurchase agreements and the maturity of a repurchase agreement with a broker/dealer. As of December 31, 2018, the unused borrowing capacity with the FHLB of Des Moines was $2.0 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB. Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities. As of December 31, 2018, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $24.4 million compared to an unrealized loss, net of taxes, of $15.0 million as of December 31, 2017. See “Quantitative and Qualitative Disclosures About Market Risk.” Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.” Also see “Federal Deposit Insurance Corporation Assessment” in Note 4 of the Consolidated Financial Statements. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Regulation of the financial services industry, including regulation of HEI, ASB Hawaii and ASB, has changed and will continue to change as a result of the enactment of the Dodd-Frank Act, which became law in July 2010. Importantly for HEI, ASB Hawaii and ASB, under the Dodd-Frank Act all of the functions of the OTS transferred on July 21, 2011 to the OCC, the FDIC, the FRB and the Consumer Financial Protection Bureau (Bureau). Supervision and regulation of HEI and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally chartered savings bank, moved to the OCC. While the laws and regulations applicable to HEI and ASB did not generally change, the applicable laws and regulations are being interpreted, and new and amended regulations may be adopted, by the FRB, the OCC and the Bureau. In addition, HEI will continue to be required to serve as a source of strength to ASB in the event of its financial distress. The Dodd-Frank Act also imposed new restrictions on the ability of a savings bank to pay dividends should it fail to remain a qualified thrift lender. At all times during 2018, ASB was a qualified thrift lender. 64 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. Final Capital Rules. On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding companies and propose to apply the FRB’s capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI. Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and addresses shortcomings in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule are: Minimum Capital Requirements Effective dates Capital conservation buffer Common equity Tier 1 ratio + conservation buffer Tier 1 capital ratio + conservation buffer Total capital ratio + conservation buffer Tier 1 leverage ratio Countercyclical capital buffer — not applicable to ASB 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019 4.50% 6.00% 8.00% 4.00% 0.625% 5.125% 6.625% 8.625% 4.00% 0.625% 1.25% 5.75% 7.25% 9.25% 4.00% 1.25% 1.875% 6.375% 7.875% 9.875% 4.00% 1.875% 2.50% 7.00% 8.50% 10.50% 4.00% 2.50% The final rule was effective January 1, 2015 for ASB. As of December 31, 2018, ASB met the new capital requirements with a Common equity Tier-1 ratio of 12.8%, a Tier-1 capital ratio of 12.8%, a Total capital ratio of 13.9% and a Tier-1 leverage ratio of 8.7%. Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any. 65 Liquidity and capital resources. December 31 (dollars in millions) Total assets Investment securities Loans held for investment, net Deposit liabilities Other bank borrowings 2018 % change 2017 % change $ 7,028 1,530 4,791 6,159 110 $ 3 6 4 5 (42) 6,799 1,446 4,617 5,891 191 6 31 (1) 6 (1) As of December 31, 2018, ASB was one of Hawaii’s largest financial institutions based on assets of $7.0 billion and deposits of $6.2 billion. ASB’s principal sources of liquidity are customer deposits, borrowings and the maturity and repayment of portfolio loans and securities. ASB’s deposits as of December 31, 2018 were $268 million higher than December 31, 2017. 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, 2018, FHLB borrowings totaled $45 million, representing 0.6% 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, 2018, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion. As of December 31, 2018, securities sold under agreements to repurchase totaled $65 million, representing 0.9% 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-backed securities. As of December 31, 2018, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.9 billion, of which, commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings were nil. 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, 2018 and 2017, ASB had $27.3 million and $23.6 million of loans on nonaccrual status, respectively, or 0.6% and 0.5% of net loans outstanding, respectively. As of December 31, 2018 and 2017, ASB had $0.4 million and $0.1 million, respectively, of real estate acquired in settlement of loans. In 2018, operating activities provided cash of $123 million. Net cash of $368 million was used by investing activities primarily due to purchases of available-for-sale investment securities of $224 million, net increase in loans receivable of $189 million, purchases of held-to-maturity investment securities of $103 million, capital expenditures of $73 million and contributions to low-income housing investments of $14 million, partly offset by receipt of repayments from available-for-sale investment securities of $219 million, proceeds from the sale of commercial loans of $7 million, repayments from held-to- maturity investment securities of $6 million and proceeds from the redemption of bank owned life insurance of $3 million. Financing activities provided net cash of $137 million primarily due to a net increase in deposits of $166 million, proceeds from FHLB advances of $696 million and a net increase in retail repurchase agreements of $27 million, partly offset by principal payments on FHLB advances of $701 million and common stock dividends to HEI (through ASB Hawaii) of $50 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, 2018, ASB was well-capitalized (see Note 4 of the Consolidated Financial Statements for ASB’s capital ratios). For a discussion of ASB dividends, see “Common stock equity” in Note 4 of the Consolidated Financial Statements. See “Commitments” and “Contingency” in Note 4 of the Consolidated Financial Statements for a discussion of commitments and contingencies and off-balance sheet arrangements. 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 66 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, commercial real estate, and commercial construction 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 utilizes a numerical-based, risk rating “PD Model” that 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 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. Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically underwritten based on common, uniform standards. For the homogeneous portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external credit bureau data and credit scores such as the Fair Isaac Corporation (FICO) score on a quarterly basis. ASB has built portfolio loss models for each major segment based on the combination of internal and external data to predict the probability of default at the loan level. ASB also considers qualitative factors in determining the allowance for loan losses. These include but are not limited to adjustments for changes in policies and procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and any concentrations of credit. 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. Fair value. Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent third party sources. However, in certain cases, ASB uses its own assumptions based on the best information available in certain circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if ASB were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of its financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. ASB classifies its financial assets and liabilities that are measured at fair value in accordance with the three-level valuation hierarchy. Level 1 valuations are based on quoted prices, unadjusted for identical instruments traded in active markets. Level 2 valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-based techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in 67 the market or significant management judgment or estimation. See “Fair value measurements” in Note 1 of the Consolidated Financial Statements). Significant assets measured at fair value on a recurring basis include ASB’s mortgage-backed securities available for sale. These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The third-party pricing services use a variety of methods to determine fair value including quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds and other observable market factors. To enhance the robustness of the pricing process, ASB compares its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by the investment manager and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans, real estate acquired in settlement of loans and goodwill. See “Investment securities” and “Derivative financial instruments” in Note 4 and Note 15 of the Consolidated Financial Statements for additional information regarding ASB’s fair value measurements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK HEI and Hawaiian Electric (in the case of Hawaiian Electric, only the information related to Hawaiian Electric and its subsidiaries is applicable): The Company manages various market risks in the ordinary course of business, including credit risk and liquidity risk. The Company believes the electric utility and the “other” segment’s exposures to these two risks were not material as of December 31, 2018. Credit risk for ASB is the risk that borrowers or issuers of securities will not be able to repay their obligations to the bank. Credit risk associated with ASB’s lending portfolios is controlled through its underwriting standards, loan rating of commercial and commercial real estate loans, on-going monitoring by loan officers, credit review and quality control functions in these lending areas and adequate allowance for loan losses. Credit risk associated with the securities portfolio is mitigated through investment portfolio limits, experienced staff working with analytical tools, monthly fair value analysis and on-going monitoring and reporting such as investment watch reports and loss sensitivity analysis. See “Allowance for loan losses” above and in Note 4 of the Consolidated Financial Statements. Liquidity risk for ASB is the risk that the bank will not meet its obligations when they become due. Liquidity risk is mitigated by ASB’s asset/liability management process, on-going analytical analysis, monitoring and reporting information such as weekly cash-flow analyses and maintenance of liquidity contingency plans. The Utilities are exposed to some commodity price risk primarily related to their fuel supply and IPP contracts. The Utilities’ commodity price risk is substantially mitigated so long as they have their current ECAC/ECRCs 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 68 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 Risk Committee. ALCO establishes policies under which management monitors and coordinates ASB’s assets and liabilities. See Note 4 of the Consolidated Financial Statements for a discussion of the use of rate lock commitments on loans held for sale and forward sale contracts to manage some interest rate risk associated with ASB’s residential loan sale program. Management of ASB measures interest-rate risk using simulation analysis with an emphasis on measuring changes in net interest income (NII) and the market value of interest-sensitive assets and liabilities in different interest-rate environments. The simulation analysis is performed using a dedicated asset/liability management software system enhanced with a mortgage prepayment model and a collateralized mortgage obligation database. The simulation software is capable of generating scenario-specific cash flows for all instruments using the specified contractual information for each instrument and product specific prepayment assumptions for mortgage loans and mortgage-backed 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-backed assets, future pricing spreads for new assets and liabilities and the speed and magnitude with which deposit rates change in response to changes in the overall level of interest rates. Other NII sensitivity analysis may include scenarios such as yield curve twists or non-static balance sheet changes (such as changes to key balance sheet drivers). Consistent with OCC guidelines, the market value or economic capitalization of ASB is measured as economic value of equity (EVE). EVE represents the theoretical market value of ASB’s net worth and is defined as the present value of expected net cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present value of expected net cash flows from existing off-balance sheet contracts. Key assumptions used in the calculation of ASB’s EVE include the prepayment behavior of loans and investments, the possible distribution of future interest rates, pricing spreads for assets and liabilities in the alternate scenarios and the rate and balance behavior of deposit accounts with indeterminate maturities. EVE is calculated in multiple scenarios. As with the NII simulation, the base case is represented by the current yield curve. Alternate scenarios are created by assuming immediate parallel shifts in the yield curve in increments of +/- 100 basis points (bp) up to + 300 bp. The change in EVE is measured as the change in EVE in a given rate scenario from the base case and expressed as a percentage. To gain further insight into the IRR profile, additional analysis is periodically performed in alternate scenarios including rate shifts of greater magnitude and changes in key balance sheet drivers. ASB’s interest-rate risk sensitivity measures as of December 31, 2018 and 2017 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, 2018 December 31, 2017 December 31, 2018 December 31, 2017 2.5% 1.9 1.1 (2.3) 3.0% 2.4 1.6 (2.7) 10.0% 8.1 5.1 (11.0) (8.0)% (4.0) (0.6) (6.0) The NII profile under the rising interest rate scenarios was less asset sensitive for all rate increases as of December 31, 2018 compared to December 31, 2017. NII asset sensitivity has been slowly decreasing as rising rates have slowed prepayment expectations, reducing the amount of the fixed-rate mortgage and mortgage-backed investment portfolios available to reprice in rising rate scenarios. In addition, the fixed-rate portion of the HELOC portfolio grew, further reducing the amount available to reprice in rising rate scenarios. 69 ASB’s base EVE increased to $1.49 billion as of December 31, 2018 compared to $1.18 billion as of December 31, 2017, due to the growth and mix of the balance sheet and longer duration of core deposits. Growth in the investment and loan portfolios was funded primarily with core deposits. In the third quarter of 2018, ASB’s biennial core deposit study was conducted by a third party as part of its regular process. As a result of the study, the duration of ASB’s core deposits extended compared to ASB’s core deposit duration at December 31, 2017. This had the effect of improving our base EVE and increasing EVE sensitivity. EVE sensitivity shifted from liability to asset sensitive as of December 31, 2018, primarily due to core deposit study enhancements leading to a higher retention rate and longer duration. The extension of core deposit duration provides greater capacity for hedging long duration assets. Although market rate increases have been slowing prepayments and extending duration in the residential loan and mortgage-backed investment portfolios, the longer duration of core deposits mitigates this exposure. The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indicative of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings, or the timing of any changes in earnings within the twelve-month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet, and management’s responses to the changes in interest rates. Other than bank interest rate risk The Company’s general policy is to manage “other than bank” interest rate risk through use of a combination of short-term debt, long-term debt and preferred securities. As of December 31, 2018, the Company was exposed to “other than bank” interest rate risk because of its periodic borrowing requirements, the impact of interest rates on the discount rate and the market value of plan assets used to determine retirement benefits expenses and obligations (see “Pension and other postretirement benefits obligations” in HEI’s MD&A and “Retirement benefits” in Notes 1 and 9 of the Consolidated Financial Statements) and the possible effect of interest rates on the electric utilities’ allowed rates of return. Other than these exposures, management believes its exposure to “other than bank” interest rate risk is not material. The Company’s long-term debt, in the form of borrowings of proceeds of revenue bonds, privately-placed senior notes and bank term loans, is at fixed rates (see Note 15 of the Consolidated Financial Statements for the fair value of long-term debt, net-other than bank). 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI and Hawaiian Electric: Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms - HEI Reports of Independent Registered Public Accounting Firms - Hawaiian Electric Consolidated Financial Statements HEI Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Balance Sheets at December 31, 2018 and 2017 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Hawaiian Electric Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Balance Sheets at December 31, 2018 and 2017 Consolidated Statements of Capitalization at December 31, 2018 and 2017 Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements Page 73 75 76 76 77 78 79 80 82 82 83 84 86 87 88 71 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Hawaiian Electric Industries, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows, for the years ended December 31, 2018 and 2017, and the related notes and the schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Honolulu, Hawaii February 28, 2019 We have served as the Company’s auditor since 2017. 72 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Hawaiian Electric Industries, Inc. In our opinion, the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2016 present fairly, in all material respects, the results of operations and cash flows of Hawaiian Electric Industries, Inc. and its subsidiaries for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2016 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California February 24, 2017 73 Report of Independent Registered Public Accounting Firm To the Shareholder and the Board of Directors of Hawaiian Electric Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets and statements of capitalization of Hawaiian Electric Company, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in common stock equity, and cash flows, for the years ended December 31, 2018 and 2017, and the related notes and the schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Honolulu, Hawaii February 28, 2019 We have served as the Company’s auditor since 2017. 74 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholder of Hawaiian Electric Company, Inc. In our opinion, the consolidated statements of income, comprehensive income, changes in common stock equity, and cash flows for the year ended December 31, 2016 present fairly, in all material respects, the results of operations and cash flows of Hawaiian Electric Company, Inc. and its subsidiaries for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2016 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California February 24, 2017 75 Consolidated Statements of Income Hawaiian Electric Industries, Inc. and Subsidiaries Years ended December 31 (in thousands, except per share amounts) Revenues Electric utility Bank Other Total revenues Expenses Electric utility Bank Other Total expenses Operating income (loss) Electric utility Bank Other Total operating income Merger termination fee Retirement defined benefits expense—other than service costs Interest expense, net – other than on deposit liabilities and other bank borrowings Allowance for borrowed funds used during construction Allowance for equity funds used during construction Income before income taxes Income taxes Net income Preferred stock dividends of subsidiaries Net income for common stock Basic earnings per common share Diluted earnings per common share Weighted-average number of common shares outstanding Net effect of potentially dilutive shares Weighted-average shares assuming dilution 2018 2017 2016 $ 2,546,525 314,275 $ 2,257,566 297,640 $ 2,094,368 285,924 49 419 362 2,860,849 2,555,625 2,380,654 2,304,864 1,994,042 1,804,298 206,040 16,589 198,104 17,246 197,697 22,821 2,527,493 2,209,392 2,024,816 241,661 108,235 (16,540) 333,356 — (5,962) (88,677) 4,867 10,877 254,461 50,797 203,664 1,890 201,774 1.85 1.85 108,855 291 109,146 $ $ $ 263,524 99,536 (16,827) 346,233 — (7,942) (78,972) 4,778 12,483 276,580 109,393 167,187 1,890 165,297 1.52 1.52 108,749 184 108,933 $ $ $ 290,070 88,227 (22,459) 355,838 90,000 (7,663) (75,803) 3,144 8,325 373,841 123,695 250,146 1,890 248,256 2.30 2.29 108,102 207 108,309 $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 76 Consolidated Statements of Comprehensive Income Hawaiian Electric Industries, Inc. and Subsidiaries Years ended December 31 (in thousands) Net income for common stock Other comprehensive income (loss), net of taxes: Net unrealized losses on available-for sale investment securities: Net unrealized losses on available-for sale investment securities arising during the period, net of tax benefits of $3,468, $2,886 and $3,763 for 2018, 2017 and 2016, respectively Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil and $238 for 2018, 2017 and 2016, respectively Derivatives qualified as cash flow hedges: Effective portion of foreign currency hedge net unrealized losses arising during the period, net of tax benefits of nil, nil and $179 for 2018, 2017 and 2016, respectively Unrealized interest rate hedging gain (loss), net of tax (expense) benefit of $151, nil and nil for 2018, 2017 and 2016, respectively Reclassification adjustment to net income, net of (taxes) benefits of nil, $289 and $(76) for 2018, 2017 and 2016, respectively Retirement benefit plans: Net gains (losses) arising during the period, net of (taxes) benefits of $9,810, $(41,129) and $27,703 for 2018, 2017 and 2016, respectively Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $7,317, $10,041 and $9,267 for 2018, 2017 and 2016, respectively Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of (taxes) benefits of $(2,887), $49,523 and $(18,206) for 2018, 2017 and 2016, respectively Other comprehensive loss, net of taxes 2018 2017 2016 $ 201,774 $ 165,297 $ 248,256 (9,472) (4,370) (5,699) — — (436) — — — — 454 (360) (281) — (119) (28,101) 65,531 (43,510) 21,015 15,737 14,518 8,325 (8,669) (78,724) (1,372) 28,584 (6,867) Comprehensive income attributable to Hawaiian Electric Industries, Inc. $ 193,105 $ 163,925 $ 241,389 The accompanying notes are an integral part of these consolidated financial statements. 77 Consolidated Balance Sheets Hawaiian Electric Industries, Inc. and Subsidiaries December 31 (dollars in thousands) ASSETS Cash and cash equivalents Accounts receivable and unbilled revenues, net Available-for-sale investment securities, at fair value Held-to-maturity investment securities, at amortized cost Stock in Federal Home Loan Bank, at cost Loans 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 Defined benefit pension and other postretirement benefit plans liability Other Total liabilities Preferred stock of subsidiaries - not subject to mandatory redemption Commitments and contingencies (Notes 3 and 4) Shareholders’ equity Preferred stock, no par value, authorized 10,000,000 shares; issued: none Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,879,245 shares and 108,787,807 shares at December 31, 2018 and 2017, respectively Retained earnings Accumulated other comprehensive loss, net of tax benefits $ $ 102,925 7,118,709 267,714 7,489,348 (2,659,230) $ $ 2018 2017 169,208 325,672 1,388,533 141,875 9,958 4,790,902 1,805 $ 4,830,118 833,426 530,364 82,190 13,104,051 214,773 28,254 6,158,852 73,992 110,040 1,879,641 372,518 950,236 538,384 580,788 10,907,478 34,293 — 1,669,267 543,623 $ 261,881 263,209 1,401,198 44,515 9,706 4,617,131 11,250 102,588 6,598,751 312,204 7,013,543 (2,553,295) $ $ 4,460,248 869,297 513,535 82,190 12,534,160 193,714 25,837 5,890,597 117,945 190,859 1,683,797 388,430 880,770 509,514 521,018 10,402,481 34,293 — 1,662,491 476,836 Net unrealized losses on securities Unrealized losses on derivatives Retirement benefit plans Total shareholders’ equity Total liabilities and shareholders’ equity $ (24,423) (436) (25,751) $ $ (50,610) 2,162,280 13,104,051 (14,951) — (26,990) $ (41,941) 2,097,386 12,534,160 The accompanying notes are an integral part of these consolidated financial statements. 78 Consolidated Statements of Changes in Shareholders’ Equity Hawaiian Electric Industries, Inc. and Subsidiaries (in thousands, except per share amounts) Balance, December 31, 2015 Net income for common stock Other comprehensive loss, net of tax benefits Issuance of common stock: Dividend reinvestment and stock purchase plan Retirement savings and other plans Share-based expenses and other, net Common stock dividends ($1.24 per share) Balance, December 31, 2016 Net income for common stock Other comprehensive loss, net of tax benefits Reclass of AOCI for tax rate reduction impact Issuance of common stock: Retirement savings and other plans Share-based expenses and other, net Common stock dividends ($1.24 per share) Balance, December 31, 2017 Net income for common stock Other comprehensive loss, net of tax benefits Issuance of common stock: Retirement savings and other plans Share-based expenses and other, net Common stock dividends ($1.24 per share) Balance, December 31, 2018 Common stock Shares Amount Retained earnings Accumulated other comprehensive income (loss) Total 107,460 $ 1,629,136 $ 324,766 $ (26,262) $ 1,927,640 — — 859 264 — — — — 26,844 9,298 (4,368) 248,256 — — — — — (134,050) 108,583 1,660,910 — — — 205 — — 438,972 165,297 — 7,440 — — — 4,664 (3,083) — — — (134,873) 108,788 1,662,491 — — 91 — — — — 2,650 4,126 — 476,836 201,774 — — — (134,987) — (6,867) 248,256 (6,867) — — — — 26,844 9,298 (4,368) (134,050) (33,129) 2,066,753 — (1,372) (7,440) — — — 165,297 (1,372) — 4,664 (3,083) (134,873) (41,941) 2,097,386 — (8,669) 201,774 (8,669) — — — 2,650 4,126 (134,987) 108,879 $ 1,669,267 $ 543,623 $ (50,610) $ 2,162,280 The accompanying notes are an integral part of these consolidated financial statements. 79 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 Loans originated and purchased, held for sale Proceeds from sale of loans, held for sale Deferred income taxes Share-based compensation expense Allowance for equity funds used during construction Other Changes in assets and liabilities Increase in accounts receivable and unbilled revenues, net Decrease (increase) in fuel oil stock Decrease (increase) in regulatory assets Increase (decrease) in accounts, interest and dividends payable Change in prepaid and accrued income taxes, tax credits and utility revenue taxes Increase in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities, net Net cash provided by operating activities Cash flows from investing activities Available-for-sale investment securities purchased Principal repayments on available-for-sale investment securities Proceeds from sale of available-for-sale investment securities Purchases of held-to-maturity investment securities Proceeds from repayments or maturities of held-to-maturity investment securities Purchase of stock from Federal Home Loan Bank Redemption of stock from Federal Home Loan Bank Net decrease (increase) in loans held for investment Proceeds from sale of commercial loans Proceeds from sale of real estate acquired in settlement of loans Proceeds from sale of real estate held for sale Capital expenditures Contributions in aid of construction Contributions to low income housing investments Acquisition of business Other, net Net cash used in investing activities 80 2018 2017 2016 $ 203,664 $ 167,187 $ 250,146 214,036 41,593 14,745 (109,537) 112,182 (9,368) 7,792 (10,877) (4,219) (64,321) 7,054 9,252 21,528 200,658 21,340 10,901 (115,104) 127,951 37,835 5,404 (12,483) (3,324) (12,875) (20,794) (17,256) 34,985 194,273 10,473 16,763 (236,769) 236,062 47,118 4,789 (8,325) (12,422) (898) 4,786 (18,273) (9,643) 29,429 20,685 39,109 20,871 15,488 499,312 882 (25,551) 420,441 1,587 (23,118) 495,658 (224,335) 218,930 — (103,184) 5,720 (28,292) 28,040 (189,352) 7,149 589 — (537,369) 30,599 (14,499) — 13,945 (792,059) (528,379) 220,231 (533,956) 219,845 — (44,515) — (2,868) 4,380 15,887 36,760 1,019 — (495,187) 64,733 (17,505) (76,323) 6,468 (815,299) 16,423 — — (7,773) 7,233 (194,042) 52,299 829 1,764 (330,043) 30,100 — — 856 (736,465) (continued) Consolidated Statements of Cash Flows (continued) Hawaiian Electric Industries, Inc. and Subsidiaries Years ended December 31 Cash flows from financing activities Net increase in deposit liabilities Net increase (decrease) in short-term borrowings with original maturities of three months or less Proceeds from issuance of short-term debt Repayment of short-term debt Net increase (decrease) in retail repurchase agreements Proceeds from other bank borrowings Repayments of other bank borrowings Proceeds from issuance of long-term debt Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds Withheld shares for employee taxes on vested share-based compensation Net proceeds from issuance of common stock Common stock dividends Preferred stock dividends of subsidiaries Other Net cash provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, January 1 Cash and cash equivalents, December 31 2018 2017 2016 165,880 341,668 523,675 (18,999) 25,000 (50,000) 26,556 696,000 (701,000) 250,000 (53,887) (996) — (134,987) (1,890) (1,603) 200,074 (92,673) 261,881 67,992 125,000 (75,000) 61,776 59,500 (123,034) 532,325 (465,000) (3,828) — (134,873) (1,890) (6,349) 378,287 (16,571) 278,452 (103,063) — — (43,601) 180,835 (272,902) 115,000 (75,000) (2,416) 13,220 (117,274) (1,890) 2,197 218,781 (22,026) 300,478 $ 169,208 $ 261,881 $ 278,452 The accompanying notes are an integral part of these consolidated financial statements. 81 Consolidated Statements of Income Hawaiian Electric Company, Inc. and Subsidiaries Years ended December 31 (in thousands) Revenues Expenses Fuel oil Purchased power Other operation and maintenance Depreciation Taxes, other than income taxes Total expenses Operating income Allowance for equity funds used during construction Retirement defined benefits expense—other than service costs 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 2018 2017 2016 $ 2,546,525 $ 2,257,566 $ 2,094,368 760,528 639,307 461,491 203,626 239,912 2,304,864 241,661 10,877 (3,631) (73,348) 4,867 180,426 34,778 145,648 915 144,733 1,080 143,653 $ 587,768 586,634 411,907 192,784 214,949 1,994,042 263,524 12,483 (6,003) (69,637) 4,778 205,145 83,199 121,946 915 121,031 1,080 119,951 $ 454,704 562,740 399,931 187,061 199,862 1,804,298 290,070 8,325 (5,602) (66,824) 3,144 229,113 84,801 144,312 915 143,397 1,080 142,317 $ The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Comprehensive Income Hawaiian Electric Company, Inc. and Subsidiaries Years ended December 31 (in thousands) Net income for common stock Other comprehensive income (loss), net of taxes: Derivatives qualified as cash flow hedges: 2018 2017 2016 $ 143,653 $ 119,951 $ 142,317 Effective portion of foreign currency hedge net unrealized losses arising during the period, net of tax benefits of nil, nil and $179 for 2018, 2017 and 2016, respectively Reclassification adjustment to net income, net of (taxes) benefits of nil, $289 and $(110) for 2018, 2017 and 2016, respectively Retirement benefit plans: Net gains (losses) arising during the period, net of (taxes) benefits of $9,024, $(39,587) and $27,153 for 2018, 2017 and 2016, respectively Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $6,594, $9,221 and $8,442 for 2018, 2017 and 2016, respectively Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of (taxes) benefits of $(2,887), $49,523 and $(18,206) for 2018, 2017 and 2016, respectively Other comprehensive income (loss), net of taxes Comprehensive income attributable to Hawaiian Electric Company, Inc. — — — 454 (281) (173) (26,019) 63,105 (42,631) 19,012 14,477 13,254 8,325 1,318 144,971 $ (78,724) (688) 119,263 $ 28,584 (1,247) 141,070 $ The accompanying notes are an integral part of these consolidated financial statements. 82 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 $1,255 and $1,251 as of December 31, 2018 and 2017, respectively Total property, plant and equipment, net Current assets Cash and cash equivalents Customer accounts receivable, net Accrued unbilled revenues, net Other accounts receivable, net Fuel oil stock, at average cost Materials and supplies, at average cost Prepayments and other Regulatory assets Total current assets Other long-term assets Regulatory assets Other Total other long-term assets Total assets Capitalization and liabilities Capitalization (see Consolidated Statements of Capitalization) Common stock equity Cumulative preferred stock – not subject to mandatory redemption Commitments and contingencies (Note 3) Long-term debt, net Total capitalization Current liabilities Current portion of long-term debt Short-term borrowings from non-affiliate Accounts payable Interest and preferred dividends payable Taxes accrued, including revenue taxes Regulatory liabilities Other Total current liabilities Deferred credits and other liabilities Deferred income taxes Regulatory liabilities Unamortized tax credits Defined benefit pension and other postretirement benefit plans liability Other Total deferred credits and other liabilities Total capitalization and liabilities The accompanying notes are an integral part of these consolidated financial statements. 83 2018 2017 $ $ 49,667 6,809,671 (2,577,342) 233,145 4,515,141 49,330 6,404,887 (2,476,352) 263,094 4,240,959 6,961 4,522,102 7,580 4,248,539 35,877 177,896 121,738 6,215 79,935 55,204 32,118 71,016 579,999 12,517 127,889 107,054 7,163 86,873 54,397 25,355 88,390 509,638 762,410 102,992 865,402 5,967,503 1,957,641 34,293 $ $ 780,907 91,529 872,436 5,630,613 1,845,283 34,293 1,418,802 3,410,736 1,318,516 3,198,092 — 25,000 171,791 23,215 233,333 17,977 60,003 531,319 49,963 4,999 159,610 22,575 199,101 3,401 59,456 499,105 383,197 932,259 91,522 503,659 114,811 2,025,448 5,967,503 $ 394,041 877,369 90,369 472,948 98,689 1,933,416 5,630,613 $ $ $ 2018 2017 $ 111,696 $ 107,634 681,305 614,675 1,164,541 1,124,193 99 (1,219) 1,957,641 1,845,283 Shares outstanding December 31, 2018 and 2017 2018 2017 150,000 $ 3,000 $ 50,000 150,000 250,000 89,657 250,000 175,000 70,000 50,000 1,000 3,000 5,000 1,793 5,000 3,500 7,000 5,000 3,000 1,000 3,000 5,000 1,793 5,000 3,500 7,000 5,000 1,234,657 34,293 34,293 (continued) Consolidated Statements of Capitalization Hawaiian Electric Company, Inc. and Subsidiaries December 31 (dollars in thousands, except par value) Common stock equity Common stock of $6 2/3 par value Authorized: 50,000,000 shares. Outstanding: 16,751,488 shares and 16,142,216 shares at December 31, 2018 and 2017, respectively Premium on capital stock Retained earnings Accumulated other comprehensive income (loss), 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 (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) 84 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): 3.10%, Refunding series 2017A, due 2026 4.00%, Refunding series 2017B, due 2037 3.25%, Refunding series 2015, due 2025 6.50%, Series 2009, due 2039 Total obligations to the State of Hawaii Other long-term debt – unsecured: Taxable senior notes: 4.38%, Series 2018A, due 2028 4.53%, Series 2018B, due 2033 4.72%, Series 2018C, due 2048 4.31%, Series 2017A, due 2047 4.54%, Series 2016A, due 2046 5.23%, Series 2015A, due 2045 3.83%, Series 2013A, due 2020 4.45%, Series 2013A and 2013B, due 2022 4.84%, Series 2013A, 2013B and 2013C, due 2027 5.65%, Series 2013B and 2013C, due 2043 3.79%, Series 2012A, paid in 2018 4.03%, Series 2012B, due 2020 4.55%, Series 2012B and 2012C, due 2023 4.72%, Series 2012D, due 2029 5.39%, Series 2012E, due 2042 4.53%, Series 2012F, due 2032 Total taxable senior notes 6.50 %, series 2004, Junior subordinated deferrable interest debentures, due 2034 Total other long-term debt – unsecured Total long-term debt Less unamortized debt issuance costs Less current portion long-term debt, net of unamortized debt issuance costs Long-term debt, net Total capitalization The accompanying notes are an integral part of these consolidated financial statements. 2018 2017 $ 125,000 $ $ $ 140,000 47,000 150,000 462,000 $ $ 67,500 17,500 15,000 50,000 40,000 80,000 14,000 52,000 100,000 70,000 — 82,000 100,000 35,000 150,000 40,000 913,000 51,546 964,546 125,000 140,000 47,000 150,000 462,000 — — — 50,000 40,000 80,000 14,000 52,000 100,000 70,000 50,000 82,000 100,000 35,000 150,000 40,000 863,000 51,546 914,546 1,426,546 1,376,546 7,744 — 8,067 49,963 1,418,802 1,318,516 $ 3,410,736 $ 3,198,092 85 Consolidated Statements of Changes in Common Stock Equity Hawaiian Electric Company, Inc. and Subsidiaries (in thousands) Balance, December 31, 2015 Net income for common stock Other comprehensive loss, net of tax benefits Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2016 Net income for common stock Other comprehensive loss, net of tax benefits Reclass of AOCI for tax rate reduction impact Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2017 Net income for common stock Other comprehensive income, net of taxes Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2018 Common stock Premium on capital Shares Amount stock Retained earnings Accumulated other comprehensive income (loss) Total 15,805 $ 105,388 $ 578,930 $ 1,043,082 $ 925 $ 1,728,325 — — 215 — — — 1,430 — — — 22,561 142,317 — — — (93,599) 16,020 106,818 601,491 1,091,800 — — — 122 — — — — 816 — — — — 13,184 119,951 — 209 — — (87,767) — (1,247) — — (322) — (688) (209) — — 142,317 (1,247) 23,991 (93,599) 1,799,787 119,951 (688) — 14,000 (87,767) 16,142 107,634 614,675 1,124,193 (1,219) 1,845,283 — — 609 — — — 4,062 — — — 66,630 143,653 — — — (103,305) 16,751 $ 111,696 $ 681,305 $ 1,164,541 $ — 1,318 — — 99 143,653 1,318 70,692 (103,305) $ 1,957,641 The accompanying notes are an integral part of these consolidated financial statements. 86 Consolidated Statements of Cash Flows Hawaiian Electric Company, 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 Deferred income taxes Allowance for equity funds used during construction Other Changes in assets and liabilities Decrease (increase) in accounts receivable Increase in accrued unbilled revenues Decrease (increase) in fuel oil stock Decrease (increase) in materials and supplies Decrease (increase) in regulatory assets Increase (decrease) in accounts payable Change in prepaid and accrued income taxes, tax credits and revenue taxes Increase in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Contributions in aid of construction Other Net cash used in investing activities Cash flows from financing activities Common stock dividends Preferred stock dividends of Hawaiian Electric and subsidiaries Proceeds from issuance of common stock Proceeds from issuance of long-term debt Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less Proceeds from other borrowings 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 2018 2017 2016 $ 145,648 $ 121,946 $ 144,312 203,626 26,602 (7,982) (10,877) (1,570) (50,917) (14,684) 6,938 (807) 9,252 24,358 25,036 18,746 20,244 393,613 192,784 8,498 38,037 (12,483) (1,066) 2,914 (15,361) (20,443) (718) (17,256) 25,734 29,862 604 (17,866) 335,186 187,061 6,935 74,386 (8,325) (3,700) 8,551 (7,184) 4,786 750 (18,273) (10,614) 2,123 484 (11,375) 369,917 (445,863) (441,598) (320,437) 30,599 10,082 64,733 4,578 30,100 2,138 (405,182) (372,287) (288,199) (103,305) (1,995) 70,700 100,000 (87,767) (1,995) 14,000 315,000 (50,000) (265,000) (4,999) 25,000 (472) 34,929 23,360 12,517 4,999 — (3,905) (24,668) (61,769) 74,286 $ 35,877 $ 12,517 $ (93,599) (1,995) 24,000 40,000 — — — (287) (31,881) 49,837 24,449 74,286 The accompanying notes are an integral part of these consolidated financial statements. 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 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, banking, and renewable/sustainable infrastructure investment businesses operating in the State of Hawaii. HEI owns Hawaiian Electric Company, Inc. (Hawaiian Electric), ASB Hawaii, Inc., an intermediate holding company, that owns American Savings Bank, F.S.B. (ASB), and Pacific Current, LLC (Pacific Current), which indirectly owns Hamakua Energy, LLC (Hamakua Energy) and Mauo, LLC (Mauo). Hawaiian Electric and its wholly owned operating subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric Light) and Maui Electric Company, Limited (Maui Electric), are regulated public electric utilities (collectively, the Utilities) in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other than Kauai. See Note 2. ASB is a federally chartered savings bank providing a full range of banking services to individual and business customers through its branch system in Hawaii. Hamakua Energy, owns and operates a 60-megawatt (MW) combined-cycle power plant, which sells the power it produces only to Hawaii Electric Light. Mauo is a commercial-scale, solar-plus-storage project (8.6 MW of solar and 42.3 MW of storage) currently under construction on the islands of Oahu and Maui. Basis of presentation. In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change for HEI and its subsidiaries (collectively, the Company) include the amounts reported for investment securities (ASB only); property, plant and equipment; pension and other postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities (Utilities only); electric utility unbilled revenues (Utilities only); and allowance for loan losses (ASB only). Consolidation. The HEI consolidated financial statements include the accounts of HEI and its subsidiaries. The Hawaiian Electric consolidated financial statements include the accounts of Hawaiian Electric and its subsidiaries, except for HECO Capital Trust III (Trust III), which is accounted for under the equity method because Hawaiian Electric does not have a controlling financial interest or variable interest in Trust III, but has the ability to exercise significant influence. When HEI or Hawaiian Electric has a controlling financial interest in another entity (usually, majority voting interest), that entity is consolidated. Investments in companies over which the Company or the Utilities have the ability to exercise significant influence, but not control, are accounted for using the equity method. The consolidated financial statements exclude variable interest entities (VIEs) when the Company or the Utilities are not the primary beneficiaries. See Note 3 for information regarding Trust III unconsolidated VIEs. In general, intercompany amounts are eliminated in consolidation (see Note 2 for exceptions). Cash and cash equivalents. The Utilities consider cash on hand, deposits in banks, money market accounts, certificates of deposit, short-term commercial paper of non-affiliates and liquid investments (with original maturities of three months or less) to be cash and cash equivalents. The Company considers the same items to be cash and cash equivalents as well as ASB’s deposits with the Federal Home Loan Bank (FHLB), federal funds sold (excess funds that ASB loans to other banks overnight at the federal funds rate) and securities purchased under resale agreements. Additionally, ASB is required by the Federal Reserve System to maintain noninterest-bearing cash reserves equal to a percentage of deposits. The reserve requirement for ASB at December 31, 2018 and 2017 was $28.1 million and $17.9 million, respectively. 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 88 accumulated depreciation. Amounts collected from customers for cost of removal are included in regulatory liabilities. See discussion regarding “Utility projects” in Note 3. 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 16 to 88 years for production plant, from 10 to 79 years for transmission and distribution plant and from 5 to 65 years for general plant. The Utilities’ composite annual depreciation rate, which includes a component for cost of removal, was 3.2% in 2018, 2017 and 2016. Leases. HEI, the Utilities and ASB have entered into lease agreements for the use of equipment and office space. The provisions of some of the lease agreements contain renewal options. HEI’s consolidated operating lease expense was $21 million, $20 million and $19 million in 2018, 2017 and 2016, respectively. The Utilities’ operating lease expense was $11 million, $11 million and $10 million in 2018, 2017 and 2016, respectively. HEI’s consolidated and the Utilities’ future minimum lease payments are as follows: (in millions) 2019 2020 2021 2022 2023 Thereafter HEI Hawaiian Electric $ $ 11 9 8 5 4 12 49 $ $ 6 6 5 2 2 3 24 Retirement benefits. Pension and other postretirement benefit costs are charged primarily to expense and electric utility plant (in the case of the Utilities). Funding for the Company’s qualified pension plans (Plans) is based on actuarial assumptions adopted by the Pension Investment Committee administering the Plans. The participating employers contribute amounts to a master pension trust for the Plans in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA), including changes promulgated by the Pension Protection Act of 2006, and considering the deductibility of contributions under the Internal Revenue Code. The Company generally funds at least the net periodic pension cost during the year, subject to limits and targeted funded status. Under a pension tracking mechanism approved by the Public Utilities Commission of the State of Hawaii (PUC), the Utilities generally will make contributions to the pension fund at the greater of the minimum level required under the law or net periodic pension cost. Certain health care and/or life insurance benefits are provided to eligible retired employees and the employees’ beneficiaries and covered dependents. The Company generally funds the net periodic postretirement benefit costs other than pensions (except for executive life) for postretirement benefits other than pensions (OPEB), while maximizing the use of the most tax-advantaged funding vehicles, subject to cash flow requirements and reviews of the funded status with the consulting actuary. The Utilities must fund OPEB costs as specified in the OPEB tracking mechanisms, which were approved by the PUC. Future decisions in rate cases could further impact funding amounts. Environmental expenditures. The Company and the Utilities are subject to numerous federal and state environmental statutes and regulations. In general, environmental contamination treatment costs are charged to expense. Environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the property for sale. Environmental costs are either capitalized or charged to expense when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated. The Utilities review their sites and measure the liability quarterly by assessing a range of reasonably likely costs of each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s and the Utilities’ assets and liabilities at federal and state tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. As a result of the 2017 Tax Cuts and Jobs Act (Tax Act), the accumulated deferred income tax balances (ADIT) were adjusted in 2017 for the lower federal income tax rate expected to be in effect when the deferred tax assets or liabilities are realized or settled. See further discussion under “Recent tax developments” in Note 11. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) income during the periods in which those temporary differences become deductible. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. HEI and the Utilities’ investment tax credits are deferred and amortized over the estimated useful lives of the properties to which the credits relate (and for the Utilities, this treatment is in accordance with Accounting Standards Codification (ASC) Topic 980, “Regulated Operations”). The Utilities are included in the consolidated income tax returns of HEI. However, income tax expense has been computed for financial statement purposes as if each utility filed a separate income tax return and Hawaiian Electric filed a consolidated Hawaiian Electric income tax return. Governmental tax authorities could challenge a tax return position taken by the Company. The Company and the Utilities use a “more-likely-than-not” recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Fair value measurements. Fair value estimates are estimates of the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s and the Utilities’ financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows: Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans, real estate acquired in settlement of loans, goodwill and asset retirement obligations (AROs). Earnings per share (HEI only). Basic earnings per share (EPS) is computed by dividing net income for common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly, except that dilutive common shares for stock compensation and the equity forward transactions are added to the denominator. Impairment of long-lived assets and long-lived assets to be disposed of. The Company and the Utilities review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Recent accounting pronouncements. Revenues from contracts with customers. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company and Hawaiian Electric adopted ASU No. 2014-09 (and subsequently issued revenue-related ASUs, as applicable) in the first quarter of 2018. There was no cumulative effect adjustment and no impact on the timing or pattern of revenue recognition, but ASU No. 2014-09 required changes with respect to the Company’s and Hawaiian Electric’s revenue disclosures. See Note 8. Financial instruments. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things: • Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. • Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. • Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). • Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company adopted ASU No. 2016-01 in the first quarter of 2018 and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated financial statements. Cash flows. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on eight specific cash flow issues - debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The Company adopted ASU No. 2016-15 in the first quarter of 2018 using a retrospective transition method and there was no impact from the adoption to the Company’s and Hawaiian Electric’s consolidated statements of cash flows. Restricted cash. In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows. Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations-Clarifying the Definition of a Business.” This update clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted ASU No. 2017-01 in the first quarter of 2018 and the impact of adoption was not material to the Company’s and Hawaiian Electric’s consolidated financial statements. 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Net periodic pension cost and net periodic postretirement benefit cost. In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost (NPPC) and net periodic postretirement benefit cost (NPBC) as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization under GAAP, when applicable. The Company adopted ASU No. 2017-07 in the first quarter of 2018: (1) retrospectively for the presentation in the income statement of the service cost component and the other components of NPPC and NPBC, and (2) prospectively for the capitalization in assets of the service cost component of NPPC and NPBC for Hawaiian Electric and its subsidiaries. HEI and ASB do not capitalize pension and OPEB costs. The Company and Hawaiian Electric elected the practical expedient that permits an entity to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The PUC approved in the Utilities’ rate cases, stipulated agreements to defer non-service cost components of NPPC and NPBC, which would have been capitalized prior to ASU No. 2017-07, as part of each utility’s pension tracking mechanisms. Such treatment is effective starting in 2018 and continues until each utility’s next rate case. In each utility’s next rate case, rates established would include recovery of the deferred non-service cost components and the Utilities’ will seek approval to capitalize only the service components of NPPC and NPBC going forward, which reflects the requirements of ASU No. 2017-07. The adoption of ASU 2017-07 in the first quarter of 2018 did not have an impact on 2018 net income. The following table summarizes the impact to the prior period financial statements of the adoption of ASU No. 2017-07: (in thousands) HEI Consolidated Statements of Income Expenses Electric utility Bank Other Total expenses Operating income Electric utility Bank Other Total operating income 2017 Adjustment from adoption of ASU No. 2017-07 As previously filed As currently reported As previously filed 2016 Adjustment from adoption of ASU No. 2017-07 As currently reported $ 2,000,045 $ 198,924 18,365 $ 2,217,334 $ (6,003) $ 1,994,042 198,104 (820) (1,119) 17,246 (7,942) $ 2,209,392 $ 1,809,900 $ 198,572 24,007 $ 2,032,479 $ (5,602) $ 1,804,298 197,697 (875) (1,186) 22,821 (7,663) $ 2,024,816 $ $ 257,521 $ 98,716 (17,946) 338,291 $ 6,003 $ 820 1,119 7,942 $ 263,524 99,536 (16,827) 346,233 $ $ 284,468 $ 87,352 (23,645) 348,175 $ 5,602 $ 875 1,186 7,663 $ 290,070 88,227 (22,459) 355,838 $ Retirement defined benefits expense--other than service costs Hawaiian Electric Consolidated Statements of Income Other operation and maintenance Total expense Operating income Retirement defined benefits expense--other than service — costs Hawaiian Electric Consolidating Statements of Income (in Note 3) 2,000,045 257,521 $ 417,910 $ — $ (7,942) $ (7,942) $ — $ (7,663) $ (7,663) (6,003) $ (6,003) 6,003 411,907 1,994,042 263,524 $ 405,533 $ 1,809,900 284,468 (5,602) $ (5,602) 5,602 399,931 1,804,298 290,070 (6,003) (6,003) — (5,602) (5,602) Hawaiian Electric (parent only) Other operation and maintenance Total expense Operating income Retirement defined benefits expense--other than service costs 279,440 1,425,655 172,849 (5,049) (5,049) 5,049 274,391 1,420,606 177,898 273,176 1,277,245 197,139 (5,058) (5,058) 5,058 268,118 1,272,187 202,197 — (5,049) (5,049) — (5,058) (5,058) 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) 2017 Adjustment from adoption of ASU No. 2017-07 As previously filed As currently reported As previously filed 2016 Adjustment from adoption of ASU No. 2017-07 As currently reported Hawaiian Electric Consolidating Statements of Income (in Note 3) Hawaii Electric Light Other operation and maintenance $ 66,277 $ (93) $ 66,184 $ 63,897 $ 319 $ 64,216 Total expense Operating income Retirement defined benefits expense--other than service costs Maui Electric Other operation and maintenance Total expense Operating income Retirement defined benefits expense--other than service costs ASB Statements of Income Data (in Note 4) Compensation and employee benefits Other expense 287,868 45,599 — 72,193 286,522 39,156 — 95,751 19,324 (93) 93 (93) (861) (861) 861 (861) (820) 820 287,775 45,692 266,823 44,562 (93) — 71,332 285,661 40,017 68,460 265,832 42,873 319 (319) 319 (863) (863) 863 267,142 44,243 319 67,597 264,969 43,736 (861) — (863) (863) 94,931 20,144 90,117 18,487 (875) 875 89,242 19,362 Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which is intended to improve and simplify accounting rules around hedge accounting. The amendments in ASU No. 2017-12 improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments also expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, but early adoption is permitted. The Company early adopted ASU No. 2017-12 in the second quarter of 2018, with an effective date of April 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements. Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset, representing its right to use the underlying asset for the lease term, for all leases (except short-term leases) at the commencement date. For finance leases, a lessee is required to recognize interest on the lease liability separately from amortization of the ROU asset in the consolidated statements of income. For operating leases, a lessee is required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. The Company adopted ASU No. 2016-02 on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information for dates and periods before January 1, 2019 will not be updated and the disclosures required under the new standard will not be provided (i.e., the Company will continue to report comparative periods presented in the financial statements in the period of adoption under ASC 840, including the required disclosures under ASC 840). The new standard provides a number of optional practical expedients in transition. The Company has elected the practical expedient package under which the Company will not have to reassess its prior conclusions about whether any expired or existing contracts are or contain leases, whether there is a change in lease classification for any expired or existing leases under the new standard, or whether there were initial direct costs for any existing leases that would be treated differently under the new standard. The most significant effect of the new standard relates to the recognition of new ROU assets and lease liabilities on the Company’s balance sheet for purchase power agreements and real estate operating leases. On adoption, the Company recognized additional lease liabilities of approximately $257 million for the Company and approximately $236 million for the 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Utilities ($215 million related to PPAs), with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all of its leases that qualify, which means the Company will not recognize lease liabilities and ROU assets for all leases that have lease terms that are 12 months or less. The Company has elected the practical expedient to not separate lease and non-lease components for its real estate leases. The Utilities also elected the practical expedient to not assess all existing land easements that were not previously accounted for in accordance with ASC 840. Credit losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU No. 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date (based on historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than- temporary impairment model of accounting for credit losses on AFS debt securities will be replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The AFS debt security model will also require the use of an allowance to record the estimated losses (and subsequent recoveries). The accounting for the initial recognition of the estimated expected credit losses for purchased financial assets with credit deterioration would be recognized through an allowance for credit losses with an offset to the cost basis of the related financial asset at acquisition (i.e., there is no impact to net income at initial recognition). The Company plans to adopt ASU No. 2016-13 in the first quarter of 2020. The guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. The Company has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The team has assigned roles and responsibilities and developed key tasks to complete and a general timeline to be followed. The Company is evaluating the effect that this ASU will have on the consolidated financial statements and disclosures. Economic conditions and the composition of the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment. Compensation-retirement benefits-defined benefit plans. In August 2018, the FASB issued ASU 2018-14, “Compensation- Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020. The Company is evaluating the impact of the adoption of ASU No. 2018-14 on its financial statement disclosures, but does not expect it to have a material impact. Reclassifications. Reclassifications made to prior year-end financial statements to conform to 2018 presentation include a reclassification of contributions in aid of construction (CIAC) balances to “Property, plant and equipment, net” and “Total property, plant and equipment, net” for the Company and Hawaiian Electric, respectively, which reduced the amounts of the respective balances. Electric utility Regulation by the Public Utilities Commission of the State of Hawaii (PUC). The Utilities are regulated by the PUC and account for the effects of regulation under FASB ASC Topic 980, “Regulated Operations.” As a result, the Utilities’ financial statements reflect assets, liabilities, revenues and expenses based on current cost-based rate-making regulations (see Note 3 —“Regulatory assets and liabilities.” 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. The rate schedules of the Utilities include energy cost adjustment clauses (ECACs) and energy costs recovery clauses (ECRCs) 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 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recovered through surcharge mechanisms. The amounts collected through the ECAC/ECRCs and PPACs are required to be reconciled quarterly. Accounts receivable. Accounts receivable are recorded at the invoiced amount. The Utilities generally assess a late payment charge on balances unpaid from the previous month. The allowance for doubtful accounts is the Utilities’ best estimate of the amount of probable credit losses in the Utilities existing accounts receivable. At December 31, 2018 and 2017, the allowance for customer accounts receivable, accrued unbilled revenues and other accounts receivable was $1.5 million and $1.2 million, respectively. 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. The carrying value of CIAC is included in property, plant and equipment, net. Electric utility revenues. Revenues related to electric service are generally recorded when service is rendered and include revenues applicable to energy consumed in the accounting period but not yet billed to the customers. The Utilities also record revenue under a decoupling mechanism. See “Decoupling” discussion in Note 3 Electric Utility segment. 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 7.3% in 2018, 7.7% in 2017 and 7.6% in 2016, and reflected quarterly compounding. Bank (HEI only) Investment securities. Investments in debt securities are classified as held-to-maturity (HTM), trading or available-for-sale (AFS). ASB determines the appropriate classification at the time of purchase. Debt securities that ASB intends to and has the ability to hold to maturity are classified as HTM securities and reported at amortized cost. Marketable debt 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 securities not classified as either HTM or trading securities are classified as AFS and reported at fair value. Unrealized gains and losses for AFS securities are excluded from earnings and reported on a net basis in accumulated other comprehensive income (AOCI) until realized. Interest income is recorded on an accrual basis. Discounts and premiums on securities are accreted or amortized into interest income using the interest method over the remaining contractual lives of the agency obligation securities and the estimated lives of the mortgage-backed securities adjusted for anticipated prepayments. ASB uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the interest method of income recognition. The discounts and premiums on the agency obligations portfolio are accreted or amortized on a prospective basis using expected contractual cash flows. The discounts and premiums on the mortgage-backed securities portfolio are accreted or amortized on a retrospective basis using changes in anticipated prepayments. This method requires a retrospective adjustment of the effective yield each time ASB changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. Estimates of future prepayments are based on the underlying collateral characteristics and historic or projected prepayment behavior of each security. The specific identification method is used in determining realized gains and losses on the sales of securities. For securities that are not trading securities, individual securities are assessed for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant. A security is impaired if the fair value of the security is less than its carrying value at the financial statement date. When a security is impaired, ASB determines whether this impairment is temporary or other-than-temporary. If ASB does not expect to recover the entire amortized cost basis of the security or there is a change in the expected cash flows, an OTTI exists. If ASB intends to sell the security, or will more likely than not be required to sell the security before recovery of its amortized cost, the OTTI must be recognized in earnings. If ASB does not intend to sell the security, and it is not more likely than not that ASB will be required to sell the security before recovery of its amortized cost, the OTTI must be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is recognized in earnings, while the remaining OTTI is 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recognized in AOCI. Based on ASB’s evaluation as of December 31, 2018, 2017 and 2016, there was no indicated impairment as the bank expects to collect the contractual cash flows for these investments. Stock in Federal Home Loan Bank (FHLB) is carried at cost and is reviewed at least quarterly for impairment, with valuation adjustments recognized in noninterest income. Loans. ASB carries loans at amortized cost less the allowance for loan losses, loan origination fees (net of direct loan origination costs), commitment fees and purchase premiums and discounts. Interest on loans is credited to income as it is earned. Discounts and premiums are accreted or amortized over the life of the loans using the interest method. Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment in yield over periods not exceeding the contractual life of the loan using the interest method or taken into income when the loan is paid off or sold. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) received for commitments to originate or purchase loans are deferred and, if the commitment is exercised, recognized as an adjustment of yield over the life of the loan using the interest method. Nonrefundable commitment fees received for which the commitment expires unexercised are recognized as income upon expiration of the commitment. Loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. Premiums, discounts and net deferred loan fees are not amortized while a loan is classified as held for sale. A sale is recognized only when the consideration received is other than beneficial interests in the assets sold and control over the assets is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold. Allowance for loan losses. ASB maintains an allowance for loan losses to absorb losses inherent in its loan portfolio. The level of allowance for loan losses is based on a continuing assessment of existing risks in the loan portfolio, historical loss experience, changes in collateral values and current conditions (e.g., economic conditions, real estate market conditions and interest rate environment). The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss factors primarily derived from actual historical default and loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Adverse changes in any of these factors could result in higher charge-offs and provision for loan losses. ASB disaggregates its portfolio loans into portfolio segments for purposes of determining the allowance for loan losses. Commercial, commercial real estate, and commercial construction loans are defined as non-homogeneous loans and ASB utilizes a risk rating system for evaluating the credit quality of the loans. Non-homogeneous loans are also categorized into the regulatory asset quality classifications-Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. ASB utilizes a numerical-based, risk rating “PD Model” that 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. Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically underwritten based on common, uniform standards. For the homogeneous portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external credit bureau data and credit scores such as the Fair Isaac Corporation (FICO) score on a quarterly basis. ASB has built portfolio loss models for each major segment based on the combination of internal and external data to predict the probability of default at the loan level. ASB also considers qualitative factors in determining the allowance for loan losses. These include but are not limited to adjustments for changes in policies and procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and any concentrations of credit. 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. 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The allowance for loan losses is based on currently available information and historical experience, and future adjustments may be required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due to changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these differences and subsequent adjustments could be material. Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if the probability of collection is insufficient to warrant further accrual. All interest that is accrued but not collected is reversed. A loan may be returned to accrual status if (i) principal and interest payments have been brought current and repayment of the remaining contractual principal and interest is expected to be made, (ii) the loan has otherwise become well- secured and in the process of collection, or (iii) the borrower has been making regularly scheduled payments in full for the prior six months and it is reasonably assured that the loan will be brought fully current within a reasonable period. Cash receipts on nonaccruing loans are generally applied to reduce the unpaid principal balance. Loans considered to be uncollectible are charged-off against the allowance for loan losses. The amount and timing of charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance for loan losses. Loans that have been charged-off against the allowance for loan losses are periodically monitored to evaluate whether further adjustments to the allowance are necessary. Loans in the commercial and commercial real estate portfolio are charged-off when the loan is risk rated “Doubtful” or “Loss.” The loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A commercial or commercial real estate loan is considered uncollectible when: (a) the borrower is delinquent in principal or interest 90 days or more; (b) significant improvement in the borrower’s repayment capacity is doubtful; and/or (c) collateral value is insufficient to cover outstanding indebtedness and no other viable assets or repayment sources exist. Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. Such loan is considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that collateral value is insufficient to cover outstanding indebtedness and no other viable assets or repayment sources exist; (c) notification of the borrower’s bankruptcy is received or the borrower’s debt is discharged in bankruptcy and the loan is not reaffirmed; or (d) in cases where ASB is in a subordinate position to other debt, the senior lien holder has foreclosed and ASB’s junior lien is extinguished. Other consumer loans are generally charged-off when the balance becomes 120 days delinquent. Loans modified in a troubled debt restructuring. Loans are considered to have been modified in a troubled debt restructuring (TDR) when, due to a borrower’s financial difficulties, ASB makes concessions to the borrower that it would not otherwise consider for a non-troubled borrower. Modifications may include interest rate reductions, interest only payments for an extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in the normal market place, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status until the borrower has demonstrated sustained repayment performance for a period of six consecutive months. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, or there is reasonable doubt over the full collectability of principal and interest, the loan remains on nonaccrual status. Real estate acquired in settlement of loans. ASB records real estate acquired in settlement of loans at fair value, less estimated selling expenses. ASB obtains appraisals based on recent comparable sales to assist management in estimating the fair value of real estate acquired in settlement of loans. Subsequent declines in value are charged to expense through a valuation allowance. Costs related to holding real estate are charged to operations as incurred. Goodwill. Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination and is subsequently evaluated at least annually for impairment during the fourth quarter. At December 31, 2018 and 2017, the amount of goodwill was $82.2 million. The goodwill relates to ASB and is the Company’s only intangible asset with an indefinite useful life. To determine if there was an impairment to the book value of goodwill pertaining to ASB, the fair value of ASB was estimated using a valuation method based on a market approach and discounted cash flow method with each method having an 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) equal weighting in determining the fair value of ASB. The market approach considers publicly traded financial institutions and measures the institutions’ market values as a multiple to (1) net income and (2) book equity. The median market value multiples for net income and book equity from the selected institutions were applied to ASB’s net income and book equity to calculate ASB’s fair value using the market approach. The discounted cash flow method values a company on a going concern basis and is based on the concept that the future benefits derived from a particular company can be measured by its sustainable after-tax cash flows in the future. For the three years ended December 31, 2018, there has been no impairment of goodwill. Mortgage banking. Mortgage loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. Premiums, discounts and net deferred loan fees are not amortized while a loan is classified as held-for-sale. A sale is recognized only when the consideration received is other than beneficial interests in the assets sold and control over the assets is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold. ASB is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud or servicing violations. This primarily occurs during a loan file review. ASB considers and records a reserve for loan repurchases if appropriate. ASB recognizes a mortgage servicing asset when a mortgage loan is sold with servicing rights retained. This mortgage servicing right (MSR) is initially capitalized at its presumed fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing assets or liabilities are included as a component of gain on sale of loans. Under ASC Topic 860, “Transfers and Servicing,” ASB amortizes the MSRs in proportion to and over the period of estimated net servicing income and assess for impairment at each reporting date. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15- and 30-year mortgages and note rate in bands primarily of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Because observable market prices with exact terms and conditions may not be readily available, ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party on a semi-annual basis. The third-party relies on both published and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of fair value generated by the valuation model. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. Loan servicing fee income represents income earned for servicing mortgage loans owned by investors. It includes mortgage servicing fees and other ancillary servicing income, net of guaranty fees. Servicing fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. Tax credit investments. ASB invests in limited liability entities formed to operate qualifying affordable housing projects. The affordable housing investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. As a limited partner, ASB has no significant influence over the operations. These investments are initially recorded at the initial capital contribution with a liability recognized for the commitment to contribute additional capital over the term of the investment. ASB uses the proportional amortization method of accounting for its investments. Under the proportional amortization method, ASB amortizes the cost of its investments in proportion to the tax credits and other tax benefits it receives. The amortization, tax credits and tax benefits are reported as a component of income tax expense. For these limited liability entities, ASB assesses whether it is the primary beneficiary of the limited liability entity, which is a variable interest entity (VIE). The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. 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 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and no direct ability to unilaterally remove the general partner. All tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or conditions indicate that it is deemed probable that ASB will not recover its investment. If an investment is determined to be impaired, it is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent recoveries in value. As of December 31, 2018, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its low-income housing tax credit (LIHTC) investments. At December 31, 2018 and 2017, the carrying amount of LIHTC investments was $67.6 million and $59.0 million, respectively, and included in other assets in the consolidated balance sheets. ASB’s unfunded commitments to fund its LIHTC investments were $18.1 million and $15.8 million as of December 31, 2018 and 2017, respectively. These unfunded commitments are unconditional and legally binding and are recorded in accounts payable and other liabilities with an increase in other assets in the consolidated balance sheets. The table below summarizes the amounts in income tax expense related to ASB’s LIHTC investments: Years ended December 31 (in millions) 2018 2017 2016 Amounts in income taxes related to low-income housing tax credit investments Amortization recognized in the provision for income taxes Tax credits and other tax benefits recognized in the provision for income taxes Net benefit to income tax expense $ $ (7.7) $ (7.4) $ 10.9 10.7 3.2 $ 3.3 $ (5.8) 8.4 2.6 Note 2 · Segment financial information The electric utility and bank segments are strategic business units of the Company that offer different products and services and operate in different regulatory environments. The accounting policies of the segments are the same as those described for the Company in the summary of significant accounting policies, except as otherwise indicated and except that federal and state income taxes for each segment are calculated on a “stand-alone” basis. HEI evaluates segment performance based on net income. Each segment accounts for intersegment sales and transfers as if the sales and transfers were to third parties (i.e., at current market prices). Intersegment revenues consist primarily of Hamakua Energy revenues, interest, rent and preferred stock dividends. Electric utility Hawaiian Electric and its wholly owned operating subsidiaries, Hawaii Electric Light and Maui Electric, are public electric utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other than Kauai, and are regulated by the PUC. The utility subsidiaries are aggregated within the electric utility segment because they: (1) are involved in the business of supplying electric energy in the same geographical location (i.e., the State of Hawaii), (2) have similar production processes that comprise electric generation, (3) serve similar customers within their franchise territories (e.g., residential, commercial and industrial customers), (4) use similar electric grids to distribute the energy to their customers, (5) are regulated by the PUC and undergo similar rate-making processes, (6) have similar economic characteristics and (7) perform financial reporting oversight and management of the business at the consolidated level. Bank ASB is a federally chartered savings bank that provides a full range of banking services to individual and business customers through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), and is subject to reserve requirements established by the Board of Governors of the Federal Reserve System. 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other “Other” includes amounts for the holding companies (HEI and ASB Hawaii, Inc.), Pacific Current, and other subsidiaries not qualifying as reportable segments, and intercompany eliminations. Pacific Current. Pacific Current was formed in September 2017 to focus on investing in non-regulated renewable energy and sustainable infrastructure in the State of Hawaii to help reach the state’s sustainability goals. Pacific Current’s investments through its subsidiaries, Hamakua Energy, LLC and Mauo, LLC, are as follows: Hamakua power plant. On November 24, 2017, Hamakua Energy, LLC acquired Hamakua Energy Partners, L.P.’s 60-MW combined cycle power plant and other assets from affiliates of ArcLight Capital Partners, a private equity firm. The plant sells all the power it produces to Hawaii Electric Light under an existing power purchase agreement (PPA) that expires in 2030. Solar + Storage Power Purchase Agreement (PPA). On February 2, 2018, Mauo, LLC executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project that will provide 8.6 MW of solar capacity and 42.3 MWH of storage capacity on the islands of Maui and Oahu. The PPA has a 15-year term with an option to extend for an additional five years. The system is being constructed by a third party contractor under an Engineering, Procurement and Construction (EPC) contract that was contemporaneously negotiated and executed by Mauo, LLC. The EPC contract provides a fixed price for the purchase of the completed system, a project completion schedule and performance obligations designed to match the requirements of the PPA. Mauo, LLC plans fund the construction of the project with a construction facility that will be repaid at the commercial operation date (ultimately with cash from investment tax credits, state renewable tax credits and non-recourse project debt). There are five separate project sites, which are expected to be placed into service during 2019 and 2020. Segment financial information was as follows: (in thousands) 2018 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, 2018) 2017 Revenues from external customers Intersegment revenues (eliminations) Revenues Depreciation and amortization Interest expense, net Income (loss) before income taxes Income taxes (benefit) Net income (loss) Preferred stock dividends of subsidiaries Net income (loss) for common stock Capital expenditures Assets (at December 31, 2017)1 Electric utility Bank Other Total $ 2,546,472 $ 314,275 $ 102 $ 2,860,849 53 2,546,525 230,228 73,348 180,426 34,778 145,648 1,995 143,653 445,863 — 314,275 21,443 15,539 106,578 24,069 82,509 — 82,509 72,666 5,967,503 7,027,894 (53) 49 3,958 15,329 (32,543) (8,050) (24,493) (105) (24,388) 18,840 108,654 — 2,860,849 255,629 104,216 254,461 50,797 203,664 1,890 201,774 537,369 13,104,051 $ 2,257,455 $ 297,640 $ 530 $ 2,555,625 111 2,257,566 201,282 69,637 205,145 83,199 121,946 1,995 119,951 441,598 — 297,640 19,416 12,156 98,716 31,719 66,997 — 66,997 53,272 5,630,613 6,798,659 100 (111) 419 1,300 9,335 (27,281) (5,525) (21,756) (105) (21,651) 317 104,888 — 2,555,625 221,998 91,128 276,580 109,393 167,187 1,890 165,297 495,187 12,534,160 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) 2016 Revenues from external customers Intersegment revenues (eliminations) Revenues Depreciation and amortization Interest expense, net Income before income taxes Income taxes Net income Preferred stock dividends of subsidiaries Net income for common stock Capital expenditures Assets (at December 31, 2016)1 Electric utility Bank Other Total $ 2,094,224 $ 285,924 $ 506 $ 2,380,654 144 2,094,368 193,996 66,824 229,113 84,801 144,312 1,995 142,317 320,437 — 285,924 9,813 12,755 87,352 30,073 57,279 — 57,279 9,394 5,431,903 6,421,357 (144) 362 937 8,979 57,376 8,821 48,555 (105) 48,660 212 28,721 — 2,380,654 204,746 88,558 373,841 123,695 250,146 1,890 248,256 330,043 11,881,981 1 Contributions in aid of construction balances were reclassified from liabilities to “Property, plant and equipment, net” and “Total property, plant and equipment, net” for the Company and Hawaiian Electric, respectively, which reduced the amounts of the respective balances. Intercompany electricity sales of the Utilities to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal. Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution and the profit on such fees is nominal. Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation. 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 3 · Electric utility segment Regulatory assets and liabilities. Regulatory assets represent deferred costs and accrued decoupling revenues which are expected to be recovered through rates over PUC-authorized periods. Generally, the Utilities do not earn a return on their regulatory assets; however, they have been allowed to recover interest on certain regulatory assets and to include certain regulatory assets in rate base. Regulatory liabilities represent amounts included in rates and collected from ratepayers for costs expected to be incurred in the future, or amounts collected in excess of costs incurred that are refundable to customers. For example, the regulatory liability for cost of removal in excess of salvage value represents amounts that have been collected from ratepayers for costs that are expected to be incurred in the future to retire utility plant. Generally, the Utilities include regulatory liabilities in rate base or are required to apply interest to certain regulatory liabilities. In the table below, noted in parentheses are the original PUC authorized amortization or recovery periods and, if different, the remaining amortization or recovery periods as of December 31, 2018 are noted. Regulatory assets were as follows: December 31 (in thousands) Retirement benefit plans (balance primarily varies with plans’ funded statuses) Income taxes (1-55 years) Decoupling revenue balancing account and RAM regulatory asset (1-2 years) Unamortized expense and premiums on retired debt and equity issuances (19-30 years; 6-18 years remaining) Vacation earned, but not yet taken (1 year) Other (1-50 years; 1-46 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 (1-60 years) Income taxes (1-55 years) Retirement benefit plans (5 years beginning with respective utility’s next rate case) Other (5 years; 1-2 years remaining) Included in: Current liabilities Long-term liabilities 2018 2017 $ 624,126 $ 637,204 114,076 118,201 49,560 10,065 10,820 24,779 833,426 71,016 762,410 833,426 $ $ $ 64,087 11,993 11,224 26,588 869,297 88,390 780,907 869,297 $ $ $ 2018 2017 $ 491,006 $ 453,986 413,339 406,324 9,546 36,345 950,236 17,977 932,259 950,236 $ $ $ 9,961 10,499 880,770 3,401 877,369 880,770 $ $ $ 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 9). Major customers. The Utilities received 11% ($273 million), 11% ($239 million) and 11% ($226 million) of their operating revenues from the sale of electricity to various federal government agencies in 2018, 2017 and 2016, 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: 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2018 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 $5.9 million, $6.2 million and $6.5 million for general management and administrative services in 2018, 2017 and 2016, 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. For the year ended December 31, 2018 and from the period November 24, 2017 to December 31, 2017, Hamakua Energy, LLC (an indirect subsidiary of HEI) sold energy and capacity to Hawaii Electric Light (subsidiary of Hawaiian Electric and indirect subsidiary of HEI) under a PPA in the amount of $56 million and $3 million, respectively. Hawaiian Electric’s short-term borrowings from HEI totaled nil at December 31, 2018 and 2017. The interest charged on short-term borrowings from HEI is based on the lower of HEI’s or Hawaiian Electric’s effective weighted average short-term external borrowing rate. If both HEI and Hawaiian Electric do not have short-term external borrowings, the interest is based on the average of the effective rate for 30-day dealer-placed commercial paper quoted by the Wall Street Journal plus 0.15%. Borrowings among the Utilities are eliminated in consolidation. Interest charged by HEI to Hawaiian Electric was not material for the years ended December 31, 2018 and 2017. HECO Capital Trust III. Trust III, a wholly-owned unconsolidated subsidiary of Hawaiian Electric, 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’s balance sheet as of December 31, 2018 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 2018 consisted of $3.4 million of interest income received from the 2004 Debentures; $3.3 million of distributions to holders of the Trust Preferred Securities; and $0.1 million of common dividends on the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004 Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock. Unconsolidated variable interest entities. Power purchase agreements. As of December 31, 2018, the Utilities had four PPAs for firm capacity (as PGV has been offline since May 2018 due to lava flow on Hawaii Island) and other PPAs with IPPs and Schedule Q providers (i.e., 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which is currently required to be consolidated as VIEs. Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and the predecessor of Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and the predecessor of Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and the predecessor of Hamakua Energy in its consolidated financial statements. In November 2017, HEI acquired the Hamakua project through Hamakua Energy, an indirect subsidiary of Pacific Current, and has consolidated it in HEI’s consolidated financial statements since the date of the acquisition. For the other PPAs with IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the Utilities do not have variable interests in the IPPs due to the absence of an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPP was considered a “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Two IPPs of as-available energy declined to provide the information necessary for Utilities to determine the applicability of accounting standards for VIEs. If information is ultimately received from the IPPs, a possible outcome of future analyses of such information is the consolidation of one or both of such IPPs in the Consolidated Financial Statements. The consolidation of any significant IPP could have a material effect on the Consolidated Financial Statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs to the IPP. Commitments and contingencies. Fuel contracts. The Utilities have fuel supply contracts with Island Energy Services, LLC (IES), for low sulfur fuel oil (LSFO), diesel, industrial fuel oil (IFO), and ultra-low sulfur diesel (ULSD), through December 31, 2019. On January 21, 2019, the Utilities and PAR Hawaii Refining, LLC, a Hawaii corporation (PAR), entered into a fuel supply contract for the Utilities' LSFO, high sulfur fuel oil (HSFO), No. 2 diesel (Diesel), and ULSD requirements (Contract), which is effective upon approval by the PUC and terminates on December 31, 2022. This Contract will supply all LSFO, HSFO, Diesel and ULSD for the islands of Oahu, Maui, Molokai and Hawaii. If PAR is unable to provide LSFO, HSFO, Diesel and/or ULSD the Contract allows the Utilities to purchase LSFO, HSFO, Diesel and/or ULSD from another supplier. The Contract will automatically renew upon the conclusion of the original term for successive terms of 1 year beginning on January 1, 2023 unless a party gives written termination notice at least 120 days before the beginning of an extension. The Contract is subject to approval of the PUC, and can be terminated by either party if approval is not received by January 22, 2020 or if the Utilities’ request for PUC approval is denied. If PUC approves the Contract prior to December 31, 2019, the existing fuel contracts with IES will terminate as agreed with IES under a mutual termination and release agreement entered into on November 28, 2018. All of the costs incurred under the fuel supply contracts with IES are included in the Utilities’ respective ECAC/ECRCs to the extent such costs are not recovered through the base rates, and the costs incurred under the contract with PAR are requested to be recovered in the Utilities’ respective ECAC/ECRCs to the extent such costs are not recovered through base rates. Based on the purchase price per barrel as of December 31, 2018, the estimated cost of minimum purchases under the fuel supply contracts is $140 million in 2019. The actual cost of purchases in 2019 could vary substantially from this estimate of minimum purchases as a result of changes in market prices, quantities actually purchased, entry into new supply contracts and/or other factors. The Utilities purchased $0.7 billion, $0.6 billion and $0.4 billion of fuel under contractual agreements in 2018, 2017 and 2016, respectively. Contingencies. The Utilities are subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, the Utilities cannot rule out the possibility that such outcomes could have a material effect on the results of operations or liquidity for a particular reporting period in the future. Interim increases. For the year ended December 31, 2018, the Utilities recognized $10 million of revenues with respect to the Maui Electric 2018 rate case interim order. Such amounts recorded are subject to refund, with interest, if they exceed amounts in a final order. 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Power purchase agreements. Purchases from all IPPs were as follows: Years ended December 31 (in millions) Kalaeloa AES Hawaii HPOWER Puna Geothermal Venture Hamakua Energy Hawaiian Commercial & Sugar Wind IPPs Solar IPPs Other IPPs1 Total IPPs 1 Includes hydro power and other PPAs 2018 2017 2016 $ $ 216 140 69 15 56 — 107 29 7 639 $ $ 180 140 67 38 35 — 97 27 3 587 $ $ 152 149 71 28 29 1 113 15 5 563 As of December 31, 2018, the Utilities had four firm capacity PPAs for a total of 516.5 megawatts (MW) of firm capacity. Since May 2018, PGV facility with 34.6 MW of firm capacity has been offline due to lava flow on Hawaii Island. 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 2019 through 2023 and a total of $0.3 billion in the period from 2024 through 2048. In general, the Utilities base their payments under the PPAs upon available capacity and actual energy supplied 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/ ECRC 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/ECRC to the extent they are not recovered through base rates. AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years ending September 2022, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, but Hawaiian Electric and AES Hawaii were not able to reach agreement on the amendment. In June 2015, AES Hawaii filed an arbitration demand regarding a dispute about whether Hawaiian Electric was obligated to buy up to 9 MW of additional capacity based on a 1992 letter. Hawaiian Electric responded to the arbitration demand and in October 2015, AES Hawaii and Hawaiian Electric entered into a settlement agreement to stay the arbitration proceeding. The settlement agreement included certain conditions precedent which, if satisfied, would have released the parties from the claims under the arbitration proceeding. Among the conditions precedent was the successful negotiation and PUC approval of an amendment to the existing PPA. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on Amendment No. 4. However, in June 2018, the PUC issued an order suspending the Amendment No. 4 docket pending a DOH decision on AES’ request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric. If approved by the PUC, Amendment No. 4 will resolve AES Hawaii’s claims. Hu Honua Bioenergy, LLC (Hu Honua). In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. Under the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction delays, failed to meet its 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) obligations under the PPA and failed to provide adequate assurances that it could perform or had the financial means to perform. Hawaii Electric Light terminated the PPA on March 1, 2016. On November 30, 2016, Hu Honua filed a civil complaint in the United States District Court for the District of Hawaii that included claims purportedly arising out of the termination of Hu Honua’s PPA. On May 26, 2017, Hawaii Electric Light and Hu Honua entered into a settlement agreement that will settle all claims related to the termination of the original PPA. The settlement agreement was contingent on the PUC’s approval of an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 5, 2017. In July 2017, the PUC approved the amended and restated PPA, which becomes effective once the PUC’s order is final and non- appealable. On August 25, 2017, the PUC’s approval was appealed by a third party. The appeal is still pending. Hu Honua expects to be ready to be on-line by the end of March 2019. Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income. Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) implementation project. On August 11, 2016, the PUC approved the Utilities’ request to commence the ERP/EAM implementation project, subject to certain conditions, including a $77.6 million cap on cost recovery as well as a requirement that the Utilities achieve future cost savings consistent with a minimum of $244 million in ERP/EAM project-related benefits to be delivered to customers over the system’s 12-year service life. The decision and order (D&O) approved the deferral of certain project costs and allowed the accrual of allowance for funds used during construction (AFUDC), but limited the AFUDC rate to 1.75%. The ERP/EAM Implementation Project went live in October 2018. As of December 31, 2018, the Utilities considered the project implementation completed with incurred costs of $77.5 million of which $16.7 million were charged to O&M expenses, $2.6 million relate to capital costs and $58.2 million are deferred costs. In the Hawaiian Electric 2017 rate case, a settlement agreement approved by the PUC included authorization for the deferred project costs to accrue a return at 1.75% after the project went into service and until the deferred project costs are included in rate base, and for amortization of the deferred costs to not begin until the amortization expense is incorporated in rates and the unamortized deferred project costs are included in rate base. As of December 31, 2018, the accrued carrying costs after the project went into service amounted to $0.2 million. In February 2019, the PUC approved a methodology for passing the benefits of the new ERP/EAM system to customers developed by the Utilities in collaboration with the Consumer Advocate. The minimum of $244 million in customer benefits to be delivered over the 12-year service life is comprised of $141 million in future net O&M expense reductions and $103 million in future cost avoidance related to capital cost and tax cost. The O&M expense reduction commitments will be recognized as regulatory liabilities between rate cases and passed through to customers as reductions in rates in rate cases. The Utilities will file semi-annual reports detailing the O&M expense reduction benefits, capital cost avoidance benefits, and tax avoidance benefits. Schofield Generating Station Project. In June 2018, Hawaiian Electric placed into service an approximately 50 MW utility-owned and operated firm, renewable and dispatchable generation facility at Schofield Barracks. The project is located on land leased from the U.S. Army under a 35-year lease. PUC orders resulted in a project cost cap of $157.3 million of which capital costs up to $141.6 million (90% of the cost cap) are recoverable through the Major Project Interim Recovery (MPIR) adjustment mechanism. (See “Decoupling” section below for MPIR guidelines and cost recovery discussion.) Project costs incurred as of December 31, 2018 amounted to $144.9 million. Cost recovery of capital costs in excess of $141.6 million is to be addressed in the next general rate case. West Loch PV Project. In June 2017, the PUC approved the expenditure of funds for Hawaiian Electric to build, own and operate a utility-owned, grid-tied 20-MW (ac) solar facility on property owned by the Department of the Navy, including a proposed project cost cap of $67 million and a performance guarantee to provide energy at 9.56 cents/kWh or less to the system. In approving the project, the PUC agreed that the project is eligible for recovery of costs offset by related net benefits under the newly-established MPIR adjustment mechanism. (See “Decoupling” section below for MPIR guidelines and cost recovery discussion.) Hawaiian Electric has provided supplemental materials, as requested by the PUC, to support meeting the MPIR guidelines, accompanied by system performance guarantee and cost savings sharing mechanisms. A decision on these matters is pending. 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Hawaiian Electric executed a fixed-price Engineering, Procurement, and Construction (EPC) contract for the project on December 6, 2017. The EPC contract includes the cost of the solar panels for the project, which is not subject to modification due to any tariffs that may be imposed under the current photovoltaic (PV) cell and module import tariffs. Construction of the facility began in the second quarter of 2018, and the facility is expected to be placed in service in the second quarter of 2019. Project costs incurred as of December 31, 2018 amounted to $38.6 million. Hawaiian Telcom. The Utilities each had separate agreements for the joint ownership and maintenance of utility poles with Hawaiian Telcom, Inc. (Hawaiian Telcom), the respective county or counties in which each utility operates and other third parties, such as the State of Hawaii. The agreements set forth various circumstances requiring pole removal/installation/ replacement and the sharing of costs among the joint pole owners. The agreements allowed for the cost of work done by one joint pole owner to be shared by the other joint pole owners based on the apportionment of costs in the agreements. The Utilities maintained, replaced and installed the majority of the jointly-owned poles in each of the respective service territories, and billed the other joint pole owners for their respective share of the costs. The counties and the State had been reimbursing the Utilities for their share of the costs. However, Hawaiian Telcom had been delinquent in reimbursing the Utilities for its share of the costs. Hawaiian Telcom’s delinquency was resolved by new agreements with Hawaiian Telcom approved by the PUC in October 2018. These new agreements provide for the purchase by the Utilities of Hawaiian Telcom’s interest in all the joint poles, and licensing and operating agreements between the Utilities and Hawaiian Telcom subsequent to the transfer of the joint pole interest to the Utilities, and a settlement on the amount Hawaiian Telcom owed the Utilities under the joint ownership and maintenance agreements. The Utilities’ consideration of approximately $48 million for Hawaiian Telcom’s interest in the poles was offset in part by the settlement of the outstanding receivables owed by Hawaiian Telcom to the Utilities of $19.1 million ($12.3 million at Hawaiian Electric, $5.5 million at Hawaii Electric Light, and $1.3 million at Maui Electric). The remaining consideration for acquiring Hawaiian Telcom’s interest in the joint poles will be settled through the set-off of fees for unbilled poles (since the delinquency and dispute were raised) and for attachment fees and license fees for 2018, and future license fees due from Hawaiian Telcom, after which Hawaiian Telcom will make cash payments for license fees under the agreement. Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances. Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity. Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The EPA has since identified environmental impacts in the subsurface soil at the Site. Although Maui Electric never operated at the Site or owned the Site property, after discussions with the EPA and the DOH Maui Electric agreed to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigating the Site and the Adjacent Parcel to determine the extent of impacts of PCBs, residual fuel oils, and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of December 31, 2018, representing the probable and reasonably estimable cost to complete the additional investigation and estimated cleanup costs at the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued investigation. Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for the costs of investigation and cleanup of PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. The Navy has completed a remedial investigation and a feasibility study (FS) for the remediation of contaminated sediment at several locations in Pearl Harbor and issued its Final FS Report on June 29, 2015. The Navy released the Proposed Plan on February 2, 2016 and the Record of Decision on September 26, 2018 for the Pearl Harbor Sediment Remediation. In the Record of Decision the Navy refined its estimate for the costs of remediation for the site to be $3.4 million. On March 23, 2015, Hawaiian Electric received a letter from the EPA requesting that Hawaiian Electric submit a work plan to assess potential sources and extent of PCB contamination onshore at the Waiau Power Plant. Onshore sampling at the 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Waiau Power Plant was completed in two phases in December 2015 and June 2016. Appropriate remedial measures are being developed to address the extent of the onshore contamination, and any associated costs have not yet been determined. As of December 31, 2018, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.8 million. The reserve balance represents the estimable cost for the onshore investigation and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the assessment of potential source control requirements for onshore sediment and actual offshore cleanup costs. 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 legal obligations associated with the retirement of plant and equipment, including removal of asbestos and other hazardous materials. The Utilities recorded AROs related to the removal of retired generating units at Hawaiian Electric’s Honolulu and Waiau power plants, certain types of transformers and underground storage tanks, and the abandonment of fuel pipelines, underground injection and supply wells. In 2017, for the retired generating unit removal projects, the AROs were reassessed (resulting in a downward revision in estimated cash flows), the removal projects were completed and the AROs were reduced to nil. Changes to the ARO liability included in “Other liabilities” on Hawaiian Electric’s balance sheet were as follows: (in thousands) Balance, January 1 Accretion expense Liabilities incurred Liabilities settled Revisions in estimated cash flows Balance, December 31 2018 $ 6,035 $ 282 1,058 (74) 1,125 $ 8,426 $ 2017 25,589 10 5,370 (527) (24,407) 6,035 The Utilities have not recorded AROs for assets that are expected to operate indefinitely or where the Utilities cannot estimate a settlement date (or range of potential settlement dates). As such, ARO liabilities are not recorded for certain asset retirement activities, including various Utilities-owned generating facilities and certain electric transmission, distribution and telecommunications assets resulting from easements over property not owned by the Utilities. Regulatory proceedings. Decoupling. Decoupling is a regulatory model that is intended to provide utility financial stability and 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 in 2011, allows the utilities to recover from customers through annual rate adjustments, target test year revenues, independent of the level of kWh sales, which have declined as privately- owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. The decoupling mechanism has the following major components: (1) monthly revenue balancing account (RBA) revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthour sales, (2) rate adjustment mechanism (RAM) revenues for escalation in certain operation and maintenance (O&M) expenses and rate base changes, (3) major project interim recovery component (MPIR), (4) performance incentive mechanisms (PIMs), and (5) 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. Under the decoupling tariff approved in 2011, the prior year accrued RBA revenues (regulatory asset) and the annual RAM amount are billed from June 1 of each year through May 31 of the following year, which is within 24 months following the end of the year in which they are recorded as required by the accounting standard for alternative revenue programs. Under the decoupling mechanism, triennial general rate cases are required. Rate adjustment mechanism. The RAM is based on the lesser of: a) an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes, or b) cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). Annualized target revenues reset upon the issuance of an interim or final D&O in a rate case. 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The RAM Cap impacted the Utilities’ recovery of capital investments as follows: • Hawaiian Electric’s RAM revenues were limited to the RAM Cap in 2017 and 2018. • Maui Electric’s RAM revenues in 2017 and 2018 were below the RAM Cap. • Hawaii Electric Light’s RAM revenues in 2017 and 2018 were below the RAM Cap. For the RAM years 2014 - 2016, Hawaiian Electric was allowed to record RAM revenue beginning on January 1 and to bill such amounts from June 1 of the applicable year through May 31 of the following year. Subsequent to 2016, Hawaiian Electric reverted to the RAM provisions initially approved in March 2011— i.e., RAM is both accrued and billed from June 1 of each year through May 31 of the following year. Major project interim recovery. On April 27, 2017, the PUC issued an order that provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases. Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including, but not restricted to, renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for approved costs of eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case and all costs that are allowed to be recovered through the MPIR adjustment mechanism must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects that are not recovered through the MPIR would be included in the RAM and be subject to the RAM Cap, until the next rate case when the Utilities would request recovery in base rates. The PUC approved recovery of capital costs under the MPIR for Schofield Generating Station, which increased revenues in July through December 2018 by $3.4 million and will be collected in customer bills beginning in June 2019. On December 14, 2018, the PUC approved recovery of net operation and maintenance costs for the Schofield Generating Station through the MPIR adjustment mechanism, with accrual commencing as of October 1, 2018, which totaled $0.5 million for 2018. In February 2019, Hawaiian Electric submitted an MPIR filing for 2019 (which accrued effective January 1, 2019) that included the 2019 return on project amount (up to the capped amount) in rate base, depreciation and incremental O&M expenses, for collection from June 2020 through May 2021. Performance incentive mechanisms. The PUC has ordered the following performance incentive mechanisms (PIM). • Service Quality performance incentives are measured on a calendar-year basis beginning in 2018. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to be re-determined upon issuance of an interim or final order in a general rate case for each utility. • Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $6.7 million - for both indices in total for the three utilities). • Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or incentive is 8 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties or incentives of approximately $1.3 million - in total for the three utilities). • The Utilities accrued $2.1 million in estimated net service quality penalties for 2018, which will be reflected in the 2019 annual decoupling filing and will reduce customer rates in the period June 1, 2019 through May 31, 2020. • Demand Response measured by the demand response resources acquired in 2018. The award is up to 5% of the aggregate annual contract value for cost-effective demand response capability contracted with aggregators by December 31, 2018. The maximum award is $0.5 million for the three utilities in total and there are no penalties. This incentive applied to one-time performance in 2018 only. No reward is expected for 2018 performance. • Procurement of low-cost variable renewable resources through the request for proposal process in 2018 measured by comparison of the procurement price to target prices. The incentive is a percentage of the savings determined by 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) comparing procured price to a target of 11.5 cents per kilowatt-hour for renewable projects with storage capability and 9.5 cents per kilowatt-hour for energy-only renewable projects. There are two phases to this incentive. Phase 1 has an incentive of 20% of the savings for purchased power agreements filed by December 31, 2018 and subsequently approved by the PUC, with a cap of $3.5 million for the three utilities in total. Phase 2 has scaled incentives of 15%, 10% and 5% of the savings for purchased power agreements filed in January, February and March 2019, respectively, and subsequently approved by the PUC, with a cap of $3 million for the three utilities in total. There are no penalties. The Utilities submitted seven agreements for PUC approval in December 2018 which may qualify for rewards. Rewards, if qualified, will be accrued when the contract is approved by the PUC. Annual decoupling filings. The net annual incremental amounts to be collected (refunded) from June 1, 2018 through May 31, 2019 are as follows: (in millions) 2018 Annual incremental RAM adjusted revenues* Annual change in accrued RBA balance as of December 31, 2017 (and associated revenue taxes) 2017 Tax Act Adjustment ** Net annual incremental amount to be collected under the tariffs $ $ $ Hawaiian Electric 13.8 $ $ $ Hawaii Electric Light Maui Electric 3.4 0.7 $ $ — $ 4.1 $ 2.0 3.2 (2.8) 2.4 6.6 — $ 20.4 $ * The 2018 annual RAM adjusted revenues for Maui Electric terminated on August 23, 2018, the effective date of interim increase tariff rates that were implemented pursuant to the Interim D&O issued in the Maui Electric consolidated 2015 and 2018 rate case. ** Maui Electric incorporated a $2.8 million adjustment into its 2018 annual decoupling filing to incorporate the impact of the lower corporate income tax rate and the exclusion of the domestic production activities deduction, as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act). Tax adjustments for Hawaiian Electric and Hawaii Electric Light are described in the discussion below of their respective on-going rate cases. Performance-based regulation proceeding. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). The PUC intends to provide a forum to collaboratively develop modifications or new components to better align utility and customer interests. The PUC stated that PBR seeks to utilize both revenue adjustment mechanisms and performance mechanisms to more strongly align utilities’ incentives with customer interests. The order stated that, in general, the PUC is interested in ratemaking elements and/or mechanisms that result in: • Greater cost control and reduced rate volatility; • Efficient investment and allocation of resources regardless of classification as capital or operating expense; • • Fair distribution of risks between utilities and customers; and Fulfillment of State policy goals. Through this investigation, the PUC intends to: (1) identify specific areas of utility performance that should be improved; (2) determine appropriate metrics for measuring successful outcomes in those areas; and (3) establish reasonable financial rewards and/or penalties that are sufficient to incent the utility to achieve those outcomes. The proceeding has two phases. Phase 1 examines the current regulatory framework and identifies those areas of utility performance that are deserving of further focus in Phase 2. The PUC provided staff reports to the parties, held technical workshops and the parties filed briefs on: 1) goals and outcomes and 2) assessment of the existing regulatory framework and 3) metrics. PUC staff issued a Phase 1 proposal, and parties scheduled to file statements of position in March 2019 and reply statements of position in April 2019. PUC order related to Phase 1 will be issued after reply statements of position. Phase 2 will address design and implementation of performance incentive mechanisms, revenue adjustment mechanisms and other regulatory reforms. Performance-based ratemaking legislation. On April 24, 2018, Act 005, Session Laws 2018 was signed into law, which establishes performance metrics that the PUC shall consider while establishing performance incentives and penalty mechanisms under a performance-based ratemaking model. The law requires that the PUC establish these performance-based ratemaking mechanisms on or before January 1, 2020. The PUC opened a proceeding on April 18, 2018. See “Performance- based regulation proceeding” above. Most recent rate proceedings. Hawaiian Electric consolidated 2014 and 2017 test year rate cases. On February 16, 2018, Hawaiian Electric implemented an interim increase of $36 million. On April 13, 2018, Hawaiian Electric implemented an additional interim rate adjustment to adjust rates for the impact of the Tax Act. On June 22, 2018, the PUC issued its Final D&O, approving final 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) rate relief of a $37.7 million increase before the Tax Act impact reduction of $38.3 million, based on an ROACE of 9.5% and an overall rate of return of 7.57%. The PUC indicated that a revised energy cost recovery clause (ECRC) mechanism shall reflect a 98%/2% fossil fuel generation cost risk-sharing split between ratepayers and Hawaiian Electric, with an annual maximum upside/downside capped at $2.5 million for the utility. On December 7, 2018, the PUC approved the ECRC tariff, consistent with the rate case order, with an effective date of January 1, 2019. Maui Electric consolidated 2015 and 2018 test year rate cases. On August 9, 2018, the PUC approved an interim rate increase based on a stipulated settlement between Maui Electric and the Consumer Advocate of $12.5 million over revenues at current effective rates based on 7.43% rate of return (which incorporates a ROACE of 9.5% and a capital structure that includes a 57% common equity capitalization) on a $462 million rate base, with the depreciation rates approved in July 2018. Interim rates went into effect on August 23, 2018. Hawaii Electric Light 2016 and 2019 test year rate cases. In August 2017, the PUC issued an order granting an interim rate increase of $9.9 million based on the Stipulated Settlement Letter of Hawaii Electric Light and the Consumer Advocate filed on July 11, 2017 and an ROACE of 9.5% and subject to refund with interest, if it exceeds amounts allowed in a final order. The interim rate increase was implemented on August 31, 2017. On May 1, 2018, Hawaii Electric Light implemented an interim rate reduction of $9.9 million which was primarily to incorporate the effects of the Tax Act. On June 29, 2018, the PUC issued its Final D&O, approving the rates implemented in the interim rate reduction. On December 14, 2018, Hawaii Electric Light filed an application for a general rate increase for its 2019 test year rate case, requesting an increase of $13.4 million over revenues at current effective rates (for a 3.4% increase in revenues), based on an 8.3% rate of return (which incorporates a ROACE of 10.5%). Tax Cuts and Jobs Act impact on utility rates. The Utilities began tracking the impact of the Tax Cuts and Jobs Act of 2017 (Tax Act) as of January 1, 2018. Each Utility accrued regulatory liabilities for estimated tax savings from January 1 to the date incorporated in rates. The Tax Act reductions were incorporated in rates as follows: • Hawaiian Electric (based on the 2017 test year rate case) - effective April 13, 2018. • Hawaii Electric Light (based on the 2016 test year rate case) - effective May 1, 2018. • Maui Electric’s rates were adjusted for the Tax Act as follows: • • • adjustments for the period January 1, 2018 through May 31, 2018 are in the annual Revenue Balancing Account adjustment, which became effective on June 1, 2018, adjustments for the period June 1, 2018 through August 22, 2018 are embedded in the Revenue Balancing Account, which will be incorporated in rates on June 1, 2019, and adjustments from August 23, 2018 and thereafter are incorporated in interim rates as a result of the 2018 test year rate case. See discussion in “Decoupling” section above. Consolidating financial information. Hawaiian Electric is not required to provide separate financial statements or other disclosures concerning Hawaii Electric Light and Maui Electric to holders of the 2004 Debentures, which was issued by Hawaii Electric Light and Maui Electric to HECO Capital Trust III (Trust III) since all of their voting capital stock is owned, and their obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by Hawaiian Electric. Consolidating information is provided below for Hawaiian Electric and each of its subsidiaries for the periods ended and as of the dates indicated. Hawaiian Electric also unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder (see Hawaiian Electric and Subsidiaries’ Consolidated Statements of Capitalization) and (c) relating to the trust preferred securities of Trust III (see above under unconsolidated variable interest entities). Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments. 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Maui Electric 368,700 Other subsidiaries — Consolidating adjustments (218) [1] Hawaiian Electric Consolidated 2,546,525 $ Consolidating statement of income Year ended December 31, 2018 (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 Retirement defined benefits expense—other than service costs Interest expense and other charges, net Allowance for borrowed funds used during construction Income before income taxes Income taxes Net income Preferred stock dividends of subsidiaries Net income attributable to Hawaiian Electric Preferred stock dividends of Hawaiian Electric Hawaiian Electric $ 1,802,550 523,706 494,450 313,346 137,410 170,363 1,639,275 163,275 9,208 45,393 Hawaii Electric Light 375,493 90,792 95,838 70,396 40,235 34,850 332,111 43,382 478 — 146,030 49,019 77,749 25,981 34,699 333,478 35,222 1,191 — (2,649) (52,180) (417) (11,836) (565) (9,550) 4,019 167,066 22,333 144,733 — 276 31,883 6,868 25,015 534 572 26,870 5,577 21,293 381 144,733 24,481 20,912 1,080 — — Net income for common stock $ 143,653 24,481 20,912 Consolidating statement of comprehensive income Year ended December 31, 2018 — — — — — — — — — — — — — — — — — — — — — — — — — (218) — (45,393) [2] — 218 [1] — (45,393) — (45,393) — (45,393) — 760,528 639,307 461,491 203,626 239,912 2,304,864 241,661 10,877 — (3,631) (73,348) 4,867 180,426 34,778 145,648 915 144,733 1,080 (45,393) $ 143,653 (in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income for common stock $ 143,653 24,481 20,912 — (45,393) $ 143,653 Other comprehensive income (loss), net of taxes: Retirement benefit plans: Net losses arising during the period, net of tax benefits Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes Other comprehensive income, net of taxes Comprehensive income attributable to common shareholder (26,019) (6,090) (5,004) 19,012 2,819 2,423 8,325 1,318 3,305 34 2,788 207 $ 144,971 24,515 21,119 — — — — — 11,094 [1] (26,019) (5,242) [1] 19,012 (6,093) [1] (241) 8,325 1,318 (45,634) $ 144,971 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statement of income Year ended December 31, 2017 (in thousands) Revenues Expenses Fuel oil Purchased power Other operation and maintenance Depreciation Taxes, other than income taxes Total expenses Operating income Allowance for equity funds used during construction Equity in earnings of subsidiaries Retirement defined benefits expense—other than service costs Interest expense and other charges, net Allowance for borrowed funds used during construction Income before income taxes Income taxes Net income Preferred stock dividends of subsidiaries Net income attributable to Hawaiian Electric Preferred stock dividends of Hawaiian Electric Net income for common stock $ Hawaiian Electric $ 1,598,504 Hawaii Electric Light 333,467 Maui Electric 325,678 Other subsidiaries — Consolidating adjustments (83) [1] Hawaiian Electric Consolidated 2,257,566 $ 408,204 454,189 274,391 130,889 152,933 1,420,606 177,898 10,896 38,057 63,894 87,772 66,184 38,741 31,184 287,775 45,692 554 — (5,049) (48,277) (93) (11,799) 4,089 177,614 56,583 121,031 — 121,031 1,080 119,951 238 34,592 13,912 20,680 534 20,146 — 20,146 115,670 44,673 71,332 23,154 30,832 285,661 40,017 1,033 — (861) (9,644) 451 30,996 12,704 18,292 381 17,911 — 17,911 — — — — — — — — — — — — — — — — — — — — — — — — (83) — (38,057) [2] — 83 [1] — (38,057) — (38,057) — (38,057) — (38,057) $ 587,768 586,634 411,907 192,784 214,949 1,994,042 263,524 12,483 — (6,003) (69,637) 4,778 205,145 83,199 121,946 915 121,031 1,080 119,951 Consolidating statement of comprehensive income Year ended December 31, 2017 (in thousands) Net income for common stock Other comprehensive income (loss), net of taxes: Derivatives qualified as cash flow hedges: Reclassification adjustment to net income, net of tax benefits Retirement benefit plans: Net losses arising during the period, net of tax benefits Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes Other comprehensive income (loss), net of taxes Comprehensive income attributable to common shareholder Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated $ 119,951 20,146 17,911 — (38,057) $ 119,951 454 — — 63,105 3,093 7,329 14,477 1,903 1,619 (78,724) (4,994) (9,003) (688) 2 (55) $ 119,263 20,148 17,856 — — — — — — — 454 (10,422) [1] 63,105 (3,522) [1] 14,477 13,997 [1] (78,724) 53 (688) (38,004) $ 119,263 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statement of income Year ended December 31, 2016 (in thousands) Revenues Expenses Fuel oil Purchased power Other operation and maintenance Depreciation Taxes, other than income taxes Total expenses Operating income Allowance for equity funds used during construction Equity in earnings of subsidiaries Retirement defined benefits expense—other than service costs Interest expense and other charges, net Allowance for borrowed funds used during construction Income before income taxes Income taxes Net income Preferred stock dividends of subsidiaries Net income attributable to Hawaiian Electric Preferred stock dividends of Hawaiian Electric Net income for common stock $ Hawaiian Electric $ 1,474,384 Hawaii Electric Light 311,385 Maui Electric 308,705 Other subsidiaries — Consolidating adjustments (106) [1] Hawaiian Electric Consolidated 2,094,368 $ 305,359 431,009 268,118 126,086 141,615 1,272,187 202,197 6,659 42,391 55,094 81,018 64,216 37,797 29,017 267,142 44,243 765 — 94,251 50,713 67,597 23,178 29,230 264,969 43,736 901 — (5,058) (45,839) 319 (11,555) (863) (9,536) 2,484 202,834 59,437 143,397 — 143,397 1,080 142,317 294 34,066 12,277 21,789 534 21,255 — 21,255 366 34,604 13,087 21,517 381 21,136 — 21,136 — — — — — — — — — — — — — — — — — — — — — — — — — (106) — (42,391) [2] — 106 [1] — (42,391) — (42,391) — (42,391) — (42,391) $ 454,704 562,740 399,931 187,061 199,862 1,804,298 290,070 8,325 — (5,602) (66,824) 3,144 229,113 84,801 144,312 915 143,397 1,080 142,317 Consolidating statement of comprehensive income Year ended December 31, 2016 (in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income for common stock $ 142,317 21,255 21,136 — (42,391) $ 142,317 Other comprehensive income (loss), net of taxes: Derivatives qualified as cash flow hedges: Effective portion of foreign currency hedge net unrealized losses arising during the period, net of tax benefits Less: reclassification adjustment to net income, net of taxes Retirement benefit plans: Net losses arising during the period, net of tax benefits Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of tax benefits Other comprehensive loss, net of tax benefits Comprehensive income attributable to common shareholder (281) (173) — — — — (42,631) (5,141) (5,447) 13,254 1,718 1,549 28,584 (1,247) 3,269 (154) 3,852 (46) $ 141,070 21,101 21,090 114 — — — — — — — — — (281) (173) 10,588 [1] (42,631) (3,267) [1] 13,254 (7,121) [1] 200 28,584 (1,247) (42,191) $ 141,070 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Consolidating balance sheet December 31, 2018 (in thousands) Assets Property, plant and equipment Utility property, plant and equipment Land Plant and equipment Less accumulated depreciation Construction in progress Utility property, plant and equipment, net Nonutility property, plant and equipment, less accumulated depreciation Total property, plant and equipment, net Investment in wholly-owned subsidiaries, at equity Current assets Cash and cash equivalents 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 Other Total other long-term assets Total assets Capitalization and liabilities Capitalization Common stock equity $ 40,449 5,606 3,612 4,456,090 1,259,553 1,094,028 (1,523,861) (547,848) (505,633) 193,677 3,166,355 5,314 3,171,669 576,838 16,732 125,960 88,060 21,962 54,262 30,291 23,214 60,093 420,574 537,708 69,749 607,457 $ 4,776,538 8,781 726,092 115 726,207 — 15,623 26,483 17,051 3,131 11,027 7,155 5,212 3,177 88,859 120,658 15,944 136,602 951,668 30,687 622,694 1,532 624,226 — 3,421 25,453 16,627 3,033 14,646 17,758 3,692 7,746 92,376 104,044 17,299 121,343 837,945 $ 1,957,641 295,874 280,863 Cumulative preferred stock–not subject to mandatory redemption Long-term debt, net Total capitalization Current liabilities Short-term borrowings-non-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 22,293 1,000,137 2,980,071 25,000 126,384 16,203 164,747 7,699 46,391 386,424 271,438 657,210 60,271 359,174 61,950 Total deferred credits and other liabilities Total capitalization and liabilities 1,410,043 $ 4,776,538 5,000 200,916 486,779 — 25,362 2,841 34,458 5,406 20,414 88,481 56,823 98,948 15,034 71,338 20,542 262,685 837,945 7,000 217,749 520,623 — 20,045 4,203 34,128 4,872 15,077 78,325 54,936 176,101 16,217 73,147 32,319 352,720 951,668 115 — — — — — — — — 101 — — — — — — — 101 — — — 101 101 — — 101 — — — — — — — — — — — — — — — — — — — — (576,838) [2] — — — (21,911) [1] — — — — (21,911) — — — $ 49,667 6,809,671 (2,577,342) 233,145 4,515,141 6,961 4,522,102 — 35,877 177,896 121,738 6,215 79,935 55,204 32,118 71,016 579,999 762,410 102,992 865,402 (598,749) $ 5,967,503 (576,838) [2] $ 1,957,641 — — (576,838) — — (32) [1] — — (21,879) [1] (21,911) — — — — — — 34,293 1,418,802 3,410,736 25,000 171,791 23,215 233,333 17,977 60,003 531,319 383,197 932,259 91,522 503,659 114,811 2,025,448 101 (598,749) $ 5,967,503 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Consolidating balance sheet December 31, 2017 (in thousands) Assets Property, plant and equipment Utility property, plant and equipment Land Plant and equipment Less accumulated depreciation Construction in progress Utility property, plant and equipment, net Nonutility property, plant and equipment, less accumulated depreciation Total property, plant and equipment, net Investment in wholly-owned subsidiaries, at equity Current assets Cash and cash equivalents Advances to affiliates Customer accounts receivable, net Accrued unbilled revenues, net Other accounts receivable, net Fuel oil stock, at average cost Materials and supplies, at average cost Prepayments and other Regulatory assets Total current assets Other long-term assets Regulatory assets Other Total other long-term assets Total assets Capitalization and liabilities Capitalization Common stock equity Cumulative preferred stock–not subject to mandatory redemption Long-term debt, net Total capitalization Current liabilities Current portion of long-term debt Short-term borrowings-non-affiliate Short-term borrowings-affiliate Accounts payable Interest and preferred dividends payable Taxes accrued Regulatory liabilities Other Total current liabilities Deferred credits and other liabilities Deferred income taxes Regulatory liabilities Unamortized tax credits Defined benefit pension and other postretirement benefit plans liability Other Total deferred credits and other liabilities Total capitalization and liabilities 1,356,312 $ 4,510,416 $ 40,392 5,922 3,016 4,144,472 1,207,043 1,053,372 (1,451,612) (528,024) (496,716) 231,571 2,964,823 8,182 693,123 5,933 115 2,970,756 693,238 557,013 — 2,059 — 86,987 77,176 11,376 64,972 28,325 17,928 76,203 4,025 — 22,510 15,940 2,268 8,698 8,041 4,514 5,038 365,026 71,034 557,464 60,157 617,621 $ 4,510,416 122,783 16,311 139,094 903,366 23,341 583,013 1,532 584,545 — 6,332 12,000 18,392 13,938 1,210 13,203 18,031 2,913 7,149 93,168 100,660 15,061 115,721 793,434 $ 1,845,283 286,647 270,265 22,293 924,979 2,792,555 7,000 202,701 496,348 5,000 190,836 466,101 29,978 4,999 12,000 121,328 15,677 133,839 607 43,121 361,549 281,223 613,329 59,039 340,983 61,738 10,992 8,993 — — 20,427 2,735 30,312 1,549 14,197 78,213 55,863 94,901 15,163 65,518 17,675 249,120 793,434 — — 17,855 4,174 34,950 1,245 9,818 79,034 56,955 169,139 16,167 66,447 19,276 327,984 903,366 116 — — — — — — — — 101 — — — — — — — — 101 — — — 101 101 — — 101 — — — — — — — — — — — — — — — — — — — — — — (557,013) [2] — (12,000) [1] — — (7,691) [1] — — — — (19,691) — — — $ 49,330 6,404,887 (2,476,352) 263,094 4,240,959 7,580 4,248,539 — 12,517 — 127,889 107,054 7,163 86,873 54,397 25,355 88,390 509,638 780,907 91,529 872,436 (576,704) $ 5,630,613 (557,013) [2] $ 1,845,283 — — (557,013) 34,293 1,318,516 3,198,092 — — (12,000) [1] — (11) [1] — — (7,680) [1] (19,691) — — — — — — 49,963 4,999 — 159,610 22,575 199,101 3,401 59,456 499,105 394,041 877,369 90,369 472,948 98,689 1,933,416 101 (576,704) $ 5,630,613 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statements of changes in common stock equity Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated (in thousands) Balance, December 31, 2015 Net income for common stock Other comprehensive loss, net of tax benefits Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2016 Net income for common stock Other comprehensive income (loss), net of taxes Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2017 Net income for common stock Other comprehensive income, net of taxes Issuance of common stock, net of expenses Common stock dividends Balance, December 31, 2018 Hawaiian Electric $ 1,728,325 142,317 (1,247) 23,991 Hawaii Electric Light 292,702 21,255 (154) (5) 263,725 21,136 (46) — (93,599) (22,507) (25,261) 1,799,787 119,951 291,291 20,146 (688) 14,000 2 4 259,554 17,911 (55) 4,801 (87,767) (24,796) (11,946) 1,845,283 143,653 1,318 70,692 286,647 24,481 34 1 270,265 20,912 207 1,498 (103,305) (15,289) (12,019) 101 (556,528) $ 1,728,325 — — — — (42,391) 200 5 47,768 142,317 (1,247) 23,991 (93,599) 101 (550,946) 1,799,787 — — — — (38,057) 53 (4,805) 36,742 119,951 (688) 14,000 (87,767) 101 (557,013) 1,845,283 — — — — (45,393) (241) (1,499) 27,308 143,653 1,318 70,692 (103,305) $ 1,957,641 295,874 280,863 101 (576,838) $ 1,957,641 117 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statement of cash flows Year ended December 31, 2018 (in thousands) Cash flows from operating activities Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income $ 144,733 25,015 21,293 Adjustments to reconcile net income to net cash provided by operating activities Equity in earnings of subsidiaries Common stock dividends received from subsidiaries Depreciation of property, plant and equipment Other amortization Deferred income taxes Allowance for equity funds used during construction Other Changes in assets and liabilities: Increase in accounts receivable Increase in accrued unbilled revenues Decrease (increase) in fuel oil stock Decrease (increase) in materials and supplies Decrease (increase) in regulatory assets Increase in accounts payable Change in prepaid and accrued income taxes, tax credits and revenue taxes Increase (decrease) in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Contributions in aid of construction Advances from (to) affiliates Other Net cash used in investing activities Cash flows from financing activities Common stock dividends Preferred stock dividends of Hawaiian Electric and subsidiaries Proceeds from issuance of common stock Proceeds from issuance of long-term debt Repayment of long-term debt Net decrease in short-term borrowings from non- affiliates and affiliate with original maturities of three months or less Proceeds from other bank borrowings 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 $ 16,732 (45,493) 27,408 137,410 20,956 (9,806) (9,208) (1,033) (51,656) (10,884) 10,710 (1,966) 12,192 14,748 — — 40,235 5,069 (341) (478) (213) (4,867) (1,111) (2,329) 886 71 6,104 — — 25,981 577 2,165 (1,191) (324) (8,614) (2,689) (1,443) 273 (3,011) 3,506 24,438 (2,118) 3,047 17,178 18,484 298,211 (760) 8,186 73,349 2,328 7,794 49,692 (330,531) (54,553) (60,779) 24,828 — 3,226 3,499 — 1,182 2,272 12,000 3,843 (302,477) (49,872) (42,664) (103,305) (15,289) (12,019) (1,080) 70,700 75,000 (534) — 15,000 (381) 1,500 10,000 (30,000) (11,000) (9,000) (16,999) 25,000 (377) 18,939 14,673 2,059 — — (56) (11,879) 11,598 4,025 15,623 — — (39) (9,939) (2,911) 6,332 3,421 118 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 101 101 (45,393) [2] $ 145,648 45,393 [2] (100) (27,308) [2] — — — — — 14,220 [1] — — — — — 100 203,626 26,602 (7,982) (10,877) (1,570) (50,917) (14,684) 6,938 (807) 9,252 24,358 (331) [1] 25,036 — (14,220) [1] (27,639) — — (12,000) [1] 1,831 [1], [2] (10,169) 18,746 20,244 393,613 (445,863) 30,599 — 10,082 (405,182) 27,308 [2] (103,305) — (1,500) [2] — — 12,000 [1] — — 37,808 — — — $ (1,995) 70,700 100,000 (50,000) (4,999) 25,000 (472) 34,929 23,360 12,517 35,877 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Consolidating statement of cash flows Year ended December 31, 2017 (in thousands) Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Equity in earnings of subsidiaries Common stock dividends received from subsidiaries Depreciation of property, plant and equipment Other amortization Deferred income taxes Allowance for equity funds used during construction Other Changes in assets and liabilities: Decrease (increase) in accounts receivable Increase in accrued unbilled revenues Increase in fuel oil stock Decrease (increase) in materials and supplies Increase in regulatory assets Increase (decrease) in accounts payable Change in prepaid and accrued income taxes, tax credits and revenue taxes Increase (decrease) in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Contributions in aid of construction Advances from (to) affiliates Other Net cash used in investing activities Cash flows from financing activities Common stock dividends $ 121,031 20,680 18,292 (38,157) 36,867 130,889 2,398 26,342 (10,896) (1,154) 1,817 (11,355) (17,733) 1,603 (8,395) 23,519 — — — — 38,741 23,154 3,225 3,954 (554) 430 (359) (2,376) (469) (661) (4,007) (3,547) 2,875 8,004 (1,033) (342) 45 (1,630) (2,241) (1,660) (4,854) 5,762 16,716 7,961 5,362 709 (16,213) 257,988 52 (433) (157) 166 62,637 51,743 (339,279) (52,077) (50,242) 57,527 — (1,711) 4,293 3,500 649 2,913 (2,000) 400 (283,463) (43,635) (48,929) (87,767) (24,796) (11,946) Preferred stock dividends of Hawaiian Electric and subsidiaries Proceeds from the issuance of common stock (1,080) 14,000 (534) — Proceeds from the issuance of long-term debt 202,000 28,000 (381) 4,800 85,000 (162,000) (28,000) (75,000) Funds transferred for redemption of special purpose revenue bonds Net increase in short-term borrowings from non- affiliates and affiliate with original maturities of three months or less Other Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, January 1 3,499 (2,506) (33,854) (59,329) 61,388 Cash and cash equivalents, December 31 $ 2,059 — (396) (25,726) (6,724) 10,749 4,025 — (1,003) 1,470 4,284 2,048 6,332 119 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 101 101 (38,057) [2] $ 121,946 38,057 [2] (100) (36,742) [2] — — (263) [1] — — 1,411 [1] — — — — — 125 192,784 8,498 38,037 (12,483) (1,066) 2,914 (15,361) (20,443) (718) (17,256) 25,734 (177) [1] 29,862 — (1,411) [1] (37,182) — — (1,500) [1] 5,240 [1], [2] 3,740 604 (17,891) 335,186 (441,598) 64,733 — 4,578 (372,287) 36,742 [2] (87,767) — (4,800) [2] — — 1,500 [1] — 33,442 — — — (1,995) 14,000 315,000 (265,000) 4,999 (3,905) (24,668) (61,769) 74,286 12,517 $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statement of cash flows Year ended December 31, 2016 (in thousands) Cash flows from operating activities Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income $ 143,397 21,789 21,517 Adjustments to reconcile net income to net cash provided by operating activities Equity in earnings of subsidiaries Common stock dividends received from subsidiaries Depreciation of property, plant and equipment Other amortization Deferred income taxes Allowance for equity funds used during construction Other Changes in assets and liabilities: Decrease (increase) in accounts receivable Increase in accrued unbilled revenues Decrease in fuel oil stock Decrease (increase) in materials and supplies Increase in regulatory assets Increase (decrease) in accounts payable Change in prepaid and accrued income taxes, tax credits and revenue taxes Increase (decrease) in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Contributions in aid of construction Advances from (to) affiliates Other Net cash used in investing activities Cash flows from financing activities Common stock dividends (42,491) 47,843 126,086 2,979 54,721 (6,659) (2,517) 10,175 (5,741) 2,216 993 (16,161) (10,247) — — 37,797 1,817 7,027 (765) (750) (718) (1,033) 81 (515) (1,243) 768 — — 23,178 2,139 12,661 (901) (433) 1,776 (410) 2,489 272 (869) (1,135) 2,933 2,645 (3,478) 599 (11,682) 296,444 53 (78) 66,875 (168) (2,272) 54,366 (236,425) (51,344) (32,668) 23,611 — 1,932 3,412 12,000 175 3,077 (2,500) 31 (210,882) (35,757) (32,060) (93,599) (22,507) (25,261) Preferred stock dividends of Hawaiian Electric and subsidiaries Proceeds from the issuance of common stock Proceeds from the issuance of long-term debt Net decrease in short-term borrowings from non- affiliates and affiliate with original maturities of three months or less Other 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) 24,000 40,000 (9,500) (276) (40,455) 45,107 16,281 61,388 (534) (381) — — — (10) — — — (1) (23,051) (25,643) 8,067 2,682 10,749 (3,337) 5,385 2,048 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. 120 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (42,391) [2] $ 144,312 42,391 [2] (100) (47,768) [2] — — (23) [1] — — (2,682) [1] — — — — — 75 187,061 6,935 74,386 (8,325) (3,700) 8,551 (7,184) 4,786 750 (18,273) (10,614) 23 [1] 2,123 — 2,682 [1] (47,768) — — (9,500) [1] — (9,500) 484 (11,350) 369,917 (320,437) 30,100 — 2,138 (288,199) 47,768 [2] (93,599) — — — 9,500 [1] — 57,268 (1,995) 24,000 40,000 — (287) (31,881) 49,837 24,449 74,286 — 101 101 — — — $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 4· Bank segment (HEI only) Selected financial information American Savings Bank, F.S.B. Statements of Income Data Years ended December 31 (in thousands) Interest and dividend income Interest and fees on loans Interest and dividends on investment securities Total interest and dividend income Interest expense Interest on deposit liabilities Interest on other borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Fees from other financial services Fee income on deposit liabilities Fee income on other financial products Bank-owned life insurance Mortgage banking income Gains on sale of investment securities, net Other income, net Total noninterest income Noninterest expense Compensation and employee benefits Occupancy Data processing Services Equipment Office supplies, printing and postage Marketing FDIC insurance Other expense Total noninterest expense Income before income taxes Income taxes Net income 121 2018 2017 2016 $ 220,463 $ 207,255 $ 199,774 37,762 258,225 13,991 1,548 15,539 242,686 14,745 227,941 18,937 21,311 7,052 5,057 1,493 — 2,200 56,050 98,387 17,073 14,268 10,847 7,186 6,134 3,567 2,713 17,238 177,413 106,578 24,069 28,823 236,078 9,660 2,496 12,156 223,922 10,901 213,021 22,796 22,204 7,205 5,539 2,201 — 1,617 61,562 94,931 16,699 13,280 10,994 7,232 6,182 3,501 2,904 20,144 175,867 98,716 31,719 $ 82,509 $ 66,997 $ 19,184 218,958 7,167 5,588 12,755 206,203 16,763 189,440 22,384 21,759 8,707 4,637 6,625 598 2,256 66,966 89,242 16,321 13,030 11,054 6,938 6,075 3,489 3,543 19,362 169,054 87,352 30,073 57,279 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Reconciliation to amounts per HEI Consolidated Statements of Income*: Years ended December 31 (in thousands) Interest and dividend income Noninterest income *Revenues-Bank Total interest expense Provision for loan losses Total noninterest expense Less: Retirement defined benefits expense—other than service costs *Expenses-Bank *Operating income-Bank Add back: Retirement defined benefits expense—other than service costs 2018 2017 2016 $ 258,225 $ 236,078 $ 218,958 56,050 314,275 15,539 14,745 177,413 (1,657) 206,040 108,235 1,657 61,562 297,640 12,156 10,901 175,867 66,966 285,924 12,755 16,763 169,054 (820) (875) 198,104 99,536 820 197,697 88,227 875 Income before income taxes $ 106,578 $ 98,716 $ 87,352 Statements of Comprehensive Income Data Years ended December 31 (in thousands) Net income Other comprehensive income (loss), net of taxes: Net unrealized losses on available-for sale investment securities: Net unrealized losses on available-for sale investment securities arising during the period, net of tax benefits of $3,468, $2,886 and $3,763 for 2018, 2017 and 2016, respectively Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil and $238 for 2018, 2017 and 2016, respectively Retirement benefit plans: Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,108, $812 and $566 for 2018, 2017 and 2016, respectively Other comprehensive loss, net of tax benefits Comprehensive income 2018 2017 2016 $ 82,509 $ 66,997 $ 57,279 (9,472) (4,370) (5,699) — — (360) 2,353 (7,119) 1,231 (3,139) $ 75,390 $ 63,858 $ 857 (5,202) 52,077 122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Balance Sheets Data December 31 (in thousands) Assets Cash and due from banks Interest-bearing deposits Investment securities Available-for-sale, at fair value Held-to-maturity, at amortized cost (fair value of $142,057 and $44,412 at December 31, 2018 and 2017, respectively) Stock in Federal Home Loan Bank, at cost Loans held for investment Allowance for loan losses Net loans Loans held for sale, at lower of cost or fair value Other Goodwill Total assets Liabilities and shareholder’s equity Deposit liabilities–noninterest-bearing Deposit liabilities–interest-bearing Other borrowings Other Total liabilities Commitments and contingencies Common stock Additional paid in capital Retained earnings Accumulated other comprehensive loss, net of tax benefits Net unrealized losses on securities Retirement benefit plans Total shareholder’s equity Total liabilities and shareholder’s equity December 31 (in thousands) Other assets Bank-owned life insurance Premises and equipment, net Accrued interest receivable Mortgage servicing rights Low-income housing investments Real estate acquired in settlement of loans, net Other Other liabilities Accrued expenses Federal and state income taxes payable Cashier’s checks Advance payments by borrowers Other 123 2018 2017 $ 122,059 4,225 $ 140,934 93,165 1,388,533 1,401,198 141,875 9,958 4,843,021 (52,119) 4,790,902 1,805 486,347 82,190 $ 7,027,894 $ 1,800,727 4,358,125 110,040 124,613 6,393,505 1 347,170 325,286 (38,068) 634,389 $ 7,027,894 44,515 9,706 4,670,768 (53,637) 4,617,131 11,250 398,570 82,190 $ 6,798,659 $ 1,760,233 4,130,364 190,859 110,356 6,191,812 1 345,018 292,957 (31,129) 606,847 $ 6,798,659 $ (14,951) (16,178) 2018 2017 $ $ $ $ 151,172 214,415 20,140 8,062 67,626 406 24,526 486,347 54,084 2,012 26,906 10,183 31,428 124,613 $ $ $ $ 148,775 136,270 18,724 8,639 59,016 133 27,013 398,570 39,312 3,736 27,000 10,245 30,063 110,356 $ (24,423) (13,645) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death. The increase in premises and equipment, net was due to the expenditures of $76.5 million for the new campus project. Investment securities. The major components of investment securities were as follows: Gross Gross Estimated Less than 12 months 12 months or longer Amortized cost unrealized gains unrealized losses fair value Number of issues Fair value Amount Number of issues Fair value Amount Gross unrealized losses $ 156,694 $ 62 $ (2,407) $ 154,349 5 $ 25,882 $ (208) 19 $ 118,405 $ (2,199) 1,192,169 49,398 23,636 789 103 — (31,542) 1,161,416 (369) — 49,132 23,636 $ 1,421,897 $ 954 $ (34,318) $ 1,388,533 22 6 — 33 129,011 23,175 — (1,330) 145 947,890 (30,212) (369) — — — — — — — $ 178,068 $ (1,907) 164 $1,066,295 $ (32,411) $ 141,875 $ 141,875 $ $ 1,446 1,446 $ $ (1,264) $ 142,057 (1,264) $ 142,057 3 3 $ 29,814 $ 29,814 $ $ (400) (400) 2 2 $ $ 31,505 31,505 $ $ (864) (864) $ 185,891 $ 438 $ (2,031) $ 184,298 15 $ 83,137 $ (825) 8 $ 62,296 $ (1,206) (dollars in thousands) December 31, 2018 Available-for-sale U.S. Treasury and federal agency obligations Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Corporate bonds Mortgage revenue bonds Held-to-maturity Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies December 31, 2017 Available-for-sale U.S. Treasury and federal agency obligations Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Mortgage revenue bond 15,427 1,220,304 793 — (19,624) 1,201,473 — 15,427 $ 1,421,622 $ 1,231 $ (21,655) $ 1,401,198 67 — 82 653,635 (6,839) — — $ 736,772 $ (7,664) 77 — 85 459,912 (12,785) — — $ 522,208 $ (13,991) Held-to-maturity Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies $ $ 44,515 44,515 $ $ 1 1 $ $ (104) $ 44,412 (104) $ 44,412 2 2 $ 35,744 $ 35,744 $ $ (104) (104) — — $ $ — $ — $ — — ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2018, represent an OTTI. Total gross unrealized losses were primarily attributable to change in market conditions. On a quarterly basis the investment securities are evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and agency mortgage-backed securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for 2018, 2017 and 2016. U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds have contractual terms to maturity. Mortgage-backed 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. 124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The contractual maturities of investment securities were as follows: December 31, 2018 (in thousands) Available-for-sale Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Total available-for-sale securities Held-to-maturity Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Total held-to-maturity securities The proceeds, gross gains and losses from sales of available-for-sale securities were as follows: Amortized Cost Fair value $ 20,002 $ 19,955 117,549 116,508 76,750 15,427 75,227 15,427 229,728 227,117 1,192,169 1,161,416 $ 1,421,897 $ 1,388,533 $ $ 141,875 141,875 $ $ 142,057 142,057 Years ended December 31 2018 2017 2016 (in millions) Proceeds Gross gains Gross losses Interest income from taxable and non-taxable investment securities were as follows: Years ended December 31 (in thousands) Taxable Non-taxable $ — $ — $ 16.4 — — — — 0.6 — 2018 2017 2016 $ 37,153 $ 28,398 $ 19,166 609 425 18 $ 37,762 $ 28,823 $ 19,184 ASB pledged securities with a market value of approximately $546.1 million and $411.4 million as of December 31, 2018 and 2017, respectively, as collateral for public funds and other deposits, automated clearinghouse transactions with Bank of Hawaii, borrowing at the discount window of the Federal Reserve Bank of San Francisco, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2018 and 2017, securities with a carrying value of $92.0 million and $165.1 million, respectively, were pledged as collateral for securities sold under agreements to repurchase. Stock in FHLB. As of December 31, 2018 and 2017, ASB’s stock in FHLB was carried at cost ($10.0 million and $9.7 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. Quarterly and as conditions warrant, ASB reviews its investment in the stock of the FHLB for impairment. ASB evaluated its investment in FHLB stock for OTTI as of December 31, 2018, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2018, 2017 and 2016 based on its evaluation of the underlying investment. Future deterioration in the FHLB’s financial position and/or negative developments in any of the factors considered in ASB’s impairment evaluation may result in future impairment losses. 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Loans. The components of loans 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 2018 2017 $ 2,143,397 $ 2,118,047 748,398 978,237 13,138 92,264 14,307 733,106 913,052 15,797 108,273 14,910 3,989,741 3,903,185 587,891 266,002 544,828 223,564 4,843,634 4,671,577 (613) (52,119) (809) (53,637) $ 4,790,902 $ 4,617,131 ASB’s policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. ASB services real estate loans for investors (principal balance of $1.2 billion as of December 31, 2018, 2017 and 2016), which are not included in the accompanying balance sheets data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan servicing cost to expense as incurred. As of December 31, 2018 and 2017, ASB had pledged loans with an amortized cost of approximately $2.7 billion and $2.4 billion, respectively, as collateral to secure advances from the FHLB. As of December 31, 2018 and 2017, 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 $24.0 million and $23.8 million, respectively. As of December 31, 2018 and 2017, $18.3 million and $18.7 million of the loan balances, respectively, were to related interests of individuals who are directors of ASB. All such loans were made at ASB’s normal credit terms. Allowance for loan losses. As discussed in Note 1, ASB must maintain an allowance for loan losses that is adequate to absorb estimated probable credit losses associated with its loan portfolio. 126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The allowance for loan losses (balances and changes) and financing receivables were as follows: (in thousands) December 31, 2018 Allowance for loan losses: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total Beginning balance $ 2,902 $ 15,796 $ 7,522 $ 896 $ 4,671 $ (128) 74 (872) — — (353) 257 (1,291) (1,055) (18) 179 (578) — — (1,881) 12 — — (8) $ 10,851 $ 10,987 $ 53,637 (2,722) (17,296) (20,517) 2,136 1,608 (1,040) 21,470 4,254 14,745 1,976 $ 14,505 $ 6,371 $ 479 $ 2,790 $ 4 $ 9,225 $ 16,769 $ 52,119 876 $ 7 $ 701 $ 6 $ — $ — $ 628 $ 4 $ 2,222 Charge-offs Recoveries Provision Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment $ $ $ Financing Receivables: Ending balance $ 2,143,397 1,100 $ $ 14,498 748,398 $ $ 5,670 978,237 $ $ 473 13,138 $ $ 2,790 92,264 $ $ 4 $ 8,597 $ 16,765 $ 49,897 14,307 $ 587,891 $ 266,002 $ 4,843,634 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2017 Allowance for loan losses: $ 16,494 $ 915 $ 14,800 $ 2,059 $ — $ — $ 5,340 $ 89 $ 39,697 $ 2,126,903 $ 747,483 $ 963,437 $ 11,079 $ 92,264 $ 14,307 $ 582,551 $ 265,913 $ 4,803,937 Beginning balance $ 2,873 $ 16,004 $ 5,039 $ 1,738 $ 6,449 $ (826) 157 698 — — (14) 308 (210) 482 — — (208) 2,189 (1,114) (1,778) 2,902 $ 15,796 $ 7,522 $ 896 $ 4,671 $ 12 — — — 12 $ 16,618 $ 6,800 $ 55,533 (4,006) (11,757) (16,813) 1,852 1,217 (3,613) 14,727 4,016 10,901 $ 10,851 $ 10,987 $ 53,637 1,248 $ 65 $ 647 $ 47 $ — $ — $ 694 $ 29 $ 2,730 1,654 $ $ 15,731 733,106 $ $ 6,875 913,052 $ $ 849 15,797 $ $ 4,671 108,273 $ $ 12 $ 10,157 $ 10,958 $ 50,907 14,910 $ 544,828 $ 223,564 $ 4,671,577 $ 2,118,047 $ 18,284 $ 1,016 $ 8,188 $ 1,265 $ — $ — $ 4,574 $ 66 $ 33,393 $ 2,099,763 $ 732,090 $ 904,864 $ 14,532 $ 108,273 $ 14,910 $ 540,254 $ 223,498 $ 4,638,184 Beginning balance $ 4,186 $ 11,342 $ 7,260 $ 1,671 $ 4,461 $ (639) 421 — — (112) 59 (1,095) 4,662 (2,168) (138) 461 (256) — — 1,988 13 — — (1) $ 17,208 $ 3,897 $ 50,038 (5,943) (7,413) (14,245) 1,093 4,260 943 9,373 2,977 16,763 2,873 $ 16,004 $ 5,039 $ 1,738 $ 6,449 $ 12 $ 16,618 $ 6,800 $ 55,533 1,352 $ 80 $ 215 $ 789 $ — $ — $ 1,641 $ 6 $ 4,083 Ending balance $ 2,048,051 1,521 $ $ 15,924 800,395 $ $ 4,824 863,163 $ $ 949 18,889 $ $ 6,449 126,768 $ $ 12 $ 14,977 $ 6,794 $ 51,450 16,080 $ 692,051 $ 178,222 $ 4,743,619 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment $ 19,854 $ 1,569 $ 6,158 $ 3,629 $ — $ — $ 20,539 $ 10 $ 51,759 $ 2,028,197 $ 798,826 $ 857,005 $ 15,260 $ 126,768 $ 16,080 $ 671,512 $ 178,212 $ 4,691,860 127 $ $ $ Charge-offs Recoveries Provision Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Financing Receivables: Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2016 Allowance for loan losses: Charge-offs Recoveries Provision Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Financing Receivables: $ $ $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans. Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/ guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted. The credit risk profile by internally assigned grade for loans was as follows: December 31 (in thousands) Grade: 2018 2017 Commercial real estate Commercial construction Commercial Total Commercial real estate Commercial construction Commercial Total Pass $ 658,288 $ 89,974 $ 547,640 $ 1,295,902 $ 630,877 $ 83,757 $ 492,942 $ 1,207,576 Special mention Substandard Doubtful Loss Total 32,871 57,239 — — — 2,290 — — 11,598 28,653 — — 44,469 88,182 — — 49,347 52,882 — — 22,500 2,016 — — 27,997 23,421 468 — 99,844 78,319 468 — $ 748,398 $ 92,264 $ 587,891 $ 1,428,553 $ 733,106 $ 108,273 $ 544,828 $ 1,386,207 128 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The credit risk profile based on payment activity for loans was as follows: (in thousands) December 31, 2018 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, 2017 Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total loans 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 $ 3,757 $ 2,773 $ 2,339 $ 8,869 $ 2,134,528 $ 2,143,397 $ — 1,139 9 — — 315 5,220 — 681 — — — 281 3,166 — 2,720 319 — — 548 2,702 — 4,540 328 — — 1,144 11,088 748,398 973,697 12,810 92,264 14,307 586,747 254,914 748,398 978,237 13,138 92,264 14,307 587,891 266,002 $ 10,440 $ 6,901 $ 8,628 $ 25,969 $ 4,817,665 $ 4,843,634 $ $ 1,532 $ 1,715 $ 5,071 $ 8,318 $ 2,109,729 $ 2,118,047 $ — 425 23 — — 1,825 3,432 — 114 — — — 2,025 2,159 — 2,051 625 — — 730 1,876 — 2,590 648 — — 4,580 7,467 733,106 910,462 15,149 108,273 14,910 540,248 216,097 733,106 913,052 15,797 108,273 14,910 544,828 223,564 $ 7,237 $ 6,013 $ 10,353 $ 23,603 $ 4,647,974 $ 4,671,577 $ — — — — — — — — — — — — — — — — — — 129 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due, and TDR loans was as follows: December 31 (in thousands) Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total nonaccrual loans Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total accruing loans 90 days or more past due Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total troubled debt restructured loans not included above 2018 2017 $ $ $ $ $ $ 12,037 $ — 6,348 436 — — 4,278 4,196 27,295 $ — $ — — — — — — — — $ 10,194 $ 915 11,597 1,622 — — 1,527 62 25,917 $ 12,598 — 4,466 841 — — 3,069 2,617 23,591 — — — — — — — — — 10,982 1,016 6,584 425 — — 1,741 66 20,814 130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The total carrying amount and the total unpaid principal balance of impaired loans were as follows: December 31 (in thousands) With no related allowance recorded Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer With an allowance recorded Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer 2018 Unpaid principal balance Recorded investment Related allowance Recorded investment 2017 Unpaid principal balance Related allowance $ 7,822 $ 8,333 $ — $ 9,097 $ 9,644 $ — 2,743 2,030 — — 3,722 32 16,349 8,672 915 12,057 29 — — 1,618 57 23,348 16,494 915 14,800 2,059 — — 5,340 89 — 3,004 2,228 — — 4,775 32 18,372 8,875 915 12,086 29 — — 1,618 57 23,580 17,208 915 15,090 2,257 — — 6,393 89 — — — — — — — — 876 7 701 6 — — 628 4 2,222 876 7 701 6 — — 628 4 — 1,496 1,143 — — 2,328 8 14,072 9,187 1,016 6,692 122 — — 2,246 58 19,321 — 1,789 1,434 — — 3,166 8 16,041 9,390 1,016 6,736 122 — — 2,252 58 19,574 — — — — — — — — — 1,248 65 647 47 — — 694 29 2,730 18,284 19,034 1,248 1,016 8,188 1,265 — — 4,574 66 1,016 8,525 1,556 — — 5,418 66 65 647 47 — — 694 29 $ 39,697 $ 41,952 $ 2,222 $ 33,393 $ 35,615 $ 2,730 131 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ASB’s average recorded investment of, and interest income recognized from, impaired loans were as follows: December 31 (in thousands) With no related allowance recorded Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer With an allowance recorded Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Total Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer 2018 2017 2016 Average recorded investment Interest income recognized* Average recorded investment Interest income recognized* Average recorded investment Interest income recognized* $ 8,595 $ 445 $ 9,440 $ 316 $ 10,136 $ 324 — 2,206 1,532 — — 3,275 22 15,630 8,878 982 10,617 37 — — 1,789 57 22,360 17,473 982 12,823 1,569 — — 5,064 79 — 75 40 — — 28 — 588 363 42 440 3 — — 122 4 974 808 42 515 43 — — 150 4 91 1,976 1,094 — — 2,776 1 15,378 9,818 1,241 5,045 1,308 — — 3,691 57 21,160 19,258 1,332 7,021 2,402 — — 6,467 58 11 101 117 — — 54 — 599 493 54 251 97 — — 723 3 1,621 809 65 352 214 — — 777 3 1,124 1,105 1,518 — — 8,694 2 22,579 11,589 1,962 3,765 2,964 — — 16,106 12 36,398 21,725 3,086 4,870 4,482 — — 24,800 14 — 23 66 — — 370 — 783 457 15 137 206 — — 456 — 1,271 781 15 160 272 — — 826 — $ 37,990 $ 1,562 $ 36,538 $ 2,220 $ 58,977 $ 2,054 * Since loan was classified as impaired. Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery. ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction, extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the 132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral or reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained. All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for loan losses. Loan modifications that occurred during 2018, 2017, and 2016 and the impact on the allowance for loan losses were as follows: (dollars in thousands) Years ended December 31, 2018 Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer December 31, 2017 Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer December 31, 2016 Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Outstanding recorded investment Number of contracts Pre- modification Post- modification Net increase in ALLL $ 1,107 $ 1,133 $ — 7,487 1,776 — — 2,550 — — 7,492 1,786 — — 2,550 — 17 — 1,220 — — — 176 — 12,920 $ 12,961 $ 1,413 5 — 58 5 — — 13 — 81 7 — 46 1 — — 9 1 $ $ 742 $ 750 $ — 3,016 92 — — 889 59 — 3,002 92 — — 889 59 64 $ 4,798 $ 4,792 $ $ 3,131 $ 3,245 $ — 3,337 203 — — 20,266 — — 3,337 204 — — 20,266 — $ 26,937 $ 27,052 $ 1,756 14 — 36 2 — — 15 — 67 133 45 — 557 — — — 248 27 877 337 — 554 — — — 865 — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Loans modified in TDRs that experienced a payment default of 90 days or more in 2018, 2017, and 2016 and for which the payment default occurred within one year of the modification, were as follows: Years ended December 31 (dollars in thousands) 2018 2017 2016 Number of contracts Recorded investment Number of contracts Recorded investment Number of contracts Recorded investment Troubled debt restructurings that subsequently defaulted Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer — $ — 1 — — — 1 — 2 $ — — 81 — — — 246 — 327 1 — — — — — — — 1 $ 222 — — — — — — — $ 222 1 — — — — — 1 — 2 $ 239 — — — — — 24 — $ 263 If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR were nil at December 31, 2018 and 2017. The Company had $4.2 million and $4.3 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2018 and 2017, respectively. Mortgage servicing rights (MSRs). In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold. ASB received $112.2 million, $128.0 million and $236.1 million of proceeds from the sale of residential mortgages in 2018, 2017, and 2016, respectively, and recognized gains on such sales of $1.5 million, $2.2 million, and $6.6 million in 2018, 2017, and 2016, respectively. Repurchased mortgage loans were nil for 2018, 2017 and 2016. Mortgage servicing fees, a component of other income, net, were $3.0 million, $3.0 million, and $2.9 million for the years ended December 31, 2018, 2017, and 2016, respectively. Changes in the carrying value of MSRs were as follows: (in thousands) December 31, 2018 December 31, 2017 Gross carrying amount1 Accumulated amortization1 Valuation allowance Net carrying amount $ $ 18,556 17,511 $ $ (10,494) (8,872) $ $ — $ — $ 8,062 8,639 1 Reflects impact of loans paid in full. 134 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Changes related to MSRs were as follows: (in thousands) Mortgage servicing rights Balance, January 1 Amount capitalized Amortization Sale of mortgage servicing rights Other-than-temporary impairment Carrying amount before valuation allowance, December 31 Valuation allowance for mortgage servicing rights Balance, January 1 Provision (recovery) Other-than-temporary impairment Balance, December 31 2018 2017 2016 $ 8,639 $ 9,373 $ 1,045 (1,622) — — 1,239 (1,973) — — 8,884 2,740 (2,251) — — 8,062 8,639 9,373 — — — — — — — — — — — — Net carrying value of mortgage servicing rights $ 8,062 $ 8,639 $ 9,373 The estimated aggregate amortization expenses of MSRs for 2019, 2020, 2021, 2022 and 2023 are $1.1 million, $1.0 million, $0.9 million, $0.8 million and $0.7 million, respectively. ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15- and 30-year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest rates impact the value of ASB’s MSRs. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of MSRs, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of MSRs and increase the amortization of the MSRs. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. Key assumptions used in estimating the fair value of ASB’s MSRs used in the impairment analysis were as follows: December 31 (dollars in thousands) Unpaid principal balance Weighted average note rate Weighted average discount rate Weighted average prepayment speed 2018 2017 $ 1,188,514 $ 1,195,454 3.98% 10.0% 6.5% 3.94% 10.0% 9.0% 135 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions was as follows: December 31 (in thousands) Prepayment rate: 25 basis points adverse rate change 50 basis points adverse rate change Discount rate: 25 basis points adverse rate change 50 basis points adverse rate change 2018 2017 $ (250) $ (566) (139) (275) (869) (1,828) (111) (220) The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear. Deposit liabilities. The summarized components of deposit liabilities were as follows: December 31 (dollars in thousands) Savings Checking Interest-bearing Noninterest-bearing Commercial checking Money market Time certificates 2018 Weighted- average stated rate Amount 2017 Weighted- average stated rate Amount 0.07% $ 2,322,552 0.07% $ 2,303,450 0.09 — — 0.63 1.61 1,055,019 932,608 868,119 152,713 827,841 0.03 — — 0.09 1.26 944,833 896,292 863,941 114,797 767,284 0.27% $ 6,158,852 0.20% $ 5,890,597 As of December 31, 2018 and 2017, time certificates of $100,000 or more totaled $500.2 million and $433.4 million, respectively. The approximate scheduled maturities of time certificates outstanding at December 31, 2018 were as follows: (in thousands) 2019 2020 2021 2022 2023 Thereafter $ $ 508,833 128,613 107,095 49,329 30,456 3,515 827,841 Overdrawn deposit accounts are classified as loans and totaled $2.1 million and $1.7 million at December 31, 2018 and 2017, respectively. 136 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Interest expense on deposit liabilities by type of deposit was as follows: Years ended December 31 (in thousands) Time certificates Savings Money market Interest-bearing checking Other borrowings. 2018 2017 2016 $ 11,044 $ 7,687 $ 1,639 602 706 1,567 168 238 5,390 1,402 202 173 $ 13,991 $ 9,660 $ 7,167 Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties: (in millions) Repurchase agreements December 31, 2018 December 31, 2017 (in millions) Commercial account holders December 31, 2018 December 31, 2017 Gross amount of recognized liabilities Gross amount offset in the Balance Sheets Net amount of liabilities presented in the Balance Sheets $ 65 $ 141 — $ — Gross amount not offset in the Balance Sheets Net amount of liabilities presented in the Balance Sheets Financial instruments Cash collateral pledged $ 65 $ 141 92 $ 165 65 141 — — The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts. The counterparties or tri-parties may determine that additional collateral is required based on movements in the fair value of the collateral. Typically, a five percent discount is taken from the fair value of the investment securities to determine the value of the collateral pledged for the repurchase agreements. 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical securities, was as follows: (dollars in millions) Amount outstanding as of December 31 Average amount outstanding during the year Maximum amount outstanding as of any month-end Weighted-average interest rate as of December 31 Weighted-average interest rate during the year Weighted-average remaining days to maturity as of December 31 Securities sold under agreements to repurchase were summarized as follows: 2017 2016 141 98 141 0.65% 0.26% 1 $ $ $ 93 170 229 0.23% 1.43% 6 $ $ $ $ $ $ 2018 65 99 152 0.75% 0.71% 1 2017 December 31 Maturity (dollars in thousands) Overnight 1 to 29 days 30 to 90 days Over 90 days 2018 Weighted- average interest rate Collateralized by mortgage-backed securities and federal agency obligations at fair value plus accrued interest Repurchase liability Repurchase liability Weighted- average interest rate Collateralized by mortgage-backed securities and federal agency obligations at fair value plus accrued interest $ 65,040 0.75% $ 92,290 $ 140,859 0.65% $ 165,464 — — — — — — — — — — — — — — — — — — $ 65,040 0.75% $ 92,290 $ 140,859 0.65% $ 165,464 Advances from Federal Home Loan Bank. FHLB advances are fixed rate for a specific term and consist of the following: December 31, 2018 (dollars in thousands) Due in 2019 2020 2021 2022 2023 Thereafter Weighted-average stated rate Amount 2.63% $ 45,000 — — — — — — — — — — 2.63% $ 45,000 ASB and the FHLB are parties to an Advances, Pledge and Security Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB’s credit policies, and makes certain warranties and representations to the FHLB. Upon the occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties), the FHLB may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB are collateralized by loans and stock in the FHLB. As of December 31, 2018 and 2017, ASB’s available FHLB borrowing capacity was $2.0 billion, and $1.8 billion, respectively. ASB is required to obtain and hold a specific number of shares of capital stock of the FHLB. ASB was in compliance with all Advances Agreement requirements as of December 31, 2018 and 2017. Common stock equity. ASB is regulated and supervised by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct 138 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) material effect on ASB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ASB must meet specific capital guidelines that involve quantitative measures of ASB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The prompt corrective action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “undercapitalized” to “critically undercapitalized.” The regulators have substantial discretion in the corrective actions that might direct and could include restrictions on dividends and other distributions that ASB may make to ASB Hawaii and the requirement that ASB develop and implement a plan to restore its capital. In 1988, HEI agreed with the OTS predecessor regulatory agency at the time, to contribute additional capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital Maintenance Agreement). As of December 31, 2018, as a result of capital contributions in prior years, HEI’s maximum obligation to contribute additional capital under the Capital Maintenance Agreement has been reduced to approximately $28.3 million. To be categorized as “well capitalized,” ASB must maintain minimum total capital, Tier 1 capital, and Tier 1 leverage ratios as set forth in the table below. As of December 31, 2018, and 2017 ASB was in compliance with the minimum capital requirements under OCC regulations, and was categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the institution’s category under the capital guidelines. The tables below set forth actual and minimum required capital amounts and ratios: (dollars in thousands) December 31, 2018 Tier 1 leverage Common equity tier 1 Tier 1 capital Total capital December 31, 2017 Tier 1 leverage Common equity tier 1 Tier 1 capital Total capital Actual Minimum required Required to be well capitalized Capital Ratio Capital Ratio Capital Ratio 606,291 606,291 606,291 660,151 571,810 571,810 571,810 626,987 8.70% 12.80% 12.80% 13.93% 8.58% 12.95% 12.95% 14.20% 278,811 213,190 284,253 379,004 266,430 198,628 264,838 353,117 4.00% 4.50% 6.00% 8.00% 4.00% 4.50% 6.00% 8.00% 348,514 307,941 379,004 473,755 333,038 286,907 353,117 441,396 5.00% 6.50% 8.00% 10.00% 5.00% 6.50% 8.00% 10.00% In 2018, ASB paid cash dividends of $50.0 million to HEI, compared to cash dividends of $37.5 million in 2017. The FRB and OCC approved the dividends. Related-party transactions. HEI charged ASB $2.2 million, $2.1 million and $2.3 million for general management and administrative services in 2018, 2017 and 2016, 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. All amounts charged to ASB were settled as a capital contribution by HEI to ASB. Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans. ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income. 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 139 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2018 2017 Notional amount Fair value Notional amount Fair value $ 10,180 $ 10,132 91 $ (43) 13,669 $ 14,465 131 (24) 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 2018 2017 Asset derivatives Liability derivatives Asset derivatives Liability derivatives $ $ 91 — 91 $ $ — $ 43 43 $ 133 4 137 $ $ 2 28 30 1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets. The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB’s statements of income: Derivative Financial Instruments Not Designated as Hedging Instruments (in thousands) Interest rate lock commitments Forward commitments Location of net gains (losses) recognized in the Statements of Income Mortgage banking income Mortgage banking income Years ended December 31 2018 2017 2016 $ $ (40) $ (290) $ (19) 153 (59) $ (137) $ 37 (148) (111) 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 commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. ASB minimizes its exposure to loss under these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if any, is based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and property, plant and equipment. Letters of credit are conditional commitments issued by ASB to guarantee payment and performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. ASB holds collateral supporting those commitments for which collateral is deemed necessary. 140 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following is a summary of outstanding off-balance sheet arrangements: December 31 (in thousands) Unfunded commitments to extend credit: Home equity line of credit Commercial and commercial real estate Consumer Residential 1-4 family Commercial and financial standby letters of credit Total 2018 2017 $ 1,242,804 $ 1,214,103 515,058 70,292 17,552 13,340 466,510 68,053 18,635 13,136 $ 1,859,046 $ 1,780,437 Contingency. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade organizations filed a notice of appeal shortly after the approval was issued. As of December 31, 2018, ASB had accrued a reserve of $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable. Federal Deposit Insurance Corporation assessment. In February 2011, the Federal Deposit Insurance Corporation (FDIC) finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category. Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was effective April 1, 2011. As of June 30, 2016, the deposit insurance fund surpassed a target of 1.15 percent of estimated insured deposits that triggered important changes in the FDIC assessments for all banks. The changes took effect for premiums billed and paid in December 2016. Banks with less than $10 billion in assets saw their overall schedule decline by two basis points for banks paying the lowest premiums and up to five points for those at the top end of the assessment scale. In addition, a new formula for calculating risk-based assessment rates is now in effect. For the years ended December 31, 2018, 2017 and 2016 ASB’s FDIC insurance assessments were $2.5 million, $2.6 million and $3.2 million, respectively. The FDIC may impose special assessments in the future if it is deemed necessary to ensure the Deposit Insurance Fund ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance. Note 5 · Short-term borrowings As of December 31, 2018, HEI had $49 million of outstanding commercial paper, with a weighted-average interest rate of 2.9% and Hawaiian Electric had no commercial paper outstanding. As of December 31, 2017, HEI and Hawaiian Electric had $63 million and $5 million of commercial paper outstanding, respectively. As of December 31, 2018, HEI and Hawaiian Electric maintained syndicated credit facilities of $150 million and $200 million, respectively (see description of credit agreements below). Both HEI and Hawaiian Electric had no borrowings under their respective facilities during 2017 and 2018. None of the facilities are collateralized. As of December 31, 2018, HEI had three letters of credit outstanding in the aggregate amount of $6.7 million on behalf of Hamakua Energy. Bank term loan. On November 29, 2018, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures on November 28, 2019. The term loan credit agreement includes substantially the same financial covenant and customary representations and warranties, affirmative and negative covenants, and events of default (the occurrence of which may result in the loan outstanding becoming immediately due and payable) consistent with those in Hawaiian Electric’s existing and amended revolving unsecured credit agreement, expiring on June 30, 2022. Hawaiian Electric drew the first $25 million on November 29, 2018 and the second $25 million on January 31, 2019. 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Credit agreements. HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Facilities), effective July 3, 2017, to amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility and $200 million Hawaiian Electric Facility both terminate on June 30, 2022. Under the Facilities, draws would generally bear interest, based on each company’s respective current long-term credit ratings, at the “Adjusted LIBO Rate,” as defined in the agreement, plus 1.375% and annual fees on undrawn commitments, excluding swingline borrowings, of 20 basis points. The Facilities contain provisions for pricing adjustments in the event of a long-term ratings change based on the respective Facilities’ ratings-based pricing grid, which includes the ratings by Fitch, Moody’s and S&P. Certain modifications were made to incorporate some updated terms and conditions customary for facilities of this type. The Facilities continue to contain customary conditions that must be met in order to draw on them, including compliance with covenants (such as covenants preventing HEI’s/Hawaiian Electric’s subsidiaries from entering into agreements that restrict the ability of the subsidiaries to pay dividends to, or to repay borrowings from, HEI/Hawaiian Electric; and a covenant in Hawaiian Electric’s facility restricting Hawaiian Electric’s ability, as well as the ability of any of its subsidiaries, to guarantee additional indebtedness of the subsidiaries if such additional debt would cause the subsidiary’s “Consolidated Subsidiary Funded Debt to Capitalization Ratio” to exceed 65%). Under the HEI Facility, it is an event of default if HEI fails to maintain an unconsolidated “Capitalization Ratio” (funded debt) of 50% or less or if HEI no longer owns Hawaiian Electric or ASB. Under the Hawaiian Electric Facility, it is an event of default if Hawaiian Electric fails to maintain a “Consolidated Capitalization Ratio” (equity) of at least 35%, or if Hawaiian Electric is no longer owned by HEI. The Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be drawn on to meet each company’s respective working capital needs and general corporate purposes. Note 6 · Long-term debt December 31 (dollars in thousands) Long-term debt of Utilities, net of unamortized debt issuance costs 1 Hamakua Energy 4.02% notes, due 2030 HEI 2.99% term loan, due 2022 HEI 5.67% senior notes, due 2021 HEI 3.99% senior notes, due 2023 HEI 4.58% senior notes, due 2025 HEI 4.72% senior notes, due 2028 Less unamortized debt issuance costs 2018 2017 $ $ 1,418,802 63,438 150,000 50,000 50,000 50,000 100,000 (2,599) 1,879,641 $ $ 1,368,479 67,325 150,000 50,000 50,000 — — (2,007) 1,683,797 1 See components of “Total long-term debt” and unamortized debt issuance costs in Hawaiian Electric and subsidiaries’ Consolidated Statements of Capitalization. As of December 31, 2018, the aggregate principal payments required on the Company’s long-term debt for 2019 through 2023 are $4 million in 2019, $100 million in 2020, $54 million in 2021, $206 million in 2022 and $154 million in 2023. As of December 31, 2018, the aggregate payments of principal required on the Utilities’ long-term debt for 2019 through 2023 are nil in 2019, $96 million in 2020, nil in 2021, $52 million in 2022 and $100 million in 2023. The HEI term loans and senior notes contain customary representation and warranties, affirmative and negative covenants and events of default (the occurrence of which may result in some or all of the notes then outstanding becoming immediately due and payable). The HEI term loans and senior notes also contain provisions requiring the maintenance by HEI of certain financial ratios generally consistent with those in HEI’s existing, amended revolving unsecured credit agreement, expiring on June 30, 2022. Upon a change of control or certain dispositions of assets (as defined in the Master Note Purchase Agreements dated March 24, 2011 and October 4, 2018), 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 142 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Electric Light and Maui Electric, of certain financial ratios generally consistent with those in Hawaiian Electric’s existing, amended revolving unsecured credit agreement, expiring on June 30, 2022. Changes in long-term debt. HEI. On October 4, 2018, HEI closed on a private placement transaction to issue $150 million senior unsecured notes in two tranches, as follows: Aggregate principal amount due at maturity Fixed coupon interest rate Maturity date Draw date $50 million 4.58% December 15, 2025 October 4, 2018 $100 million 4.72% December 15, 2028 December 18, 2018 HEI Series 2018A HEI Series 2018B Proceeds from the HEI Series 2018A tranche were used to repay HEI’s short-term borrowing with The Bank of Tokyo- Mitsubishi UFJ, Ltd, which matured on October 5, 2018. Proceeds from the HEI Series 2018B tranche drawn in December 2018 were used for general corporate purposes, including a contribution of approximately $71 million to Hawaiian Electric to maintain a targeted equity capitalization structure. Interest is paid semiannually on June 15th and December 15th. The note purchase agreement contains certain restrictive financial covenants that are substantially the same as the financial covenants contained in HEI’s senior credit facility, as amended. Mauo. In June 2018, Mauo, LLC, an indirect subsidiary of Pacific Current, LLC, entered into an unsecured $50.5 million construction loan facility in connection with the construction of the solar-plus-storage PPA project. The loan bears interest at LIBOR plus 1.375% and matures in March 2021. As of December 31, 2018, no amounts were outstanding under the facility. The loan is guaranteed by HEI and contains restrictive covenants that are substantially the same as the financial covenants contained in HEI’s senior credit facility, as amended. Hawaiian Electric. On May 30, 2018, the Utilities issued, through a private placement pursuant to separate Note Purchase Agreements (the Note Purchase Agreements), the following unsecured notes bearing taxable interest (the Notes): Aggregate principal amount Fixed coupon interest rate Maturity date State of Hawaii Department of Budget and Finance loaned the proceeds to: Hawaiian Electric Hawaii Electric Light Maui Electric Series 2018A $67.5 million 4.38% May 30, 2028 $52 million $9 million $6.5 million Series 2018B $17.5 million 4.53% May 30, 2033 $12.5 million $3 million $2 million Series 2018C $15 million 4.72% May 30, 2048 $10.5 million $3 million $1.5 million The Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the Note Purchase Agreements entered into by Hawaii Electric Light and Maui Electric. All the proceeds of the Notes were used by Hawaiian Electric, Hawaii Electric Light and Maui Electric to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. The Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount,” as defined in the Note Purchase Agreements. 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 7 · Shareholders’ equity Reserved shares. As of December 31, 2018, HEI had reserved a total of 10,029,398 shares of common stock for future issuance under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP), the HEI 2011 Nonemployee Director Stock Plan, the ASB 401(k) Plan and the 2010 Executive Incentive Plan. Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other comprehensive income/(loss) (AOCI) were as follows: HEI Consolidated Hawaiian Electric Consolidated (in thousands) Net unrealized gains (losses) on securities Unrealized gains (losses) on derivatives Retirement benefit plans Unrealized gains (losses) on derivatives Retirement benefit plans AOCI AOCI Balance, December 31, 2015 $ (1,872) $ (54) $ (24,336) $ (26,262) $ — $ 925 $ 925 Current period other comprehensive loss, net of taxes Balance, December 31, 2016 Current period other comprehensive income (loss), net of taxes Reclass of AOCI for tax rate reduction impact Balance, December 31, 2017 Current period other comprehensive income (loss), net of taxes (6,059) (7,931) (4,370) (2,650) (14,951) (400) (454) (408) (6,867) (24,744) (33,129) (454) (454) (793) (1,247) 132 (322) 454 2,544 (1,372) 454 (1,142) (688) — — (4,790) (7,440) (26,990) (41,941) (9,472) (436) 1,239 (8,669) — — — (209) (209) (1,219) (1,219) 1,318 1,318 Balance, December 31, 2018 $ (24,423) $ (436) $ (25,751) $ (50,610) $ — $ 99 $ 99 144 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Reclassifications out of AOCI were as follows: Years ended December 31 2018 2017 2016 Income/Balance Sheet Amount reclassified from AOCI Affected line item in the Statement of (in thousands) HEI consolidated Net realized gains on securities included in net income Derivatives qualifying as cash flow hedges: Window forward contracts Interest rate contracts (settled in 2011) Retirement benefit plans: Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost Impact of D&Os of the PUC included in regulatory assets Total reclassifications Hawaiian Electric consolidated Derivatives qualifying as cash flow hedges Window forward contracts Retirement benefit plans: Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost Impact of D&Os of the PUC included in regulatory assets $ — $ — $ (360) Revenues-bank (gains on sale of investment securities, net) — — 454 — Property, plant and equipment-electric utilities (2017); Revenues-electric utilities (gains on window forward contracts (2016) (173) 54 Interest expense 21,015 15,737 14,518 See Note 9 for additional details 8,325 (78,724) 28,584 See Note 9 for additional details $ 29,340 $ (62,533) $ 42,623 $ — $ 454 $ (173) Property, plant and equipment (2017); Revenues (gains on window forward contracts (2016)) 19,012 14,477 13,254 See Note 9 for additional details 8,325 (78,724) 28,584 See Note 9 for additional details Total reclassifications $ 27,337 $ (63,793) $ 41,665 Note 8· Revenues Adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” In the first quarter of 2018, the Company and Hawaiian Electric adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with accounting standards in effect for those periods. The adoption of Topic 606 had no significant impact on the timing or pattern of revenue recognition for the Company or Hawaiian Electric. Revenue from contracts with customers. The revenues subject to Topic 606 include the Utilities’ electric energy sales revenue and the ASB’s transaction fees, as further described below. Electric Utilities. Electric energy sales. Electric energy sales represent revenues from the generation and transmission of electricity to customers under tariffs approved by the PUC. Transaction pricing for electricity is determined and approved by the PUC for each rate class and includes revenues from the base electric charges, which are composed of (1) the customer, demand, energy, and minimum charges, and (2) the power factor, service voltage, and other adjustments as provided in each rate and rate rider schedule. The Utilities satisfy performance obligations over time, i.e., the Utilities generate and transfer control of the electricity over time as the customer simultaneously receives and consumes the benefits provided by the Utilities’ performance. Payments from customers are generally due within 30 days from the end of the billing period. As electric bills to customers reflect the amount that corresponds directly with the value of the Utilities’ performance to date, the Utilities have elected to use the right to invoice practical expedient, which entitles them to recognize revenue in the amount they have the right to invoice. The Utilities’ revenues include amounts for recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the year the related revenues are recognized. For 2018, 2017 and 2016, the Utilities’ revenues include 145 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recovery of revenue taxes of approximately $226 million, $202 million and $187 million, respectively, which amounts are in “Taxes, other than income taxes” expense. However, the Utilities pay revenue taxes to the taxing authorities based on (1) the prior year’s billed revenues (in the case of public service company taxes and PUC fees) in the current year or (2) the current year’s cash collections from electric sales (in the case of franchise taxes) after year end. As of December 31, 2018 and 2017, the Utilities had recorded $130 million and $115 million, respectively, in “Taxes accrued, including revenue taxes” on the Utilities’ consolidated balance sheet for amounts previously collected from customers or accrued for public service company taxes and PUC fees, net of amounts paid to the taxing authorities. Such amounts will be used to pay public service company taxes and PUC fees owed for the following year. Bank. Bank fees. Bank fees are primarily transaction-based and are recognized when the transaction has occurred and the performance obligation satisfied. From time to time, customers will request a fee waiver and ASB may grant reversals of fees. Revenues are not recorded for the estimated amount of fee reversals for each period. Under the new standard, certain fees paid to third parties that were previously recognized as a component of noninterest expense are now netted with fee income. The change in presentation will have no effect on the reported amount of operating income. Fees from other financial services - These fees primarily include debit card interchange income and fees, automated teller machine fees, credit card interchange income and fees, check ordering fees, wire fees, safe deposit rental fees, corporate/ business fees, merchant income, online banking fees and international banking fees. Amounts paid to third parties for payment network expenses are included in this financial statement caption in ASB’s Statements of Income Data (in Revenues—Bank financial statement caption of HEI’s Consolidated Statements of Income). Previously, these expenses were recorded in the other expense financial statement caption of ASB’s Statements of Income Data (in Expenses—Bank financial statement caption of HEI’s Consolidated Statements of Income). Fee income on deposit liabilities - These fees primarily include “not sufficient funds” fees, monthly deposit account service charge fees, commercial account analysis fees and other deposit fees. Fee income on other financial products - These fees primarily include commission income from the sales of annuity, mutual fund, and life insurance products. In 2017, ASB began offering a fee-based, managed account product in which income is based on a percentage of assets under management. ASB satisfies its performance obligations under the managed account arrangement over time, and consequently, fees for assets under management are recognized over time as the customer simultaneously receives and consumes the benefit of asset management services. Fees recognized to date from the managed account product were minimal. Revenues from other sources. Revenues from other sources not subject to Topic 606 are accounted for as follows: Electric Utilities. Regulatory revenues. Regulatory revenues primarily consist of revenues from decoupling mechanism, cost recovery surcharges and the Tax Act adjustments. Decoupling mechanism - Under the decoupling mechanism, the Utilities are allowed to recover or refund the difference between actual revenue and the target revenue as determined by the PUC, collect revenue adjustment mechanism and major project interim recovery revenues, and recover or refund performance incentive mechanism penalties or rewards. These adjustments will be reflected in tariffs in future periods. Cost recovery surcharges - For the timely recovery of additional costs incurred, and reconciliation of costs and expenses included in tariffed rates, the Utilities recognize revenues under surcharge mechanisms approved by the PUC. These will be reflected in tariffs in future periods (e.g., ECAC/ECRC and PPAC). Tax Act adjustments - These represent adjustments to revenues for the amounts included in tariffed revenues that will be returned to customers as a result of the Tax Act. Since revenue adjustments discussed above resulted from either agreements with the PUC or change in tax law, rather than contracts with customers, they are not subject to the scope of Topic 606. Also, see Notes 1, 3 and 11 of the Consolidated Financial Statements. The Utilities have elected to present these revenue adjustments on a gross basis, which results in the amounts being billed to customers presented in revenues from contracts with customers and the amortization of the related regulatory asset/liability as revenues from other sources. Depending on whether the previous deferral balance being amortized was a regulatory asset or regulatory liability, and depending on the size and direction of the current year deferral of surcharges and/or refunds to customers, it could result in negative regulatory revenue during the year. 146 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Utility pole attachment fees. These fees primarily represent revenues from third-party companies for their access to and shared use of Utilities-owned poles through licensing agreements. As shared portion of the utility pole is functionally dependent on the rest of the structure, no distinct goods appear to exist. Therefore, these fees are not subject to the scope of Topic 606, but recognized in accordance with ASC Topic 610, Other Income. See note 3 of the Consolidated Financial Statements. Bank. Interest and dividend income. Interest and fees on loans are recognized in accordance with ASC Topic 310, Receivables, including the related allowance for loan losses. Interest and dividends on investment securities are recognized in accordance with ASC Topic 320, Investments-Debt and Equity Securities. See Notes 1 and 4 of the Consolidated Financial Statements. Other bank noninterest income. Other bank noninterest income primarily consists of mortgage banking income and bank-owned life insurance income. Mortgage banking income - Mortgage banking income consists primarily of realized and unrealized gains on sale of loans accounted for pursuant to ASC Topic 860, Transfers and Servicing. Interest rate lock commitments and forward loan sales are considered derivatives and are accounted pursuant to ASC Topic 815, Derivatives and Hedging. Bank-Owned Life Insurance (BOLI) - The recognition of BOLI cash surrender value does not represent a contract with a customer and is accounted for in accordance with Emerging Issues Task Force Issue 06-05, Accounting for Purchases of Life Insurance-Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Revenue disaggregation. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment: Year ended December 31, 2018 (in thousands) Revenues from contracts with customers Electric energy sales - residential Electric energy sales - commercial Electric energy sales - large light and power Electric energy sales - other Bank fees Total revenues from contracts with customers Revenues from other sources Regulatory revenue Bank interest and dividend income Other bank noninterest income Other Total revenues from other sources Total revenues Timing of revenue recognition Services/goods transferred at a point in time Services/goods transferred over time Total revenues from contracts with customers Electric utility $ 801,846 853,672 894,770 17,243 — 2,567,531 (37,687) — — 16,681 (21,006) $ 2,546,525 $ $ Bank Other Total — $ — — — 47,300 47,300 — 258,225 8,750 — 266,975 314,275 $ $ $ — $ — — — — — 801,846 853,672 894,770 17,243 47,300 2,614,831 — — — 49 49 49 (37,687) 258,225 8,750 16,730 246,018 $ 2,860,849 47,300 — $ — 2,567,531 — $ 2,614,831 $ — $ 2,567,531 $ 2,567,531 $ 47,300 — 47,300 There are no material contract assets or liabilities associated with revenues from contracts with customers existing at the beginning or as of December 31, 2018. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are disclosed as accounts receivable and unbilled revenues, net on HEI’s consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s consolidated balance sheets. As of December 31, 2018, the Company had no material remaining performance obligations due to the nature of the Company’s contracts with its customers. For the Utilities, performance obligations are fulfilled as electricity is delivered to customers. For ASB, fees are recognized when a transaction is completed. 147 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 9 · Retirement benefits Defined benefit plans. Substantially all of the employees of HEI and the Utilities participate in the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI Pension Plan). Substantially all of the employees of ASB participated in the American Savings Bank Retirement Plan (ASB Pension Plan) until it was frozen on December 31, 2007. The HEI Pension Plan and the ASB Pension Plan (collectively, the Plans) are qualified, noncontributory defined benefit pension plans and include, in the case of the HEI Pension Plan, benefits for utility union employees determined in accordance with the terms of the collective bargaining agreements between the Utilities and the union. The Plans are subject to the provisions of ERISA. In addition, some current and former executives and directors of HEI and its subsidiaries participate in noncontributory, nonqualified plans (collectively, Supplemental Plans). In general, benefits are based on the employees’ or directors’ years of service and compensation. The continuation of the Plans and the Supplemental Plans and the payment of any contribution thereunder are not assumed as contractual obligations by the participating employers. The Supplemental Plan for directors has been frozen since 1996. The ASB Pension Plan was frozen as of December 31, 2007. The HEI Supplemental Executive Retirement Plan and ASB Supplemental Executive Retirement, Disability, and Death Benefit Plan (noncontributory, nonqualified, defined benefit plans) were frozen as of December 31, 2008. No participants have accrued any benefits under these plans after the respective plan’s freeze and the plans will be terminated at the time all remaining benefits have been paid. Each participating employer reserves the right to terminate its participation in the applicable plans at any time, and HEI and ASB reserve the right to terminate their respective plans at any time. If a participating employer terminates its participation in the Plans, the interest of each affected participant would become 100% vested to the extent funded. Upon the termination of the Plans, assets would be distributed to affected participants in accordance with the applicable allocation provisions of ERISA and any excess assets that exist would be paid to the participating employers. Participants’ benefits in the Plans are covered up to certain limits under insurance provided by the Pension Benefit Guaranty Corporation. Postretirement benefits other than pensions. HEI and the Utilities provide eligible employees health and life insurance benefits upon retirement under the Postretirement Welfare Benefits Plan for Employees of Hawaiian Electric Company, Inc. and participating employers (Hawaiian Electric Benefits Plan). Eligibility of employees and dependents is based on eligibility to retire at termination, the retirement date and the date of hire. The plan was amended in 2011, changing eligibility for certain bargaining unit employees hired prior to May 1, 2011, based on new minimum age and service requirements effective January 1, 2012, per the collective bargaining agreement, and certain management employees hired prior to May 1, 2011 based on new eligibility minimum age and service requirements effective January 1, 2012. The minimum age and service requirements for management and bargaining unit employees hired May 1, 2011 and thereafter have increased and their dependents are not eligible to receive postretirement benefits. Employees may be eligible to receive benefits from the HEI Pension Plan but may not be eligible for postretirement welfare benefits if the different eligibility requirements are not met. The executive death benefit plan was frozen on September 10, 2009 for participants at benefit levels as of that date. The Company’s and Utilities’ cost for OPEB has been adjusted to reflect the plan amendments, which reduced benefits and created prior service credits to be amortized over average future service of affected participants. The amortization of the prior service credit will reduce benefit costs over the next few years until the various credit bases are fully recognized. Each participating employer reserves the right to terminate its participation in the Hawaiian Electric Benefits Plan at any time. Balance sheet recognition of the funded status of retirement plans. Employers must recognize on their balance sheets the funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity (using the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO), to calculate the funded status). The PUC allowed the Utilities to adopt pension and OPEB tracking mechanisms in previous rate cases. The amount of the net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in each rate case. Under the Utilities’ tracking mechanisms, any actual costs determined in accordance with GAAP that are over/ under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit expenses (except for executive life and nonqualified pension plan expenses, which amounted to $1.0 million and $1.1 million in 2018 and 2017, respectively) determined in accordance with GAAP will be recovered. Under the tracking mechanisms, amounts that would otherwise be recorded in AOCI (excluding amounts for executive life and nonqualified pension plans), net of taxes, as well as other pension and OPEB charges, are allowed to be reclassified as a regulatory asset, as those costs will be recovered in rates through the NPPC and NPBC in the future. The Utilities have reclassified to a regulatory asset/(liability) charges for retirement benefits that would otherwise be recorded in AOCI (amounting to the elimination of a potential charge to AOCI of $11.2 million pretax and $(128) million pretax for 2018 and 2017, respectively). 148 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Under the pension tracking mechanism, the Utilities are required to make contributions to the pension trust in the amount of the actuarially calculated NPPC, except when limited by the ERISA minimum contributions requirements or the maximum contributions imposed by the Internal Revenue Code. Contributions in excess of the calculated NPPC are recorded in a separate regulatory asset. In 2018, the pension tracking mechanism was modified to allow prior year contributions made in excess of NPPC to satisfy future contributions, when the ERISA minimum required contribution is less than NPPC. The Utilities reduced their 2018 contribution for this modification. The OPEB tracking mechanisms generally require the Utilities to make contributions to the OPEB trust in the amount of the actuarially calculated NPBC, (excluding amounts for executive life), except when limited by material, adverse consequences imposed by federal regulations. 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 2018 and 2017 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, 2018 and 2017 were as follows: (in thousands) HEI consolidated Benefit obligation, January 1 Service cost Interest cost Actuarial losses (gains) Participants contributions Benefits paid and expenses Benefit obligation, December 31 Fair value of plan assets, January 1 Actual return on plan assets Employer contributions Participants contributions Benefits paid and expenses Fair value of plan assets, December 31 Accrued benefit asset (liability), December 31 Other assets Defined benefit pension and other postretirement benefit plans liability Accrued benefit asset (liability), December 31 AOCI debit, January 1 (excluding impact of PUC D&Os) Recognized during year – prior service credit Recognized during year – net actuarial losses Occurring during year – net actuarial losses (gains) AOCI debit before cumulative impact of PUC D&Os, December 31 Cumulative impact of PUC D&Os AOCI debit/(credit), December 31 Net actuarial loss Prior service gain AOCI debit before cumulative impact of PUC D&Os, December 31 Cumulative impact of PUC D&Os AOCI debit/(credit), December 31 Income taxes (benefits) AOCI debit/(credit), net of taxes (benefits), December 31 $ $ $ $ $ $ $ $ 2018 2017 Pension benefits Other benefits Pension benefits Other benefits $ 2,094,356 68,987 77,374 (171,226) — (78,107) 1,991,384 1,618,703 (101,406) 38,496 — (76,726) 1,479,067 (512,317) $ $ 10,930 (523,247) (512,317) $ 527,830 $ 42 (30,084) 39,132 536,920 (498,944) 37,976 536,954 (34) 536,920 (498,944) 37,976 (10,023) 27,953 $ $ $ $ 212,601 2,721 7,933 (25,977) 2,505 (11,117) 188,666 193,995 (11,846) — 2,505 (10,961) 173,693 (14,973) $ — $ (14,973) (14,973) $ 1,474 $ 1,805 (95) (1,222) 1,962 (4,929) (2,967) $ $ 8,865 (6,903) 1,962 (4,929) (2,967) 765 (2,202) $ $ 1,935,494 64,906 81,185 87,399 — (74,628) 2,094,356 1,369,701 255,324 66,983 — (73,305) 1,618,703 (475,653) $ $ 15,443 (491,096) (475,653) $ 619,451 $ 55 (26,496) (65,180) 527,830 (489,894) 37,936 527,907 (77) 527,830 (489,894) 37,936 (9,986) 27,950 $ $ $ 233,835 3,374 9,453 (25,557) 2,078 (10,582) 212,601 174,251 28,248 — 2,078 (10,582) 193,995 (18,606) — (18,606) (18,606) 42,290 1,793 (1,130) (41,479) 1,474 (2,767) (1,293) 10,183 (8,709) 1,474 (2,767) (1,293) 333 (960) As of December 31, 2018 and 2017, the other postretirement benefit plans shown in the table above had ABOs in excess of plan assets. 149 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) Hawaiian Electric consolidated Benefit obligation, January 1 Service cost Interest cost Actuarial losses (gains) Participants contributions Benefits paid and expenses Transfers Benefit obligation, December 31 Fair value of plan assets, January 1 Actual return on plan assets Employer contributions Participants contributions Benefits paid and expenses Other Fair value of plan assets, December 31 Accrued benefit liability, December 31 Other liabilities (short-term) Defined benefit pension and other postretirement benefit plans liability Accrued benefit liability, December 31 AOCI debit, January 1 (excluding impact of PUC D&Os) Recognized during year – prior service credit (cost) Recognized during year – net actuarial losses Occurring during year – net actuarial losses (gains) AOCI debit before cumulative impact of PUC D&Os, December 31 Cumulative impact of PUC D&Os AOCI debit/(credit), December 31 Net actuarial loss Prior service cost (gain) AOCI debit before cumulative impact of PUC D&Os, December 31 Cumulative impact of PUC D&Os AOCI debit/(credit), December 31 Income taxes (benefits) AOCI debit/(credit), net of taxes (benefits), December 31 $ $ $ $ $ $ $ 2018 2017 Pension benefits Other benefits Pension benefits Other benefits $ 1,928,648 67,359 71,294 (158,258) — (71,535) 145 1,837,653 1,468,403 (91,836) 37,550 — (71,060) 56 1,343,113 (494,540) $ (512) (494,028) (494,540) $ $ 493,464 (8) (27,302) 36,035 502,189 (498,944) 3,245 502,173 16 502,189 (498,944) 3,245 (836) 2,409 $ $ $ $ 204,644 2,704 7,628 (25,330) 2,472 (10,958) 2 181,162 190,814 (11,625) — 2,472 (10,801) 2 170,862 (10,300) $ (669) (9,631) (10,300) $ $ 839 1,803 (98) (993) 1,551 (4,929) (3,378) $ $ 8,439 (6,888) 1,551 (4,929) (3,378) 870 (2,508) $ $ 1,779,626 63,059 74,632 80,186 — (68,691) (164) 1,928,648 1,233,184 237,830 65,669 — (68,225) (55) 1,468,403 (460,245) $ (494) (459,751) (460,245) $ $ 579,725 (8) (24,392) (61,861) 493,464 (489,894) 3,570 493,439 25 493,464 (489,894) 3,570 (920) 2,650 $ $ $ 225,723 3,353 9,115 (25,172) 2,047 (10,419) (3) 204,644 171,383 27,806 — 2,047 (10,419) (3) 190,814 (13,830) (633) (13,197) (13,830) 40,967 1,804 (1,102) (40,830) 839 (2,767) (1,928) 9,531 (8,692) 839 (2,767) (1,928) 497 (1,431) As of December 31, 2018 and 2017, the other postretirement benefit plan shown in the table above had ABOs in excess of plan assets. The dates used to determine retirement benefit measurements for the defined benefit plans were December 31 of 2018, 2017 and 2016. For purposes of calculating NPPC and NPBC, the Company and the Utilities have determined the market-related value of retirement benefit plan assets by calculating the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the difference over future years – 0% in the first year and 25% in each of years two through five – and finally adding or subtracting the unamortized differences for the past four years from fair value. The method includes a 15% range restriction around the fair value of such assets (i.e., 85% to 115% of fair value). A primary goal of the plans is to achieve long-term asset growth sufficient to pay future benefit obligations at a reasonable level of risk. The investment policy target for defined benefit pension and OPEB plans reflects the philosophy that long-term growth can best be achieved by prudent investments in equity securities while balancing overall fund volatility by an appropriate allocation to fixed income securities. In order to reduce the level of portfolio risk and volatility in returns, efforts 150 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 (excluding cash) and related investment policy targets and ranges were as follows: December 31 Assets held by category Equity securities Fixed income securities Pension benefits1 Other benefits2 Investment policy Investment policy 2018 2017 Target Range 2018 2017 Target Range 69% 31 100% 73% 27 100% 70% 30 100% 65-75 25-35 70% 30 100% 73% 27 100% 70% 30 100% 65-75 25-35 1 Asset allocation is applicable to only HEI and the Utilities. As of December 31, 2018 and 2017, nearly all of ASB’s pension assets were invested in fixed income securities. 2 Asset allocation is applicable to only HEI and the Utilities. ASB does not fund its other benefits. Assets held in various trusts for the retirement benefit plans are measured at fair value on a recurring basis and were as follows: (in millions) 2018 Equity securities Equity index and exchange-traded funds Equity investments at net asset value (NAV) Total equity investments Fixed income securities and public mutual funds Fixed income investments at NAV Total fixed income investments Cash equivalents at NAV Total Cash, receivables and payables, net Fair value of plan assets 2017 Equity securities Equity index and exchange-traded funds Equity investments at NAV Total equity investments Fixed income securities and public mutual funds Fixed income investments at NAV Total fixed income investments Cash equivalents at NAV Total Cash, receivables and payables, net Fair value of plan assets $ Pension benefits Other benefits Fair value measurements using Fair value measurements using Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31 December 31 Level 1 Level 2 Level 3 $ 507 $ 507 $ — $ — $ 65 $ 65 $ — $ — 348 — 855 123 — 123 — — — — 187 — 187 — $ 978 $ 187 $ 348 65 920 310 208 518 36 1,474 5 1,479 42 — 107 45 — 45 — $ 152 $ — — — 2 — 2 — 2 — — — — — — — $ — — — — — — — — — $ 42 10 117 47 4 51 5 173 1 174 568 $ 568 $ — $ — $ 75 $ 75 $ — $ — $ $ — — — 216 — 216 — 435 76 435 — 1,079 1,003 81 — 81 — 297 203 500 36 1,615 4 1,619 $ 1,084 $ 216 $ 151 52 — 127 43 — 43 — $ 170 $ — — — 3 — 3 — 3 — — — — — — — $ — — — — — — — — — $ 52 12 139 46 4 50 5 194 — 194 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Measured at net asset value December 31 Redemption frequency Redemption notice period December 31 Redemption frequency Redemption notice period Pension benefits Other benefits (in millions) 2018 Non U.S. equity funds (a) Fixed income investments (b) Cash equivalents (c) 2017 Non U.S. equity funds (a) Fixed income investments (b) Cash equivalents (c) $ $ $ $ 65 208 36 309 76 203 36 315 Daily-Monthly Monthly Daily 5 - 30 days 15 days 0-1 day Daily-Monthly Monthly Daily 5 - 30 days 15 days 0-1 day $ $ $ $ 10 4 5 19 12 4 5 21 Daily-Monthly Monthly Daily 5-30 days 15 days 0-1 day Daily-Monthly Monthly Daily 5-30 days 15 days 0-1 day None of the investments presented in the tables above have unfunded commitments. (a) Represents investments in funds that primarily invest in non-U.S., emerging markets equities. Redemption frequency for pension benefits assets as of December 31, 2018 and 2017 both were: daily, 32% and monthly, 68%. Redemption frequency for other benefits assets as of December 31, 2018 were: daily, 27% and monthly, 73% and as of December 31, 2017 were: daily, 26% and monthly, 74%. (b ) Represents investments in fixed income securities invested in a US-dollar denominated fund that seeks to exceed the Barclays Capital Long Corporate A or better Index through investments in US-dollar denominated fixed income securities and commingled vehicles. (c) Represents investments in cash equivalent funds. This class includes funds that invest primarily in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. For pension benefits, the fund may also invest in fixed income securities of investment grade issuers. The fair values of the investments shown in the table above represent the Company’s best estimates of the amounts that would be received upon sale of those assets in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset at the measurement date, the fair value measurement reflects the Company’s judgments about the assumptions that market participants would use in pricing the asset. Those judgments are developed by the Company based on the best information available in the circumstances. The fair value of investments measured at net asset value presented in the tables above are intended to permit reconciliation to the fair value of plan assets amounts. The Company used the following valuation methodologies for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2018 and 2017. Equity securities, equity index and exchange-traded funds, U.S. Treasury fixed income securities and public mutual funds (Level 1). Equity securities, equity index and exchange-traded funds, U.S. Treasury fixed income securities and public mutual funds are valued at the closing price reported on the active market on which the individual securities or funds are traded. Fixed income securities (Level 2). Fixed income securities, other than those issued by the U.S. Treasury, are valued based on yields currently available on comparable securities of issuers with similar credit ratings. The following weighted-average assumptions were used in the accounting for the plans: December 31 Benefit obligation Discount rate Rate of compensation increase Net periodic pension/benefit cost (years ended) Discount rate Expected return on plan assets1 Rate of compensation increase2 NA Not applicable Pension benefits 2017 2018 2016 2018 Other benefits 2017 2016 4.31% 3.50 3.74% 3.50 4.26% 3.50 4.34% NA 3.72% NA 4.22% NA 3.74 7.50 3.50 4.26 7.50 3.50 4.60 7.75 3.50 3.72 7.50 4.22 7.50 4.57 7.75 NA NA NA 1 HEI’s and Utilities’ plan assets only. For 2018, 2017 and 2016, ASB’s expected return on plan assets was 3.94%, 4.46% and 4.80%, respectively. 2 The Company and the Utilities use a graded rate of compensation increase assumption based on age. The rate provided above is an average across all future years of service for the current population. 152 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company and the Utilities based their selection of an assumed discount rate for 2019 NPPC and NPBC and December 31, 2018 disclosure on a cash flow matching analysis that utilized bond information provided by Bloomberg for all non-callable, high quality bonds (generally rated Aa or better) as of December 31, 2018. In selecting the expected rate of return on plan assets for 2019 NPPC and NPBC: a) HEI and the Utilities considered economic forecasts for the types of investments held by the plans (primarily equity and fixed income investments), the Plans’ asset allocations, industry and corporate surveys and the past performance of the plans’ assets in selecting 7.25% and b) ASB considered its liability driven investment strategy in selecting 4.51%, which is consistent with the assumed discount rate as of December 31, 2018 with a 20 basis point active manager premium. For 2018, retirement benefit plans’ assets of HEI and the Utilities had a net loss of 6.5%. As of December 31, 2018, the assumed health care trend rates for 2019 and future years were as follows: medical, 7.25%, grading down to 5% for 2028 and thereafter; dental, 5%; and vision, 4%. As of December 31, 2017, the assumed health care trend rates for 2018 and future years were as follows: medical, 7.50%, grading down to 5% for 2028 and thereafter; dental, 5%; and vision, 4%. The components of NPPC and NPBC were as follows: (in thousands) HEI consolidated Service cost Interest cost Expected return on plan assets Amortization of net prior service (gain) cost Amortization of net actuarial losses Net periodic pension/benefit cost Impact of PUC D&Os Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) Hawaiian Electric consolidated Service cost Interest cost Amortization of net prior service (gain) cost Amortization of net actuarial losses Net periodic pension/benefit cost Impact of PUC D&Os Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) Pension benefits Other benefits 2018 2017 2016 2018 2017 2016 $ 68,987 $ 64,906 $ 60,555 $ 2,721 $ 3,374 $ 77,374 81,185 (108,953) (102,745) 81,549 (98,559) (57) 24,832 68,320 (55) 26,496 69,787 (18,004) (18,117) $ $ $ $ 51,783 63,059 74,632 $ $ 50,203 58,796 74,808 (42) 30,084 67,450 25,828 93,278 67,359 71,294 $ $ 8 27,302 63,595 25,828 8 24,392 66,199 13 22,693 64,677 (18,004) (18,117) 7,933 (12,908) (1,805) 95 (3,964) 3,842 9,453 (12,326) (1,793) 1,130 (162) 1,211 $ $ (122) $ 1,049 2,704 $ 7,628 (12,713) (1,803) 98 (4,086) 3,842 3,353 9,115 (12,147) (1,804) 1,102 (381) 1,211 3,331 9,670 (12,273) (1,793) 804 (261) 1,343 1,082 3,284 9,337 (12,096) (1,803) 793 (485) 1,343 $ 89,423 $ 48,195 $ 46,560 $ (244) $ 830 $ 858 Expected return on plan assets (102,368) (95,892) (91,633) The estimated prior service credit and net actuarial loss for defined benefit plans that will be amortized from AOCI or regulatory assets into NPPC and NPBC during 2019 is as follows: (in millions) Estimated prior service credit Net actuarial loss HEI consolidated Hawaiian Electric consolidated Pension benefits Other benefits Pension benefits Other benefits $ — $ (1.8) $ 15.4 — — $ 14.3 (1.8) — The Company recorded pension expense of $59 million, $33 million and $33 million and OPEB expense of nil, $1.0 million and $1.0 million in 2018, 2017 and 2016, respectively, and charged the remaining amounts primarily to electric utility plant. The Utilities recorded pension expense of $55 million, $30 million and $30 million and OPEB (income) expense of $(0.1) million, $0.8 million and $0.7 million in 2018, 2017 and 2016, 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, 2018, for the Company, a one-percentage-point increase in the assumed health care cost trend rates would have 153 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) increased the total service and interest cost by $0.1 million and the accumulated postretirement benefit obligation (APBO) by $2.9 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.1 million and the APBO by $3.3 million. As of December 31, 2018, for the Utilities, a one-percentage-point increase in the assumed health care cost trend rates would have increased the total service and interest cost by $0.1 million and the APBO by $2.8 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.1 million and the APBO by $3.2 million. Additional information on the defined benefit pension plans’ accumulated benefit obligations (ABOs), which do not consider projected pay increases (unlike the PBOs shown in the table above), PBOs and assets were as follows: December 31 (in billions) Defined benefit plans - ABOs Defined benefit plans with ABO in excess of plan assets ABOs Plan assets Defined benefit plans with PBOs in excess of plan assets PBOs Plan assets HEI consolidated Hawaiian Electric consolidated 2018 2017 2018 2017 $ 1.7 $ 1.8 $ 1.6 $ 1.6 1.4 1.9 1.4 1.7 1.5 2.0 1.5 1.6 1.3 1.8 1.3 1.7 1.7 1.5 1.9 1.5 HEI consolidated. The Company estimates that the cash funding for the qualified defined benefit pension plans in 2019 will be $47 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 2019 is nil. As of December 31, 2018, the benefits expected to be paid under all retirement benefit plans in 2019, 2020, 2021, 2022, 2023 and 2024 through 2028 amount to $88 million, $91 million, $95 million, $99 million, $103 million and $574 million, respectively. Hawaiian Electric consolidated. The Utilities estimate that the cash funding for the qualified defined benefit pension plan in 2019 will be $47 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 2019 is nil. As of December 31, 2018, the benefits expected to be paid under all retirement benefit plans in 2019, 2020, 2021, 2022, 2023 and 2024 through 2028 amounted to $81 million, $83 million, $87 million, $90 million, $93 million and $525 million, respectively. Defined contribution plans information. For 2018, 2017 and 2016, the Company’s expenses for its defined contribution pension plans under the HEIRSP and the ASB 401(k) Plan were $7 million, $7 million and $5 million, respectively, and cash contributions were $7 million, $6 million and $5 million, respectively. The Utilities’ expenses and cash contributions for its defined contribution pension plan under the HEIRSP for 2018, 2017 and 2016 were $2.3 million, $2.0 million and $1.5 million, respectively. 154 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 10 · Share-based compensation Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights (SARs), restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares were added to the shares available for issuance under these programs. As of December 31, 2018, approximately 3.2 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an estimated 0.6 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved at maximum levels). Restricted stock units awarded under the 2010 Equity and Incentive Plan in 2018, 2017, 2016 and 2015 will vest and be issued in unrestricted stock in four equal annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become vested for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations due to death, disability and retirement. Restricted stock units expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividend equivalent rights are accrued quarterly and are paid at the end of the restriction period when the associated restricted stock units vest. Stock performance awards granted under the 2018-2020 and 2017-2019 long-term incentive plans (LTIP) entitle the grantee to shares of common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period, except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of accounting for performance shares. Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. As of December 31, 2018, there were 46,607 shares remaining available for future issuance under the 2011 Director Plan. Share-based compensation expense and the related income tax benefit were as follows: (in millions) HEI consolidated Share-based compensation expense1 Income tax benefit Hawaiian Electric consolidated Share-based compensation expense1 Income tax benefit 2018 2017 2016 $ $ 7.8 1.1 2.7 0.5 $ 5.4 1.9 1.9 0.7 4.8 1.6 1.4 0.5 1 For 2018, 2017 and 2016, the Company has not capitalized any share-based compensation. Stock awards. Nonemployee director awards totaling $0.2 million were paid in cash (in lieu of common stock) in July 2016. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as follows: (dollars in millions) Shares granted Fair value Income tax benefit 2018 38,821 1.3 0.3 $ 2017 35,770 1.2 0.5 $ 2016 19,846 0.6 0.2 $ The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI Common Stock on the grant date. 155 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Restricted stock units. Information about HEI’s grants of restricted stock units was as follows: Outstanding, January 1 Granted Vested Forfeited Outstanding, December 31 Total weighted-average grant-date fair value of shares granted (in millions) 2018 Shares 197,047 93,853 (75,683) (14,859) 200,358 $ $ (1) 31.53 34.12 30.56 32.35 33.05 2017 Shares 220,683 97,873 (92,147) (29,362) 197,047 $ $ (1) 29.57 33.47 28.88 31.57 31.53 2016 Shares 210,634 114,431 (85,003) (19,379) 220,683 $ $ (1) 28.82 29.70 27.84 29.82 29.57 $ 3.2 $ 3.3 $ 3.4 (1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant. For 2018, 2017 and 2016, total restricted stock units and related dividends that vested had a fair value of $2.7 million, $3.5 million and $2.8 million, respectively, and the related tax benefits were $0.4 million, $1.1 million and $0.9 million, respectively. As of December 31, 2018, there was $4.0 million of total unrecognized compensation cost related to the nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.5 years. Long-term incentive plan payable in stock. The 2017-2019 and 2018-2020 LTIPs provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals including a market condition goal. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are made subject to the achievement of specified performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target shares depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR) compared to the Edison Electric Institute Index over the relevant three-year period. The other performance condition goals relate to EPS growth, return on average common equity (ROACE) and ASB’s efficiency ratio. The 2016-2018 LTIP provides for performance awards payable in cash, and thus is not included in the tables below. LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows: Outstanding, January 1 Granted Vested (issued or unissued and cancelled) Forfeited Outstanding, December 31 Total weighted-average grant-date fair value of shares granted (in millions) 2018 Shares 32,904 37,832 — (5,158) 65,578 $ $ (1) 39.51 38.21 — 38.84 38.81 2017 Shares 83,106 37,204 (83,106) (4,300) 32,904 $ $ (1) 22.95 39.51 22.95 39.51 39.51 2016 Shares 162,500 — (78,553) (841) 83,106 $ $ (1) 27.66 — 32.69 22.95 22.95 $ 1.4 $ 1.5 $ — (1) Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model. The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same three-year historical period. The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TSR and the resulting fair value of LTIP awards granted: Risk-free interest rate Expected life in years Expected volatility Range of expected volatility for Peer Group Grant date fair value (per share) 2018 2.29% 3 17.0% 15.1% to 26.2% 38.20 $ 2017 1.46% 3 20.1% 15.4% to 26.0% 39.51 $ 156 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For 2017, total vested LTIP awards linked to TSR and related dividends had a fair value of $1.9 million and the related tax benefits were $0.7 million. For 2016, all vested shares in the table above were unissued and cancelled (i.e., lapsed) because the TSR performance goal was not met. As of December 31, 2018, there was $1.2 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of 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 Increase above target (cancelled) Forfeited Outstanding, December 31 2018 Shares 131,616 151,328 — 13,858 (20,633) 276,169 $ $ (1) 33.47 34.12 — 33.49 33.80 33.80 2017 Shares 109,816 148,818 (109,816) — (17,202) 131,616 $ $ (1) 25.18 33.47 25.18 — 33.48 33.47 2016 Shares 222,647 — (109,097) (1,989) (1,745) 109,816 $ $ (1) 26.02 — 26.89 25.26 25.19 25.18 Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) $ 5.2 $ 5.0 $ — (1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant. For 2017 and 2016, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $4.2 million and $3.6 million, respectively, and the related tax benefits were $1.6 million and $1.4 million, respectively. As of December 31, 2018, there was $4.5 million of total unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TSR. The cost is expected to be recognized over a weighted-average period of 1.5 years. Note 11 · 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 2017 2018 2016 Hawaiian Electric consolidated 2016 2017 2018 $ 42,903 (6,099) (12) 36,792 $ 61,534 33,967 (20) 95,481 $ 59,873 43,666 268 103,807 $ 29,649 (5,245) (12) 24,392 $ 36,267 35,229 (20) 71,476 $ 952 70,513 268 71,733 17,361 (3,269) (87) 14,005 $ 50,797 10,076 3,868 (32) 13,912 $ 109,393 16,473 3,452 (37) 19,888 $ 123,695 13,210 (2,737) (87) 10,386 $ 34,778 8,947 2,808 (32) 11,723 $ 83,199 9,232 3,873 (37) 13,068 $ 84,801 * The 2018 deferred income tax expense includes the final adjustment to reduce the provisional amount recorded in 2017 pursuant to Staff Accounting Bulletin No. 118 (SAB No. 118). See SAB No. 118 disclosure below for details of the accounting for the enactment of the Tax Act. 157 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A reconciliation of the amount of income taxes computed at the federal statutory rate to the amount provided in the consolidated statements of income was as follows: Years ended December 31 (in thousands) Amount at the federal statutory income tax rate Increase (decrease) resulting from: HEI consolidated 2017 2018 2016 Hawaiian Electric consolidated 2016 2017 2018 $ 53,437 $ 96,796 $ 130,844 $ 37,889 $ 71,801 $ 80,190 State income taxes, net of federal income tax benefit 11,832 9,789 13,915 8,080 7,584 8,494 Net deferred tax asset (liability) adjustment related to the Tax Act Other, net Total Effective income tax rate (9,540) (4,932) $ 50,797 13,420 (10,612) $ 109,393 — (21,064) $ 123,695 (9,285) (1,906) $ 34,778 9,168 (5,354) $ 83,199 — (3,883) $ 84,801 20.0% 39.6% 33.1% 19.3% 40.6% 37.0% 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 Regulatory liabilities, excluding amounts attributable to property, plant and equipment Allowance for bad debts Other Total deferred tax assets Deferred tax liabilities Property, plant and equipment related 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 HEI consolidated Hawaiian Electric consolidated 2018 2017 2018 2017 $ $ $ 104,868 14,647 46,036 165,551 $ 104,984 16,192 24,397 145,573 $ 104,868 659 26,522 132,049 104,984 1,812 11,253 118,049 437,644 415,452 434,831 413,891 37,345 11,278 20,173 31,629 538,069 372,518 $ 38,314 15,038 32,952 32,247 534,003 388,430 $ 37,345 11,278 25,430 6,362 515,246 383,197 $ 38,314 15,038 38,020 6,827 512,090 394,041 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, 2018 and 2017, valuation allowances for deferred tax benefits were nil. 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). The following is a reconciliation of the Company’s liability for unrecognized tax benefits for 2018, 2017 and 2016. (in millions) Unrecognized tax benefits, January 1 Additions based on tax positions taken during the year Reductions based on tax positions taken during the year Additions for tax positions of prior years Reductions for tax positions of prior years Lapses of statute of limitations Unrecognized tax benefits, December 31 HEI consolidated 2017 2018 2016 Hawaiian Electric consolidated 2017 2018 2016 $ $ 4.0 0.3 — 0.1 (0.1) (2.2) 2.1 $ $ 3.8 0.9 (0.2) — (0.5) — 4.0 $ $ 3.6 — (0.1) 0.3 — — 3.8 $ $ 3.5 0.3 — 0.1 (0.1) (2.2) 1.6 $ $ 3.8 0.4 (0.2) — (0.5) — 3.5 $ 3.6 — (0.1) 0.3 — — 3.8 158 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At December 31, 2018 and 2017, there were $0.5 million and $0.5 million, respectively, of unrecognized tax benefits that, if recognized, would affect the Company’s annual effective tax rate. As of December 31, 2018 and 2017, the Utilities had no unrecognized tax benefits that, if recognized, would affect the Utilities’ annual effective tax rate. The Company and Utilities believe that the unrecognized tax benefits will not significantly increase or decrease within the next 12 months. HEI consolidated. The Company recognizes interest accrued related to unrecognized tax benefits in “Interest expense- other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2018, 2017 and 2016, the Company recognized approximately $(0.1) million, $0.2 million and $0.2 million in interest expense. The Company had $0.4 million and $0.5 million of interest accrued as of December 31, 2018 and 2017, respectively. Hawaiian Electric consolidated. The Utilities recognize interest accrued related to unrecognized tax benefits in “Interest expense and other charges, net” and penalties, if any, in operating expenses. In 2018, 2017 and 2016, the Utilities recognized approximately $0.1 million, $0.1 million and $0.03 million, respectively, in interest expense. Additional interest expense related to the Utilities’ unrecognized tax benefits was recognized at HEI Consolidated because of the Utilities NOL position. The Utilities had $0.3 million and $0.2 million of interest accrued as of December 31, 2018 and 2017, respectively. As of December 31, 2018, the disclosures above present the Company’s and the Utilities’ accruals for potential tax liabilities, which involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts. Based on information currently available, the Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and state tax authorities, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity. IRS examinations have been completed and settled through the tax year 2011 and the statute of limitations has expired for years prior to 2015, leaving subsequent years subject to IRS examination. The tax years 2011 and subsequent are still subject to examination by the Hawaii Department of Taxation. Major tax developments. The 2017 Tax Cuts and Jobs Act was the first comprehensive change in the law since the 1986 Tax Reform Act and has a continuing impact on U.S. taxpayers. The changes for corporate taxpayers are numerous but the following summarizes the provisions that have a major impact on the Company. Lower tax rate. The corporate income tax rate reduction from 35% to 21% lowers the Company’s effective tax rate in 2018 and the subsequent years. For the regulated Utilities, the excess ADIT resulting from the rate change is being returned to customers over various periods determined with the approval of the PUC. Bonus depreciation. The Tax Act allows 100% bonus depreciation through the end of 2022 for qualified property purchased and placed in service after September 27, 2017. However, property placed into service after September 27, 2017 are grandfathered under the pre-Tax Act rules allowing 50% bonus depreciation if subject to written binding purchase contracts prior to September 28, 2017. The Tax Act provides that property used in the trade or business of a regulated utility (including the furnishing or selling electrical energy) is not qualified property. Other applicable provisions. There are a number of other provisions in the Tax Act that have an impact on the Company, including the narrowing of the exclusions from taxability of certain contributions in aid of construction (CIAC), the repeal of the domestic production activities deduction (DPAD), non-deductibility of transportation fringe benefits excluded from employees income, and the increased limitation on the deductibility of executive compensation. SAB No. 118. On December 22, 2017, the SEC staff issued SAB No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company applied the guidance in SAB No. 118 when accounting for enactment date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, the Company had not completed its re-measurement of deferred tax assets and liabilities as a result of the reduction in the US federal corporate income tax rate to 21% and in accordance with SAB No. 118, recorded a provisional amount. The Tax Act’s reduction of the corporate tax rate to 21% resulted in a net deferred tax balance that was in excess of the taxes the Company expected to pay or be refunded in the future when the temporary differences creating these deferred taxes reverse. The excess related to the Utilities’ deferred taxes that are expected to be refunded in rates was reclassified to a regulatory liability that will be returned to the customers prospectively. The remaining excess was written off through deferred tax expense. Consequently, the Company recorded a provisional decrease in net deferred tax liabilities of $271.5 million ($275.7 million at the Utilities) with the corresponding net adjustment to increase deferred tax expense of $13.4 million ($9.2 million at the Utilities) and to increase the Utilities’ regulatory liabilities by $284.9 million. December 22, 2018 159 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) marked the end of the measurement period for purposes of SAB No. 118. Consequently, the Company (and Utilities) has completed the analysis, based on available Treasury and legislative guidance relating to the Tax Act. In 2018, the Company re-measured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future. For the period ended December 31, 2018, the net deferred tax liabilities decreased by $13.9 million ($13.6 million at the Utilities) with the corresponding net adjustment that decreased deferred tax expense by $5.5 million ($5.2 million at the Utilities) and increased the regulatory liability by $11.3 million. The decrease in deferred tax expense is included as a component of income tax expense and had the effect of decreasing the effective tax rate in 2018 from 22.1% to 20.0% (22.2% to 19.3% at the Utilities). Note 12 · Cash flows Years ended December 31 (in millions) Supplemental disclosures of cash flow information HEI consolidated 2018 2017 2016 Interest paid to non-affiliates, net of amounts capitalized $ 102 $ Income taxes paid (including refundable credits) Income taxes refunded (including refundable credits) Hawaiian Electric consolidated Interest paid to non-affiliates, net of amounts capitalized Income taxes paid (including refundable credits) Income taxes refunded (including refundable credits) Supplemental disclosures of noncash activities HEI consolidated Property, plant and equipment Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) Common stock dividends reinvested in HEI common stock (financing) 1 Loans transferred from held for investment to held for sale (investing) Real estate acquired in settlement of loans (investing) Real estate transferred from property, plant and equipment to other assets held-for-sale (investing) Common stock issued (gross) for director and executive/management compensation (financing)2 Obligations to fund low income housing investments, net (investing) 72 34 73 64 31 59 — 1 — — 4 12 Transfer of retail repurchase agreements to deposit liabilities (financing) 102 Hawaiian Electric consolidated Electric utility property, plant and equipment Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) HEI Consolidated and Hawaiian Electric consolidated Electric utility property, plant and equipment Estimated fair value of noncash contributions in aid of construction (investing) Acquisition of Hawaiian Telcom’s interest in joint poles (investing) 44 14 48 $ 83 55 1 63 26 — 38 — 41 — — 11 13 — 38 18 — 84 55 45 62 1 20 84 17 24 1 1 7 — — 84 28 — 1 The amounts shown represents common stock dividends reinvested in HEI common stock under the HEI DRIP in noncash transactions. 2 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities. 160 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 13 · Regulatory restrictions on net assets 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, 2018, the consolidated common stock equity of HEI’s electric utility subsidiaries was 57% of their total capitalization (as calculated for purposes of the PUC Agreement). As of December 31, 2018, Hawaiian Electric and its subsidiaries had common stock equity of $2.0 billion of which approximately $782 million was not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB’s capital and would improve ASB’s financial condition, ASB is prohibited from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized. ASB is required to notify the FRB and OCC prior to making any capital distribution (including dividends) to HEI (through ASB Hawaii). All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to ASB Hawaii and HEI. 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, 2018, in order to maintain its “well-capitalized” position, ASB could not transfer approximately $474 million of net assets to HEI. 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. Note 14 · 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. See Note 3 of the Consolidated Financial Statements for a discussion of the Utilities’ major customers. 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 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. Pacific Current’s strategy is focused on investing in non-regulated renewable energy and sustainable infrastructure in the State of Hawaii. 161 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 15 · Fair value measurements Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value: Short-term borrowings—other than bank. The carrying amount of short-term borrowings approximated fair value because of the short maturity of these instruments. Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that fall under Level 2 of ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds, and other observable market factors. To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non- affiliated broker. The fair value of the mortgage revenue bonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy. Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the valuation hierarchy. Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates, and the underlying interest rate of the portfolio. This information is input into the valuation models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These assumptions are derived from internal and third party sources. Since the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy. Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is determined primarily by using an income, cost, or market approach and is normally provided through appraisals. Impaired loans carried at fair value generally receive specific allocations within the allowance for loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Generally, impaired loans are evaluated quarterly for additional impairment and adjusted accordingly. Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair value of collateral-dependent loans and real estate owned using the sales comparison approach. Mortgage servicing rights. Mortgage servicing rights (MSRs) are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding 162 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate. Deposit liabilities. Includes only fixed-maturity certificates of deposit beginning in 2018. 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. Deposit liabilities are classified in Level 2 of the valuation hierarchy. Other borrowings. For advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources including broker market transactions and third party pricing services. Long-term debt-other than bank. Fair value of long-term debt of HEI and the Utilities was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar risks, terms, and remaining maturities. Long-term debt-other than bank is classified in Level 2 of the valuation hierarchy. Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements. Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements. Window forward contracts. The estimated fair value of the Utilities’ window forward contracts was obtained from a third- party financial services provider based on the effective exchange rate offered for the foreign currency denominated transaction. Window forward contracts were classified as Level 2 measurements. As of December 31, 2018, the Utilities had no outstanding window forward contract as the last contract was paid on December 21, 2018. The following table presents the carrying or notional amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments. For stock in Federal Home Loan Bank, the carrying amount is a reasonable estimate of fair value because it can only be redeemed at par. 163 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) December 31, 2018 Financial assets HEI consolidated Available-for-sale investment securities Held-to-maturity investment securities Stock in Federal Home Loan Bank Loans, net Mortgage servicing rights Derivative assets Financial liabilities HEI consolidated Deposit liabilities1 Short-term borrowings—other than bank Other bank borrowings Long-term debt, net—other than bank Derivative liabilities Hawaiian Electric consolidated Short-term borrowings Long-term debt, net December 31, 2017 Financial assets HEI consolidated Available-for-sale investment securities Held-to-maturity investment securities Stock in Federal Home Loan Bank Loans, net Mortgage servicing rights Derivative assets Hawaiian Electric consolidated Derivative assets-window forward contracts 3,240 Financial liabilities HEI consolidated Deposit liabilities1 Short-term borrowings—other than bank Other bank borrowings Long-term debt, net—other than bank Derivative liabilities Hawaiian Electric consolidated Short-term borrowings Long-term debt, net 5,890,597 117,945 190,859 1,683,797 13,562 4,999 1,368,479 Estimated fair value Carrying or notional amount Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ 1,388,533 $ — $ 1,364,897 $ 23,636 $ 1,388,533 141,875 9,958 4,792,707 8,062 10,180 827,841 73,992 110,040 1,879,641 34,132 25,000 1,418,802 — — — — — — — — — 34 — — 142,057 9,958 1,809 — 91 — — 142,057 9,958 4,800,244 4,802,053 13,618 — 13,618 91 817,667 73,992 110,037 1,904,261 596 25,000 1,443,968 — — — — — — — 817,667 73,992 110,037 1,904,261 630 25,000 1,443,968 $ 1,401,198 $ — $ 1,385,771 $ 15,427 $ 1,401,198 44,515 9,706 4,628,381 8,639 17,812 — — — — — — — — — — 20 — — 44,412 9,706 11,254 — 393 256 5,884,071 117,945 190,829 1,813,295 10 4,999 1,497,079 — — 44,412 9,706 4,770,497 4,781,751 12,052 — — — — — — — — — 12,052 393 256 5,884,071 117,945 190,829 1,813,295 30 4,999 1,497,079 1 As of December 31, 2018, deposit liabilities include only fixed-maturity certificates of deposit as a result of the Company’s adoption of ASU No. 2016-01 in the first quarter of 2018. As of December 31, 2017, deposit liabilities include noninterest-bearing demand, interest-bearing demand, and savings and money market deposits, for which the carrying amount represents a reasonable estimate of fair value, as such liabilities have no stated maturity. 164 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as follows: December 31 (in thousands) 2018 2017 Fair value measurements using Fair value measurements using Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Available-for-sale investment securities (bank segment) Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies U.S. Treasury and federal agency obligations Corporate bonds Mortgage revenue bonds Derivative assets Interest rate lock commitments (bank segment)1 Forward commitments (bank segment)1 Window forward contracts (electric utility segment)2 Derivative liabilities Interest rate lock commitments (bank segment)1 Forward commitments (bank segment)1 Interest rate swap (Other segment)3 $ $ $ $ $ $ — $ 1,161,416 $ — $ — $1,201,473 $ — — — 154,349 49,132 — — — 23,636 — — — 184,298 — — — — — 15,427 — $ 1,364,897 $ 23,636 $ — $1,385,771 $ 15,427 — $ — $ 133 $ — $ — — — $ 91 — — 91 $ $ — — — — — $ — $ — $ — $ — $ — $ 34 — 34 $ 9 587 596 — — $ — $ 20 — 20 $ 4 256 393 2 8 — 10 $ $ $ — — — — — — — — 1 Derivatives are carried at fair value in other assets or other liabilities in the balance sheets with changes in value included in mortgage banking income. 2 Derivatives were included in regulatory assets and/or liabilities in the balance sheets in 2017. 3 Derivatives are included in Other liabilities in the balance sheets. There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2018 and 2017. The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: (in thousands) Mortgage revenue bonds Balance, January 1 Principal payments received Purchases Unrealized gain (loss) included in other comprehensive income Balance, December 31 2018 2017 15,427 $ 15,427 — 8,209 — — — — 23,636 $ 15,427 $ $ ASB holds two mortgage revenue bonds issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of December 31, 2018, the weighted average discount rate was 3.96% which was derived by incorporating a credit spread over the one month LIBOR rate. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement. 165 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Fair value measurements on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of cost or fair value or from impairment of individual assets. The carrying value of assets measured at fair value on a nonrecurring basis were as follows: (in thousands) December 31, 2018 Loans Real estate acquired in settlement of loans December 31, 2017 Loans Balance Fair value measurements using Level 2 Level 3 Level 1 $ $ 77 186 — $ — — $ — 77 186 2,621 — — 2,621 For 2018 and 2017, there were no adjustments to fair value for ASB’s loans held for sale. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis: (dollars in thousands) Fair value Valuation technique Significant unobservable input value (1) Significant unobservable input Range Weighted Average December 31, 2018 Home equity line of credit Total loans Real estate acquired in settlement of loans December 31, 2017 Residential loans Commercial loans Total loans $ $ $ $ $ 77 Fair value of property or collateral Appraised value less 7% selling cost 77 186 Fair value of property or collateral Appraised value less 7% selling cost N/A (2) N/A (2) 613 Fair value of collateral Appraised value less 7% selling cost 2,008 Fair value of collateral Appraised value 71-92% 71-76% 84% 75% 2,621 (1) Represent percent of outstanding principal balance. (2) N/A - Not applicable. There is one asset in each fair value measurement type. Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements. Note 16 · Termination of proposed merger and other matters On December 3, 2014, HEI, NextEra Energy, Inc. (NEE) and two subsidiaries of NEE entered into an Agreement and Plan of Merger (the Merger Agreement), under which Hawaiian Electric was to become a subsidiary of NEE. The Merger Agreement contemplated that, prior to the Merger, HEI would distribute to its shareholders all of the common stock of ASB Hawaii, Inc. (ASB Hawaii), the parent company of ASB (such distribution referred to as the Spin-Off). The closing of the Merger was subject to various conditions, including receipt of regulatory approval from the PUC. In July 2016: (1) the PUC dismissed the NEE and Hawaiian Electric’s application requesting approval of the proposed Merger, (2) NEE terminated the Merger Agreement, (3) pursuant to the terms of the Merger Agreement, NEE paid HEI a $90 million termination fee and $5 million for the reimbursement of expenses associated with the transaction. In 2016, the Company recognized $60 million of net income ($2 million of net loss in each of the first and second quarters and $64 million of net income in the third quarter), comprised of the termination fee ($55 million), reimbursements of expenses from NEE and insurance ($3 million), and additional tax benefits on the previously non-tax-deductible merger- and spin-off-related expenses incurred through June 30, 2016 ($8 million), less merger- and spin-off-related expenses incurred in 2016 ($6 million) (all net of tax impacts). In May 2016, the Utilities had filed an application for approval of an LNG supply and transport agreement and LNG- related capital equipment, which application was conditioned on the PUC’s approval of the proposed Merger. Subsequently, the Utilities terminated the agreement and withdrew the application. In 2016, Hawaiian Electric recognized expenses related to the terminated LNG agreement of $1 million, net of tax benefits, in each of the first and second quarters. 166 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 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 2018 Revenues Operating income1 Net income Net income for common stock Basic earnings per common share 2 Diluted earnings per common share 3 Dividends per common share 20174 Revenues Operating income1 Net income Net income for common stock Basic earnings per common share 2 Diluted earnings per common share 3 Dividends per common share Hawaiian Electric consolidated 2018 Revenues Operating income1 Net income Net income for common stock 20175 Revenues Operating income1 Net income Net income for common stock $ 645,874 $ 685,277 $ 768,048 $ 761,650 $ 2,860,849 71,889 40,720 40,247 0.37 0.37 0.31 78,799 46,527 46,054 0.42 0.42 0.31 98,064 66,371 65,900 0.61 0.60 0.31 84,604 50,046 49,573 0.46 0.45 0.31 333,356 203,664 201,774 1.85 1.85 1.24 $ 591,562 $ 632,281 $ 673,185 $ 658,597 $ 2,555,625 69,738 34,666 34,193 0.31 0.31 0.31 77,802 39,134 38,661 0.36 0.36 0.31 111,473 60,544 60,073 0.55 0.55 0.31 87,220 32,843 32,370 0.30 0.30 0.31 346,233 167,187 165,297 1.52 1.52 1.24 $ 570,427 $ 608,126 $ 687,409 $ 680,563 $ 2,546,525 51,369 27,974 27,475 55,144 31,668 31,169 74,036 50,210 49,712 61,112 35,796 35,297 241,661 145,648 143,653 $ 518,611 $ 556,875 $ 598,769 $ 583,311 2,257,566 50,361 21,964 21,465 56,482 26,143 25,644 88,497 47,985 47,487 68,184 25,854 25,355 263,524 121,946 119,951 Note: HEI owns all of Hawaiian Electric’s common stock, therefore per share data for Hawaiian Electric is not meaningful. 1 2 3 4 5 The Company and Hawaiian Electric adopted ASU No. 2017-07 in the first quarter of 2018: (1) retrospectively for the presentation in the income statement of the service cost component and the other components of NPPC and NPBC, and (2) prospectively for the capitalization in assets of the service cost component of NPPC and NPBC for Hawaiian Electric and its subsidiaries. See Note 1. The quarterly basic earnings per common share are based upon the weighted-average number of shares of common stock outstanding in each quarter. The quarterly diluted earnings per common share are based upon the weighted-average number of shares of common stock outstanding in each quarter plus the dilutive incremental shares at quarter end. In the fourth quarter of 2017, the Company recorded a $14.2 million adjustment, primarily to reduce deferred tax net asset balances (not accounted for under Utility regulatory ratemaking) to reflect the lower rates enacted by the Tax Act. Also included in this adjustment is $0.7 million (net of tax) of non-executive bonuses paid by ASB related to the enactment of federal tax reform. See below for the impact of the Utilities lower RAM revenues due to the expiration of the 2013 settlement agreement. In the fourth quarter of 2017, Hawaiian Electric consolidated recorded a $9.2 million adjustment to reduce deferred tax net asset balances (not accounted for under regulatory ratemaking) to reflect the lower rates enacted by the Tax Act. In the first five months of 2017, the Utilities recorded lower RAM revenues due to the expiration of the 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric. For the first and second quarters of 2017, the Utilities recorded lower revenues of $12 million ($7 million, net of tax impacts) and $8 million ($4 million, net of tax impacts) due to this RAM lag, respectively. 167 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and Hawaiian Electric: None ITEM 9A. CONTROLS AND PROCEDURES HEI: Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Constance H. Lau, HEI Chief Executive Officer (CEO), and Gregory C. Hazelton, HEI Chief Financial Officer (CFO), have evaluated the disclosure controls and procedures of HEI as of December 31, 2018. Based on their evaluation, as of December 31, 2018, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be disclosed by HEI in reports HEI files or submits under the Securities Exchange Act of 1934: (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to HEI management, including HEI’s CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 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, 2018. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report which appears herein. Changes in Internal Control over Financial Reporting On October 2, 2018, Hawaiian Electric completed the implementation of an ERP/EAM system utilizing SAP, which supports essentially all of the Utilities’ business processes and activities including work management, procurement and supply chain, customer relationship management, invoicing and collection of payments, human resource management, payroll, and the preparation of financial information for financial reporting. SAP allows Hawaiian Electric to benefit from enhanced security features and seamless data integration. The implementation of SAP modified processes and procedures which resulted in changes to Hawaiian Electric’s internal control over financial reporting in the fourth quarter of 2018. There have been no changes in internal control over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Hawaiian Electric: Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Alan M. Oshima, Hawaiian Electric CEO, and Tayne S. Y. Sekimura, Hawaiian Electric CFO, have evaluated the disclosure controls and procedures of Hawaiian Electric as of December 31, 2018. Based on their evaluation, as of December 31, 2018, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 168 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be disclosed by Hawaiian Electric in reports Hawaiian Electric files or submits under the Securities Exchange Act of 1934: (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to Hawaiian Electric management, including Hawaiian Electric’s CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Hawaiian Electric’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of Hawaiian Electric’s internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Based on this evaluation, management has concluded that Hawaiian Electric’s internal control over financial reporting was effective as of December 31, 2018. Changes in Internal Control over Financial Reporting On October 2, 2018, Hawaiian Electric completed the implementation of an ERP/EAM system utilizing SAP, which supports essentially all of the Utilities’ business processes and activities including work management, procurement and supply chain, customer relationship management, invoicing and collection of payments, human resource management, payroll, and the preparation of financial information for financial reporting. SAP allows Hawaiian Electric to benefit from enhanced security features and seamless data integration. The implementation of SAP modified processes and procedures which resulted in changes to Hawaiian Electric’s internal control over financial reporting in the fourth quarter of 2018. There were no other changes in internal control over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION HEI and Hawaiian Electric: None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE HEI: Information regarding HEI’s executive officers is provided in the “Executive Officers of the Registrant” section following Item 4 of this report. The remaining information required by this Item 10 for HEI is incorporated herein by reference to the following sections in HEI’s 2019 Proxy Statement: • • • • • “Nominees for Class II directors whose terms expire at the 2022 Annual Meeting” “Nominee for Class III director whose term expires at the 2020 Annual Meeting” “Continuing Class III directors whose terms expire at the 2020 Annual Meeting” “Continuing Class I directors whose terms expire at the 2021 Annual Meeting” “Committees of the Board” (portions regarding whether HEI has an audit committee and identifying its members; no other portion of the Committees of the Board section is incorporated herein by reference) 169 • “Audit Committee Report” (portion identifying audit committee financial experts who serve on the HEI Audit Committee only; no other portion of the Audit Committee Report is incorporated herein by reference) Family relationships; director arrangements There are no family relationships between any HEI director or director nominee and any other HEI director or director nominee or any HEI executive officer. There are no arrangements or understandings between any HEI director or director nominee and any other person pursuant to which such director or director nominee was selected. Section 16(a) beneficial ownership reporting compliance Information required to be reported under this caption is incorporated herein by reference to the “Stock Ownership Information-Section 16(a) Beneficial Ownership Reporting Compliance” section in HEI’s 2019 Proxy Statement. Code of Conduct HEI has 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 intends to disclose the information required by Form 8-K, Item 5.05, “Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics,” through this website and such information will remain available on this website for at least a 12-month period. Hawaiian Electric: The information required by this Item 10 for Hawaiian Electric is incorporated herein by reference to pages 1 to 7 of Hawaiian Electric Exhibit 99.1. ITEM 11. EXECUTIVE COMPENSATION HEI: The information required by this Item 11 for HEI is incorporated herein by reference to the information relating to executive and director compensation in HEI’s 2019 Proxy Statement. Hawaiian Electric: The information required by this Item 11 for Hawaiian Electric is incorporated herein by reference to: Pages 8 to 31 of Hawaiian Electric Exhibit 99.1 to this Form 10-K; • • The discussion of “2017-19 Long-Term Incentive Plan” at pages 15-16 of Hawaiian Electric’s Exhibit 99.1 to Annual • Report on Form 10-K for the year ended December 31, 2017; and Information concerning compensation paid to directors of Hawaiian Electric who are also directors of HEI under the section of HEI’s 2019 Proxy Statement entitled, “Director Compensation.” COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION HEI: The information required to be reported under this caption for HEI is incorporated herein by reference to the “Compensation Committee Interlocks and Insider Participation” section in HEI’s 2019 Proxy Statement. Hawaiian Electric: The information required to be reported under this caption for Hawaiian Electric is incorporated herein by reference to page 21 of Hawaiian Electric Exhibit 99.1. 170 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS HEI: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The information required by this Item 12 for HEI is incorporated herein by reference to the “Stock Ownership Information- Security Ownership of Certain Beneficial Owners” section in HEI’s 2019 Proxy Statement. Equity Compensation Plan Information Information as of December 31, 2018 about HEI Common Stock that may be issued under all of the Company’s equity compensation plans was as follows: Plan category Equity compensation plans approved by shareholders Equity compensation plans not approved by shareholders Total (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) (b) Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (2) 555,172 — 555,172 $ $ — — — 2,704,852 — 2,704,852 (1) This column includes the number of shares of HEI Common Stock which may be issued under the Revised and Amended HEI 2010 Equity Incentive Plan (amended EIP) on account of awards outstanding as of December 31, 2018, including: EIP 142,100 Restricted stock units plus estimated compounded dividend equivalents (if applicable) * Shares to be issued in February 2020 and 2021 under the 2017-2019 and 2018-2020 LTIPs, respectively, plus 413,072 compounded dividend equivalents 555,172 * Under the amended EIP as of December 31, 2018, RSUs count as one share against shares available for issuance less estimated shares withheld for taxes under net share settlement which again become available for the issuance of new shares on a one-to-one basis. (2) This represents the number of shares available as of December 31, 2018 for future awards, including 2,658,245 shares available for future awards under the amended EIP and 46,607 shares available for future awards under the 2011 Nonemployee Director Plan. Hawaiian Electric: The information required by this Item 12 for Hawaiian Electric is incorporated herein by reference to pages 34 to 35 of Hawaiian Electric Exhibit 99.1. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE HEI: The information required by this Item 13 for HEI is incorporated herein by reference to the sections relating to related person transactions and director independence in HEI’s 2019 Proxy Statement. Hawaiian Electric: The information required by this Item 13 for Hawaiian Electric is incorporated herein by reference to pages 35 to 36 of Hawaiian Electric Exhibit 99.1. 171 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES HEI: The information required by this Item 14 for HEI is incorporated herein by reference to the relevant information in the Audit Committee Report in HEI’s 2019 Proxy Statement (but no other part of the “Audit Committee Report” is incorporated herein by reference). Hawaiian Electric: The information required by this Item 14 for Hawaiian Electric is incorporated herein by reference to page 37 of Hawaiian Electric Exhibit 99.1. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial statements See Item 8 for the Consolidated Financial Statements of HEI and Hawaiian Electric. (a)(2) and (c) Financial statement schedules The following financial statement schedules for HEI and Hawaiian Electric are included in this report on the pages indicated below: Schedule I Schedule II NA Not applicable. Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) at December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 Valuation and Qualifying Accounts, Hawaiian Electric Industries, Inc. and subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries for the years ended December 31, 2018, 2017 and 2016 Page/s in Form 10-K HEI Hawaiian Electric 173-175 177 NA 177 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. 172 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 Notes receivable Property, plant and equipment, net Deferred income tax assets Other assets Investments in subsidiaries, at equity Total assets Liabilities and shareholders’ equity Liabilities Accounts payable Interest payable Notes payable to subsidiaries Commercial paper Short-term debt, net Long-term debt, net Retirement benefits liability Other Total liabilities Shareholders’ equity Preferred stock, no par value, authorized 10,000,000 shares; issued: none Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,879,245 shares and 108,787,807 shares at December 31, 2018 and 2017, respectively Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity 2018 2017 $ 3,742 $ 2,604 20,789 3,456 10,147 11,963 2,605,038 11,702 2,347 — 3,910 8,710 15,480 2,466,342 $ $ 2,657,739 $ 2,508,491 2,001 $ 3,476 34 48,992 — 398,874 29,565 12,517 495,459 561 2,319 1,918 62,993 49,953 249,588 31,518 12,255 411,105 — — 1,669,267 1,662,491 543,623 (50,610) 476,836 (41,941) 2,162,280 2,097,386 $ 2,657,739 $ 2,508,491 173 Hawaiian Electric Industries, Inc. SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME Years ended December 31 (in thousands) Revenues Equity in net income of subsidiaries Expenses: Operating, administrative and general Depreciation of property, plant and equipment Taxes, other than income taxes Total expenses Income before merger termination fee, interest expense and income (taxes) benefits Merger termination fee Income before interest expense and income (taxes) benefits Retirement defined benefits expense—other than service costs Interest expense Income before income (taxes) benefits Income (taxes) benefits Net income 2018 2017 2016 $ 429 $ 798 $ 647 226,972 187,097 199,485 19,515 16,578 597 509 20,621 206,780 — 548 496 17,622 170,273 — 206,780 170,273 674 12,664 193,442 8,332 1,119 9,389 159,765 5,532 17,515 566 4,726 22,807 177,325 90,000 267,325 1,186 9,037 257,102 (8,846) $ 201,774 $ 165,297 $ 248,256 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. 174 Hawaiian Electric Industries, Inc. SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31 (in thousands) Net cash provided by operating activities Cash flows from investing activities Increase in note receivable from subsidiary Decrease in note receivable from subsidiary Capital expenditures Investments in subsidiaries Other Net cash used in investing activities Cash flows from financing activities Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or less Net increase (decrease) in short-term borrowings with original maturities of three months or less Proceeds from issuance of short-term debt Repayment of short-term debt Proceeds from issuance of long-term debt Repayment of long-term debt Withheld shares for employee taxes on vested share-based compensation Net proceeds from issuance of common stock Common stock dividends Other Net cash used in financing activities Net decrease in cash and equivalents Cash and cash equivalents, January 1 Cash and cash equivalents, December 31 2018 2017 2016 $ 135,470 $ 99,600 $ 191,710 (20,596) — (143) (71,970) 140 (92,569) (70,000) 66,391 (317) (22,353) (177) (26,456) — — (212) (24,000) 1 (24,211) (30) 98 (618) (14,000) — (50,000) 150,000 — (996) — (134,987) (848) (50,861) (7,960) 11,702 3,742 $ 62,993 125,000 (75,000) 150,000 (200,000) (3,828) — (134,873) (756) (76,366) (3,222) 14,924 11,702 $ (103,063) — — 75,000 (75,000) (2,416) 13,220 (117,274) 2,460 (207,691) (40,192) 55,116 14,924 $ 175 NOTES TO CONDENSED FINANCIAL INFORMATION Basis of Presentation The “Notes to Consolidated Financial Statements” in Part II, Item 8 should be read in conjunction with the above HEI (Parent Company) financial statements. All HEI subsidiaries are reflected in the Condensed Financial Statements under the equity method. Income taxes for equity method investments are included in “Equity in net income of subsidiaries.” The Condensed Statements of Income Data reflects the retrospective application of ASU No. 2017-07, “Compensation- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which was adopted in the first quarter of 2018. Nonservice cost was reclassified from “Operating, general and administrative expenses” to “Retirement defined benefits expense—other than service costs.” Long-term debt The components of long-term debt, net, were as follows: December 31 (dollars in thousands) HEI 2.99% term loan, due 2022 HEI 5.67% senior note, due 2021 HEI 3.99% senior note, due 2023 HEI 4.58% senior notes, due 2025 HEI 4.72% senior notes, due 2028 Less unamortized debt issuance costs Long-term debt, net 2018 2017 $ 150,000 $ 150,000 50,000 50,000 50,000 100,000 (1,126) 50,000 50,000 — — (412) $ 398,874 $ 249,588 The aggregate payments of principal required within five years after December 31, 2018 on long-term debt are nil in 2019 and 2020, $50 million in 2021, $150 million in 2022 and $50 million in 2023. Indemnities As of December 31, 2018, 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 $0.6 million self-insured United States Longshore & Harbor bond and a $0.7 million self-insured automobile bond. Income taxes The Company’s financial reporting policy for income tax allocations is based upon a separate entity concept whereby each subsidiary provides income tax expense (or benefits) as if each were a separate taxable entity. The difference between the aggregate separate tax return income tax provisions and the consolidated financial reporting income tax provision is charged or credited to HEI’s separate tax provision. Dividends from HEI subsidiaries In 2018, 2017 and 2016, cash dividends received from subsidiaries were $154 million, $125 million and $130 million, respectively. Supplemental disclosures of noncash activities In 2018, 2017 and 2016, $2.3 million, $2.8 million and $2.3 million, respectively, of HEI accounts receivable from ASB Hawaii were reduced with a corresponding reduction in HEI notes payable to ASB Hawaii in noncash transactions. In 2018, 2017 and 2016, $2.3 million, $2.8 million and $2.3 million, respectively, were contributed as equity by HEI into ASB Hawaii with a corresponding increase in HEI notes payable to ASB Hawaii in noncash transactions. In 2017, $3.6 million of HEI notes receivable from Hamakua Energy, LLC were converted to equity in a noncash transaction. Under the HEI DRIP, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to nil, nil and $17 million in 2018, 2017 and 2016, respectively. From January 1, 2016 through January 6, 2016 and December 7, 2016 to date, HEI satisfied the share purchase requirements of the DRIP through open market purchases of its common stock rather than new issuances. 176 Hawaiian Electric Industries, Inc. and subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2018, 2017 and 2016 (in thousands) Description Col. A 2018 Allowance for uncollectible accounts – electric utility Allowance for uncollectible interest – bank Allowance for losses for loans – bank 2017 Allowance for uncollectible accounts – electric utility Allowance for uncollectible interest – bank Allowance for losses for loans – bank Deferred tax valuation allowance – HEI 2016 Allowance for uncollectible accounts – electric utility Allowance for uncollectible interest – bank Allowance for losses for loans – bank Deferred tax valuation allowance – HEI Col. B Balance at begin- ning of period Col. C Additions Col. D Col. E Charged to costs and expenses Charged to other accounts Deductions Balance at end of period $ $ $ $ $ $ $ $ $ $ $ 1,178 367 53,637 1,121 1,834 55,533 38 1,699 1,679 50,038 54 $ $ $ $ $ $ $ $ $ $ $ 2,474 — (4,099) (a), (c) 6 $ $ 14,745 (d) $ 4,254 (a) 1,810 — $ $ 785 (a) — 10,901 (d) $ 4,016 (a) — 2,383 — $ $ $ — 877 (a) 155 16,763 (d) $ 2,977 (a) — $ — $ $ $ $ $ $ $ $ $ $ $ (1,927) (b), (c) — 20,517 (b) (b), (c) 2,538 1,467 16,813 (b) 38 (b), (c) 3,838 — 14,245 (b) 16 $ $ $ $ $ $ $ $ $ $ $ 1,480 373 52,119 1,178 367 53,637 — 1,121 1,834 55,533 38 (a) Primarily recoveries. (b) Bad debts charged off. (c) Reclass (reversal) of allowance for one customer account into other long term assets in 2018, 2017 and 2016 were $(4,934), $841, and $1,790, respectively. (d) Represents provision for loan loss. 177 (a)(3) and (b) Exhibits The exhibits listed for HEI and Hawaiian Electric are listed in the index under the headings “HEI” and “Hawaiian Electric,” respectively, except that the exhibits listed under “Hawaiian Electric” are also exhibits for HEI. EXHIBIT INDEX The exhibits designated by an asterisk (*) are filed herewith. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808-0730. Exhibit no. Description HEI: 3(i) 3(ii) 4.1 4.2 4.2(a) 4.3 4.4 4.4(a) 4.4(b) 4.4(c) 4.4(d) 4.4(e) 4.4(f) 4.4(g) 4.4(h) 4.5 4.6 4.6(a) 10.1 10.2 10.3 HEI’s Amended and Restated Articles of Incorporation. Amended and Restated Bylaws of HEI effective February 14, 2019. Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries. Master Note Purchase Agreement among HEI and the Purchasers thereto, dated March 24, 2011. First Supplement to Note Purchase Agreement among HEI and the Purchasers thereto, dated March 6, 2013. Hawaiian Electric Industries Retirement Savings Plan, restatement effective January 1, 2013. Master Trust Agreement dated as of September 4, 2012 between HEI and ASB and Fidelity Management Trust Company, as Trustee Letter Amendment effective November 28, 2012 to Master Trust Agreement dated as of September 4, 2012 between HEI and ASB and Fidelity Management Trust Company. Letter Amendment effective October 1, 2014 to Master Trust Agreement dated as of September 4, 2012 between HEI and ASB and Fidelity Management Trust Company. First Amendment to Master Trust Agreement (dated as of September 4, 2012) effective March 1, 2015 between HEI and ASB and Fidelity Management Trust Company. Letter Amendment effective August 3, 2015 to Master Trust Agreement (dated as of September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Letter Amendment effective August 15, 2017 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Second Amendment effective January 1, 2018 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Letter of Direction effective January 2, 2018 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Third Amendment effective July 1, 2018 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan, as amended and restated effective October 5, 2017. American Savings Bank 401(k) Plan, restatement effective January 1, 2013. Amendment 2013-1 to the American Savings Bank 401(k) Plan, effective January 1, 2014. Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc. dated September 23, 1982. Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle). OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988. 178 File Form Number Exhibit # 8-K 8-K 10-K 1-8503 1-8503 1-8503 3(i) 3.1 4.1 Filing date 5/6/09 2/19/19 3/31/93 8-K 1-8503 4(a) 3/28/11 8-K 1-8503 4(a) 3/6/13 10-K 1-8503 4.5 2/19/13 10-Q 1-8503 4 11/8/12 10-K 1-8503 4.6(a) 2/19/13 10-Q 1-8503 10-Q 1-8503 4 4 11/6/14 5/6/15 10-K 1-8503 4.4(d) 3/1/18 10-Q 1-8503 4 11/2/17 10-K 1-8503 4.4(f) 3/1/18 10-K 1-8503 4.4(g) 3/1/18 10-Q 1-8503 4 8/3/18 S-3 10-K 10-K 333- 220842 1-8503 1-8503 4.3 4.8 4.7(a) 10/5/17 2/19/13 2/23/16 10-K 1-8503 10.1 2/28/07 8-K 1-8503 (28)-2 5/26/88** 10-K 1-8503 10.3(a) 3/31/93 Exhibit no. Description File Form Number Exhibit # Filing date 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 10.7 10.7(a) 10.7(b) 10.7(c) 10.7(d) 10.7(e) 10.8 10.9 10.9(a) HEI Executive Incentive Compensation Plan amended as of February 4, 2013. 10-K 1-8503 10.4 2/19/13 HEI Executives’ Deferred Compensation Plan amended and restated effective January 1, 2019. Hawaiian Electric Industries, Inc. 2010 Equity and Incentive Plan, as amended and restated November 16, 2010. Hawaiian Electric Industries, Inc. 2010 Equity and Incentive Plan, as amended and restated February 14, 2014. Form of Non-Qualified Stock Option Agreement pursuant to 2010 Equity and Incentive Plan. Form of Stock Appreciation Right Agreement pursuant to 2010 Equity and Incentive Plan. Form of Restricted Shares Agreement pursuant to 2010 Equity and Incentive Plan. Form of Performance Shares Agreement pursuant to 2010 Equity and Incentive Plan. Form of Restricted Stock Unit Agreement, amended as of December 15, 2016, pursuant to 2010 Equity and Incentive Plan, as amended and restated February 14, 2014. HEI Long-Term Incentive Plan amended as of February 4, 2013. HEI Supplemental Executive Retirement Plan amended and restated as of January 1, 2009. Amendments to the HEI Supplemental Executive Retirement Plan Freezing Benefit Accruals Effective December 31, 2008. 10-K 1-8503 10.6 2/18/11 Proxy (DEF 14A) S-8 S-8 S-8 S-8 1-8503 Appendix 3/25/14 D 4.4 4.5 4.6 4.7 5/11/10 5/11/10 5/11/10 5/11/10 333- 166737 333- 166737 333- 166737 333- 166737 10-K 1-8503 10.7(e) 2/24/17 10-K 10-Q 1-8503 1-8503 10.8 10.3 2/19/13 11/5/08 10-K 1-8503 10.9(a) 2/27/09 10.10 HEI Excess Pay Plan amended and restated as of January 1, 2009. 10.10(a) HEI Excess Pay Plan Addendum for Constance H. Lau. 10-K 10-K 1-8503 1-8503 10.10 2/27/09 10.10(a) 2/27/09 10.10(b) Amendment No. 1 dated December 13, 2010 to January 1, 2009 Restatement of HEI Excess Pay Plan. 10-K 1-8503 10.10(c) 2/19/13 10.11 10.12 10.13 Form of Change in Control Agreement. Nonemployee Director Retirement Plan, effective as of October 1, 1989. HEI 2011 Nonemployee Director Stock Plan. * 10.14 Nonemployee Director’s Compensation Schedule effective January 1, 2019. HEI Non-Employee Directors’ Deferred Compensation Plan. Executive Death Benefit Plan of HEI and Participating Subsidiaries restatement effective as of January 1, 2009. 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. Amended and Restated Severance Pay Plan for Management Employees of Hawaiian Electric Industries, Inc. and Executive Employees of Affiliates, effective as of April 2, 2018. Hawaiian Electric Industries Deferred Compensation Plan adopted on December 13, 2010. Form of Indemnity Agreement (HEI, Hawaiian Electric and ASB with their respective directors and HEI with certain of its senior officers). American Savings Bank Select Deferred Compensation Plan (Restatement Effective January 1, 2009). 10-K 10-K Proxy (DEF 14A) 1-8503 1-8503 10.11 10.15 2/27/09 3/27/90** 1-8503 Appendix 3/21/11 A 10-Q 10-Q 1-8503 1-8503 10.5 10.6 11/5/08 11/5/08 10-Q 1-8503 10.1 11/5/09 10-Q 1-8503 10 8/3/18 10-K 1-8503 10.18 2/18/11 10-Q 1-8503 10.1 11/8/12 10-Q 1-8503 10.7 11/5/08 Amendment No. 1 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 30, 2009. Amendment No. 2 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 29, 2010. 10-K 1-8503 10.20(a) 2/23/16 10-K 1-8503 10.20(b) 2/23/16 179 10.15 10.16 10.16(a) 10.17 10.18 10.19 10.20 10.20(a) 10.20(b) Exhibit no. 10.20(c) Description Amendment No. 3 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 3, 2014. File Form 10-K Number Exhibit # 10.20(c) 1-8503 Filing date 2/23/16 10.20(d) 10.21 10.21(a) 10.22 * 11 * 21.1 * 23.1 * 23.2 * 31.1 * 31.2 Amendment No. 4 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 4, 2017. 10-K 1-8503 10.20(d) 3/1/18 American Savings Bank Supplemental Executive Retirement, Disability, and Death Benefit Plan, effective January 1, 2009. 10-Q 1-8503 10.8 11/5/08 10-K 1-8503 10.19(b) 2/27/09 10-Q 1-8503 10.1 8/3/17 Amendments to the American Savings Bank Supplemental Executive Retirement, Disability, and Death Benefit Plan Freezing Benefit Accruals Effective December 31, 2008. Second Amended and Restated Credit Agreement, dated as of June 30, 2017, among HEI, as Borrower, the Lenders Party Thereto and Wells Fargo Bank, National Association, as Syndication Agent, and Bank of America, N.A., MUFG Union Bank, N.A., Barclays Bank PLC, U.S. Bank National Association and Bank of Hawaii as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, and JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners. HEI - Computation of Earnings per Share of Common Stock. HEI - Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP). Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP). Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer). Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer). * 32.1 HEI Certification Pursuant to 18 U.S.C. Section 1350. * 101.INS XBRL Instance Document. * 101.SCH XBRL Taxonomy Extension Schema Document. * 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. * 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. * 101.LAB XBRL Taxonomy Extension Label Linkbase Document. * 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. Hawaiian Electric: 3(i).1 3(i).2 3(i).3 3(i).4 3(ii) 4.1 4.2 4.3 4.4 4.5 4.6 Hawaiian Electric’s Certificate of Amendment of Articles of Incorporation. Articles of Amendment to Hawaiian Electric’s Amended Articles of Incorporation. Articles of Amendment to Hawaiian Electric’s Amended Articles of Incorporation. 10-K 10-K 1-4955 1-4955 3.1 3/31/89 3.1(b) 3/27/90** 10-K 1-4955 3(i).4 3/23/99 Articles of Amendment amending Article V of Hawaiian Electric’s Amended Articles of Incorporation effective August 6, 2009. 10-Q 1-4955 3(i).4 8/7/09 Hawaiian Electric’s Amended and Restated Bylaws (as last amended August 6, 2010). 8-K 1-4955 3(ii) 8/9/10 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of Hawaiian Electric, Hawaii Electric Light and Maui Electric Certificate of Trust of HECO Capital Trust III. Amended and Restated Trust Agreement of HECO Capital Trust III dated as of March 1, 2004. Hawaiian Electric Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 2004 6.500% Quarterly Income Trust Preferred Security issued by HECO Capital Trust III, dated March 18, 2004. 10-K 1-4955 4.1 3/19/03 S-3 8-K 333- 111073 1-4955 4(a) 12/10/03 4(c) 3/22/04 8-K 1-4955 4(f) 3/22/04 8-K 1-4955 4(d) 3/22/04 6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Hawaiian Electric, dated March 18, 2004. 8-K 1-4955 4(g) 3/22/04 180 Exhibit no. Description Trust Guarantee Agreement between The Bank of New York, as Trust Guarantee Trustee, and Hawaiian Electric dated as of March 1, 2004. File Form 8-K Number Exhibit # 1-4955 4(l) Filing date 3/22/04 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 10.1(a) 10.1(b) 10.1(c) 10.1(d) 10.1(e) 10.1(f) 10.1(g) 10.1(h) 10.1(i) Maui Electric Junior Indenture with The Bank of New York, as Trustee, including Hawaiian Electric Subsidiary Guarantee, dated as of March 1, 2004. 8-K 1-4955 4(h) 3/22/04 Hawaii Electric Light Junior Indenture with The Bank of New York, as Trustee, including Hawaiian Electric Subsidiary Guarantee, dated as of March 1, 2004. 6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Maui Electric, dated March 18, 2004. 6.500% Junior Subordinated Deferrable Interest Debenture, Series 2004 issued by Hawaii Electric Light, dated March 18, 2004. Expense Agreement, dated March 1, 2004, among HECO Capital Trust III, Hawaiian Electric, Maui Electric and Hawaii Electric Light. Note Purchase Agreement among Hawaiian Electric and the Purchasers that are parties thereto, dated April 19, 2012. Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui Electric and the Purchasers that are parties thereto, dated April 19, 2012. 8-K 1-4955 4(j) 3/22/04 8-K 1-4955 4(i) 3/22/04 8-K 1-4955 4(k) 3/22/04 8-K 1-4955 4(m) 3/22/04 8-K 1-4955 4(a) 4/23/12 8-K 1-4955 4(b) 4/23/12 Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii Electric Light and the Purchasers that are parties thereto, dated April 19, 2012. 8-K 1-4955 4(c) 4/23/12 Note Purchase Agreement among Hawaiian Electric and the Purchasers that are parties thereto, dated September 13, 2012. Note Purchase Agreement among Hawaiian Electric Company, Inc. and the Purchasers that are parties thereto, dated as of October 3, 2013. Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui Electric Company, Limited and the Purchasers that are parties thereto, dated as of October 3, 2013. Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii Electric Light Company, Inc. and the Purchasers that are parties thereto, dated as of October 3, 2013. Note Purchase Agreement among Hawaiian Electric Company, Inc. and the Purchasers that are parties thereto, dated as of October 15, 2015. Note Purchase and Guaranty Agreement among Hawaiian Electric, Maui Electric Company, Limited and the Purchasers that are parties thereto, dated as of October 15, 2015. Note Purchase and Guaranty Agreement among Hawaiian Electric, Hawaii Electric Light Company, Inc. and the Purchasers that are parties thereto, dated as of October 15, 2015. Note Purchase Agreement among Hawaiian Electric Company, Inc. and the Purchasers that are parties thereto, dated as of December 15, 2016. Power Purchase Agreement between Kalaeloa Partners, L.P., and Hawaiian Electric dated October 14, 1988. Amendment No. 1 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated June 15, 1989. Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and Hawaiian Electric, as Lessee, dated February 27, 1989. Restated and Amended Amendment No. 2 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated February 9, 1990. Amendment No. 3 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated December 10, 1991. Amendment No. 4 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated October 1, 1999. Confirmation Agreement Concerning Section 5.2B(2) of Power Purchase Agreement and Amendment No. 5 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated October 12, 2004. Agreement for Increment Two Capacity and Amendment No. 6 to Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated October 12, 2004. Letter agreement dated July 28, 2016 and executed August 1, 2016 extending the term of the Power Purchase Agreement between Hawaiian Electric and Kalaeloa Partners, L.P., dated October 14, 1988 (as amended). 181 8-K 1-4955 4 9/14/12 8-K 1-4955 4(a) 10/7/13 8-K 1-4955 4(b) 10/7/13 10-Q 1-4955 4 11/7/13 8-K 1-4955 4(a) 10/16/15 8-K 1-4955 4(b) 10/16/15 8-K 1-4955 4(c) 10/16/15 8-K 1-4955 4 12/19/16 10-Q 1-4955 10(a) 11/14/88 10-Q 1-4955 10(c) 8/14/89 10-Q 1-4955 10(d) 8/14/89 10-K 1-4955 10.2(c) 3/27/90** 10-K 1-4955 10.2(e) 3/24/92 10-Q 1-4955 10.1 11/8/00 10-Q 1-4955 10.3 11/5/04 10-Q 1-4955 10.4 11/5/04 10-Q 1-4955 10 11/4/16 Exhibit no. 10.2(a) 10.2(b) 10.2(c) 10.2(d) 10.2(e) 10.2(f) 10.3(a) 10.3(b) 10.3(c) 10.3(d) 10.3(e) 10.3(f) 10.3(g) 10.4(a) 10.4(b) 10.4(c) 10.4(d) 10.5 * 10.5(a) 10.6 Description Power Purchase Agreement between AES Barbers Point, Inc. and Hawaiian Electric, entered into on March 25, 1988. Agreement between Hawaiian Electric and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988. Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement between AES Barbers Point, Inc. and Hawaiian Electric. Hawaiian Electric’s Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990. Amendment No. 2, entered into as of May 8, 2003, to Power Purchase Agreement between AES Hawaii, Inc. and Hawaiian Electric. Amendment No. 4, entered into as of February 14, 2018, to Power Purchase Agreement between AES Hawaii, Inc. and Hawaiian Electric Company, Inc. (subject to PUC approval). Purchase Power Contract between Hawaii Electric Light and Thermal Power Company dated March 24, 1986. Firm Capacity Amendment between Hawaii Electric Light and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power Contract between Hawaii Electric Light and Thermal Power Company dated March 24, 1986. Amendment made in October 1993 to Purchase Power Contract between Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as amended. Third Amendment dated March 7, 1995 to the Purchase Power Contract between Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as amended. Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power Contract between Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as amended. Fifth Amendment dated February 7, 2011 to the Purchase Power Contract between Hawaii Electric Light and Puna Geothermal Venture dated March 24, 1986, as amended. Power Purchase Agreement between Puna Geothermal Venture and Hawaii Electric Light dated February 7, 2011. Power Purchase Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated October 22, 1997 (but with the following attachments omitted: Attachment C, “Selected portions of the North American Electric Reliability Council Generating Availability Data System Data Reporting Instructions dated October 1996” and Attachment E, “Form of the Interconnection Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light,” which is provided in final form as Exhibit 10.6(b)). Interconnection Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated October 22, 1997. Amendment No. 1, executed on January 14, 1999, to Power Purchase Agreement between Encogen Hawaii, L.P. and Hawaii Electric Light dated October 22, 1997. Notice and acknowledgment under power purchase agreement effective November 24, 2017 by Hamakua Energy, LLC and acknowledged by Hawaii Electric Light. Inter-Island Supply Contract for Petroleum Fuels by and between Chevron Products Company and Hawaiian Electric, Hawaii Electric Light and Maui Electric dated as of February 18, 2016 (confidential treatment has been granted for portions of this exhibit through December 31, 2019). Mutual Termination and Release Agreement on Inter-Island Contract for Petroleum Fuels by and between IES, as successor in interest to Chevron Products Company, and Hawaiian Electric, Hawaii Electric Light and Maui Electric dated November 28, 2018. Supply Contract for LSFO, Diesel and MATS Fuel by and between Hawaiian Electric and Chevron Products Company dated February 18, 2016 (confidential treatment has been granted for portions of this exhibit through December 31, 2019). File Form 10-Q Number Exhibit # 1-4955 10(a) Filing date 5/16/88 10-K 1-4955 10.4 3/31/89 10-Q 1-4955 10 11/13/89 10-K 1-4955 13(c) 3/27/90** 10-K 1-4955 10.2(e) 3/9/04 10-Q 1-4955 10 5/10/18 10-Q 1-4955 10(a) 8/14/89 10-Q 1-4955 10(b) 8/14/89 10-K 1-4955 10.5(b) 3/27/98 10-K 1-4955 10.5(c) 3/27/98 10-K 1-4955 10.5(b) 3/25/96 10-K 1-4955 10.4(f) 2/17/12 10-K 1-4955 10.4(g) 2/17/12 10-K 1-4955 10.7 3/27/98 10-K 1-4955 10.7(a) 3/27/98 10-K 1-4955 10.7(b) 3/23/99 10-K 1-4955 10.4(d) 3/1/18 10-Q 1-4955 10.1 5/4/16 10-Q 1-4955 10.2 5/4/16 182 Exhibit no. 10.6(a) * 10.7 * 10.7(a) 10.8(a) 10.8(b) 10.9(a) 10.9(b) 10.10 Description File Form Number Exhibit # Filing date Mutual Termination and Release Agreement on Supply Contract for LSFO, Diesel and MATS Fuel by and between Hawaiian Electric and IES, as successor in interest to Chevron Products Company, dated November 28, 2018. Fuels Terminalling Agreement by and between Chevron Products Company and Hawaii Electric Light dated February 18, 2016 (confidential treatment has been granted for portions of this exhibit through December 31, 2019). Mutual Termination and Release Agreement on Fuel Terminalling Agreement by and between IES, as successor in interest to Chevron Products Company, and Hawaii Electric Light dated November 28, 2018. Contract of private carriage by and between HITI and Hawaii Electric Light dated December 4, 2000. Consent to Change of Ownership/Control of Carrier by and between K-Sea Operating Partnership, L.P., and Hawaii Electric Light, dated July 1, 2011. Contract of private carriage by and between HITI and Maui Electric dated December 4, 2000. Consent to Change of Ownership/Control of Carrier by and between K-Sea Operating Partnership, L.P., and Maui Electric, dated July 1, 2011. Second Amended and Restated Credit Agreement, dated as of June 30, 2017, among Hawaiian Electric Company, Inc., as Borrower, the Lenders Party Hereto and Wells Fargo Bank, National Association, as Syndication Agent, and Bank of America, N.A., MUFG Union Bank, N.A., Barclays Bank PLC, U.S. Bank National Association and Bank of Hawaii as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, and JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners. 10-Q 1-4955 10.3 5/4/16 10-K 1-4955 10.13 3/23/01 10-K 1-4955 10.13(b) 2/19/13 10-K 1-4955 10.14 3/23/01 10-K 1-4955 10.14(b) 2/19/13 10-Q 1-4955 10.2 8/3/17 10.11(a) Amended and Restated Power Purchase Agreement between Hawaiian Electric and Hu Honua Bioenergy, LLC dated May 9, 2017. 10-K 1-4955 10.11(a) 3/1/18 11 * 21.2 * 31.3 * 31.4 * 32.2 * 99.1 Computation of Earnings Per Share of Common Stock (See note on Hawaiian Electric’s Item 6. Selected Financial Data). Hawaiian Electric - Subsidiaries of the Registrant. Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Alan M. Oshima (Hawaiian Electric Chief Executive Officer). Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer). Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350. Hawaiian Electric’s Directors, Executive Officers and Corporate Governance; Hawaiian Electric’s Executive Compensation; Hawaiian Electric’s Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Hawaiian Electric’s Certain Relationships and Related Transactions, and Director Independence; and Hawaiian Electric’s Principal Accounting Fees and Services. ** Date of transmittal letter to SEC. 183 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The execution of this report by registrant Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its subsidiaries. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Gregory C. Hazelton Gregory C. Hazelton By /s/ Tayne S. Y. Sekimura Tayne S. Y. Sekimura Executive Vice President, Chief Financial Officer Senior Vice President and Chief Financial Officer and Treasurer (Principal Financial Officer of HEI) (Principal Financial Officer of Hawaiian Electric) Date: February 28, 2019 Date: February 28, 2019 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 28, 2019. The execution of this report by each of the undersigned who signs this report solely in such person’s capacity as a director or officer of Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its subsidiaries. Signature /s/ Constance H. Lau Constance H. Lau /s/ Alan M. Oshima Alan M. Oshima /s/ Gregory C. Hazelton Gregory C. Hazelton /s/ Tayne S. Y. Sekimura Tayne S. Y. Sekimura /s/ Paul K. Ito Paul K. Ito /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, Chief Financial Officer and Treasurer of HEI (Principal Financial Officer) Senior Vice President and Chief Financial Officer of Hawaiian Electric (Principal Financial Officer of Hawaiian Electric) Vice President, Tax, Controller & Assistant Treasurer of HEI (Chief Accounting Officer of HEI) Controller of Hawaiian Electric (Principal Accounting Officer of Hawaiian Electric) 184 Signature /s/ Kevin M. Burke Kevin M. Burke /s/ Richard J. Dahl Richard J. Dahl /s/ Thomas B. Fargo Thomas B. Fargo /s/ Peggy Y. Fowler Peggy Y. Fowler /s/ Timothy E. Johns Timothy E. Johns /s/ Micah A. Kane Micah A. Kane /s/ Bert A. Kobayashi, Jr. Bert A. Kobayashi, Jr. /s/ Keith P. Russell Keith P. Russell /s/ James K. Scott James K. Scott /s/ Kelvin H. Taketa Kelvin H. Taketa /s/ Barry K. Taniguchi Barry K. Taniguchi /s/ Jeffrey N. Watanabe Jeffrey N. Watanabe Title Director of Hawaiian Electric Director of HEI and Hawaiian Electric Director of HEI Director of HEI Director of Hawaiian Electric Director of Hawaiian Electric Director of Hawaiian Electric Director of HEI Director of HEI Director of HEI and Hawaiian Electric Director of HEI Chairman of the Board of Directors of HEI and director of Hawaiian Electric 185 Appendix A Shareholder Return Performance Graph The graph below compares the cumulative total shareholder return on HEI Common Stock against the cumulative total return of the companies listed on the S&P 500 Stock Index and the Edison Electric Institute (EEI) Index of Investor- Owned Electric Companies (42 companies were included as of December 31, 2018). 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, 2013, in HEI Common Stock and the common stock of all companies in the indices and that dividends were reinvested. Source: S&P Global Inc. Appendix B Explanation of HEI’s Use of Certain Unaudited Non-GAAP Measures HEI and Hawaiian Electric Company management use certain non-GAAP measures to evaluate the performance of HEI and the utility. Management believes these non-GAAP measures provide useful information and are a better indicator of the companies’ core operating activities given the non-recurring nature of certain items. Core earnings and other financial measures as presented here may not be comparable to similarly titled measures used by other companies. The accompanying tables provide a reconciliation of reported GAAP1 earnings to non-GAAP core earnings and the adjusted return on average common equity (ROACE) for HEI and the utility. The reconciling adjustments from GAAP earnings to core earnings include income, costs and associated taxes related to the terminated merger between HEI and NextEra Energy, Inc., the cancelled spin-off of ASB Hawaii, Inc. and the terminated liquefied natural gas (LNG) contract which required the Hawaii Public Utilities Commission approval of the merger with NextEra Energy, Inc. For more information on the transactions, see HEI’s Form 8-K filed on July 18, 2016, and HEI’s Form 8-K filed on July 19, 2016. The reconciling adjustments from GAAP earnings to core earnings exclude the 2017 impact of the federal tax reform act due to the adjustment of the deferred tax balances and the $1,000 employee bonuses paid by the bank related to federal tax reform. Management does not consider these items to be representative of the company’s fundamental core earnings. Management has shown adjusted non-GAAP (core) net income, adjusted non-GAAP (core) diluted earnings per common share and adjusted non-GAAP (core) ROACE in order to provide better comparability of core net income, EPS and ROACE between periods. RECONCILIATION OF GAAP1 TO NON-GAAP MEASURES Hawaiian Electric Industries, Inc. and Subsidiaries (HEI) Unaudited ($ in millions, except per share amounts) 2018 2017 2016 HEI CONSOLIDATED NET INCOME GAAP (as reported) Excluding special items (after-tax): (Income) expenses related to the terminated merger with NextEra Energy and cancelled spin-off of ASB Hawaii Costs related to the terminated LNG contract2 Bonus related to enactment of federal tax reform3 Federal tax reform impacts4 Non-GAAP (core) net income HEI CONSOLIDATED DILUTED EARNINGS PER COMMON SHARE GAAP (as reported) Excluding special items (after-tax): (Income) expenses related to the terminated merger with NextEra Energy and cancelled spin-off of ASB Hawaii Costs related to the terminated LNG contract2 Bonus related to enactment of federal tax reform3 Federal tax reform impacts4 Non-GAAP (core) diluted earnings per common share $ 201.8 $ 165.3 $ 248.3 - - - - - - 201.8 $ $ 0.7 13.4 179.4 $ (60.3) 2.1 - - 190.1 $ 1.85 $ 1.52 $ 2.29 - - - - (0.56) 0.02 - - 1.85 $ 0.01 0.12 1.65 $ - - 1.75 $ HEI CONSOLIDATED RETURN ON AVERAGE COMMON EQUITY (ROACE) (simple average) Based on GAAP Based on non-GAAP (core)5 Note: Columns may not foot due to rounding 9.5% 9.5% 7.9% 8.6% 12.4% 9.5% 1 Accounting principles generally accepted in the United States of America 2 The LNG contract was terminated as it was conditioned on the merger with NextEra Energy closing 3 Bonus paid by American Savings Bank related to enactment of federal tax reform 4 Reflects the lower rates enacted by federal tax reform, primarily the adjustments to reduce the unregulated net deferred tax asset balances 5 Calculated as core net income divided by average GAAP common equity Executive Management (as of March 1, 2019) Hawaiian Electric Industries (HEI) Constance H. Lau President and Chief Executive Officer, Hawaiian Electric Industries, Inc. Chair, Hawaiian Electric Company, Inc. Chair, American Savings Bank, F.S.B. Greg C. Hazelton Executive Vice President, Chief Financial Officer and Treasurer Hawaiian Electric Alan M. Oshima President and Chief Executive Officer Sharon M. Suzuki President, Maui County and Hawai‘i Island Utilities* Jimmy D. Alberts Senior Vice President, Business Development and Strategic Planning Colton K. Ching Senior Vice President, Planning and Technology Ronald R. Cox Senior Vice President, Operations Shelee M. T. Kimura Senior Vice President, Customer Service * Hawaiian Electric Subsidiaries Maui Electric Company, Ltd. and Hawai‘i Electric Light Company, Inc. American Savings Bank (ASB) Richard F. Wacker President and Chief Executive Officer Danielle K. N. Aiu Executive Vice President, Consumer Banking Brian M. Yoshii Executive Vice President, Chief Information Officer Gabriel S. H. Lee Executive Vice President, Commercial Markets Dane A. Teruya Executive Vice President and Chief Financial Officer Craig A. Norris Executive Vice President and Chief Credit Officer Pacific Current Scott Valentino President Susan A. Li Senior Vice President, General Counsel, Chief Compliance and Administrative Officer, and Corporate Secretary Tayne S. Y. Sekimura Senior Vice President and Chief Financial Officer Scott W. H. Seu Senior Vice President, Public Affairs Natalie M. H. Taniguchi Executive Vice President, Enterprise Risk and Regulatory Relations Ann C. Teranishi Executive Vice President, Operations K. Elizabeth Whitehead Executive Vice President, Chief Administrative Officer and Assistant Secretary John S. Ward Executive Vice President, Chief Experience Officer Board of Directors Jeffrey N. Watanabe Chair, HEI Chair, HEI Executive Committee Director, Hawaiian Electric Director, ASB Retired Founder, Watanabe Ing LLP Constance H. Lau President and CEO, HEI Barry K. Taniguchi Chair, HEI Audit Committee Director, HEI Director, HEI Chair, Hawaiian Electric Chair, ASB Audit Committee Chair, ASB Chair, ASB Executive Committee Director, ASB Chairman and CEO, KTA Super Stores Admiral Thomas B. Fargo, USN (Retired) Chair, HEI Compensation Committee Director, HEI Chairman, Huntington Ingalls Industries, Inc. Former Commander of the U.S. Pacific Command Kelvin H. Taketa Director, HEI Director, Hawaiian Electric Former President and CEO, Hawai‘i Community Foundation Peggy Y. Fowler Chair, HEI Nominating & Corporate Governance Committee Director, HEI Chairman, Umpqua Holdings Corp. Former President and CEO, Portland General Electric Company Richard J. Dahl Director, HEI Keith P. Russell Director, HEI James K. Scott, Ed.D. Director, HEI James A. Ajello Director, ASB Director, Hawaiian Electric Chair, ASB Risk Committee Director, ASB Non-Executive Chairman, Dine Brands Global, Inc. Non-Executive Chairman, Retired President and CEO, James Campbell Company, LLC Director, ASB President, Punahou School President, Russell Financial, Inc. Retired Executive Vice President and Chief Financial Officer, HEI Kevin M. Burke Director, Hawaiian Electric Chief Marketing Officer, Square, Inc. Shirley J. Daniel, Ph.D. Director, ASB Professor of Accountancy, Shidler College of Business, University of Hawai‘i-Manoa Timothy E. Johns Chair, Hawaiian Electric Audit Committee Director, Hawaiian Electric President and CEO, Zephyr Insurance Company, Inc. Micah A. Kane Director, Hawaiian Electric President and CEO, Hawai‘i Community Foundation Michael J. Kennedy Director, ASB President, North America, OFX Alan M. Oshima President and CEO, Hawaiian Electric Director, Hawaiian Electric Richard F. Wacker President and CEO, ASB Director, ASB Bert A. Kobayashi, Sr. Director, ASB Bert A. Kobayashi, Jr. Director, Hawaiian Electric Chairman and CEO, Kobayashi Development Group LLC Managing Partner, BlackSand Capital, LLC Elisia K. Flores Director, ASB Chief Financial Officer, L&L Franchise, Inc. Former Senior Finance Manager, General Electric Company HEI Hawaiian Electric ASB Jeffrey N. Watanabe, Chair (1, 3) Barry K. Taniguchi (1, 2) Admiral Thomas B. Fargo, USN (Retired) (3, 4) Kelvin H. Taketa (4) Richard J. Dahl (2) Peggy Y. Fowler (3, 4) Constance H. Lau (1) Keith P. Russell (2) Constance H. Lau, Chair Bert A. Kobayashi, Jr. Constance H. Lau, Chair (6, 8) Timothy E. Johns (5) Alan M. Oshima Barry K. Taniguchi (6, 7) Richard J. Dahl (5) Micah A. Kane (5) Kelvin H. Taketa Keith P. Russell (7, 8) Jeffrey N. Watanabe James A. Ajello (8) James K. Scott, Ed.D. (4) Kevin M. Burke Michael J. Kennedy (8) Shirley J. Daniel, Ph.D. (7) Bert A. Kobayashi, Sr. James K. Scott, Ed.D. Richard F. Wacker Jeffrey N. Watanabe (6, 8) Elisia K. Flores (7) HEI Board Committees: Hawaiian Electric Board Committees: ASB Board Committees: (1) Executive (3) Compensation (5) Audit Jeffrey N. Watanabe, Chair Admiral Thomas B. Fargo, USN (Retired), Chair (2) Audit Barry K. Taniguchi, Chair (4) Nominating & Corporate Governance Peggy Y. Fowler, Chair Timothy E. Johns, Chair (6) Executive Constance H. Lau, Chair (8) Risk (7) Audit Barry K. Taniguchi, Chair Keith P. Russell, Chair Shareholder Information Corporate Headquarters Hawaiian Electric Industries, Inc. 1001 Bishop Street, Suite 2900 Honolulu, Hawai‘i 96813 Telephone: 808-543-5662 Mailing address: P.O. Box 730 Honolulu, Hawai‘i 96808-0730 New York Stock Exchange Common stock symbol: HE Trust preferred securities symbol: HEPrU (Hawaiian Electric Company, Inc.) Shareholder Services P.O. Box 730 Honolulu, Hawai‘i 96808-0730 Telephone: 808-532-5841 Toll Free: 866-672-5841 Facsimile: 808-532-5868 E-mail: invest@hei.com Office hours: 7:30 a.m. to 3:30 p.m. H.S.T. Correspondence about common stock and utility preferred stock ownership, dividend payments, transfer requirements, changes of address, lost stock certificates, duplicate mailings, and account status may be directed to Shareholder Services. A copy of the 2018 Form 10-K Annual Report for Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc., including financial statements and schedules, will be provided by HEI without charge upon written request directed to Shareholder Services, at the above address for Shareholder Services or through HEI’s website. Website Internet users can access information about HEI and its subsidiaries at http://www.hei.com. Dividends and Distributions Common stock quarterly dividends are customarily paid on or about the 10th of March, June, September, and December to shareholders of record on the dividend record date. Quarterly distributions on trust preferred securities are paid by HECO Capital Trust III, an unconsolidated financing subsidiary of Hawaiian Electric Company, Inc., on or about March 31, June 30, September 30, and December 31 to holders of record on the business day before the distribution is paid. Utility company preferred stock quarterly dividends are paid on the 15th of January, April, July, and October to preferred shareholders of record on the 5th of these months. Direct Registration HEI common stock can be issued in direct registration (book entry) form. The stock is DRS (Direct Registration System) eligible. Dividend Reinvestment and Stock Purchase Plan Any individual of legal age or any entity may buy HEI common stock at market prices directly from HEI. The minimum initial investment is $250. Additional optional cash investments may be as small as $25. The annual maximum investment is $300,000. After your account is open, you may reinvest all of your dividends to purchase additional shares or elect to receive some or all of your dividends in cash. You may instruct HEI to electronically debit a regular amount from a checking or savings account. HEI can also deposit dividends automatically to your checking or savings account. A prospectus describing the plan may be obtained through HEI’s website or by contacting Shareholder Services. Annual Meeting Tuesday, May 7, 2019, 10:00 a.m. American Savings Bank Tower 1001 Bishop Street 8th Floor, Room 805 Honolulu, Hawai‘i 96813 Please direct inquiries to: Kurt K. Murao Vice President, Legal and Administration and Corporate Secretary Telephone: 808-543-5884 Facsimile: 808-203-1992 Independent Registered Public Accounting Firm Deloitte & Touche LLP 999 Bishop Street, Suite 2700 Honolulu, Hawai‘i 96813 Telephone: 808-543-0700 Facsimile: 855-214-5030 Institutional Investor and Securities Analyst Inquiries Please direct inquiries to: Julie R. Smolinski Director, Investor Relations & Strategic Planning Telephone: 808-543-7300 Facsimile: 808-695-3201 E-mail: ir@hei.com Transfer Agents Common stock and utility company preferred stock: Shareholder Services Common stock only: Continental Stock Transfer & Trust Company 1 State Street, 30th Floor New York, New York 10004-1561 Telephone: 212-509-4000 Facsimile: 212-509-5150 Trust preferred securities: Contact your investment broker for information on transfer procedures. To minimize our environmental impact, this report was printed on paper containing fibers from socially and environmentally responsible forestry products. To learn more, please visit us at www.hei.com 

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