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
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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.
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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
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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.
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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
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• 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.
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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
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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.
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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
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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
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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.
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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
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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
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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