Hawaiian Electric Industries
Annual Report 2019

Plain-text annual report

Kakou Working together for Hawai‘i’s future 2019 Annual Report to Shareholders Hawai‘i has some of the nation’s most ambitious clean energy goals—100% renewable energy and a carbon neutral economy by 2045. Achieving these goals in the right way for our island state will take balancing important community needs, like affordability, resilience, social equity and cultural considerations, and addressing key challenges, like limited land and competing needs for that resource—from affordable housing to clean energy to agriculture. This is why we say reaching our goals must be done in a way that is “kakou,” meaning that it will take our whole community working together, and “pono,” done in a way that is right and just for our communities. Only together can we find the solutions that strike the right balance for our island home. D Letter to Shareholders Dear Fellow Shareholders, We have long viewed the success of our enterprise and the value we deliver to shareholders as inextricably linked with the value we deliver to our customers, our employees and our communities, and with the health of our environment, our economy and our state as a whole. This link has become even more important in the context of achieving our state’s clean energy and carbon neutrality goals. Our work to achieve these goals will help preserve our environment, increase our energy independence, strengthen our economy and create long- term value for our shareholders. Our company, our employees, our customers and our communities each play a unique role in achieving these goals, and all of us need to work together to be successful. In other words, it’s a “kakou” thing. together to be successful. In other words, it’s a “kakou” thing. The paragraphs that follow summarize what our HEI family of companies achieved over the course of 2019, and how we are working to advance our state’s goals and create value for all of our stakeholders. Solid Financial Results In 2019 our consolidated companies generated $218 million in net income and $1.99 in earnings per share (EPS), representing 8% growth over net income and EPS in 2018. Hawaiian Electric grew earnings by 9% and strengthened its return on equity, while continuing to deliver on priorities established in its five-year strategic plan. American Savings Bank (ASB) grew earnings and maintained a strong net interest margin, while growing its dividend to the holding company by 12%. Now that the bank is operating in its new campus, it sold two of its former properties and is focused on realizing the benefits of the consolidation into the new space, including increased collaboration and efficiencies. Growing Our Dividend In 2019 we not only continued our record of paying uninterrupted dividends to our shareholders since 1901, we also increased our annual dividend by 3%. In early 2020 we announced a second consecutive 3% increase, raising the quarterly dividend from 32 cents to 33 cents per share, reflecting the strength of our financial performance, and the Board’s confidence in our future. “Our work to achieve our state’s clean energy and carbon neutrality goals will help preserve our environment, increase our energy independence, strengthen our economy and create long-term value for our shareholders. Our company, our employees, our customers and our communities each play a unique role in achieving these goals, and all of us need to work together to be successful. In other words, it’s a ‘kakou’ thing.” Constance H. Lau President and Chief Executive Officer Hawaiian Electric Industries, Inc. * PACIFIC CURRENT 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 *Hawaiian Electric Company, Inc. is a subsidiary of HEI. As a holding company, HEI does not sell products or services and therefore is not regulated by the state Public Utilities Commission. 1 HAWAIIAN ELECTRIC 2019 HIGHLIGHTS 4.6% The number of residential rooftop solar systems increased 4.6% 28% Over 28% of electricity sales achieved with renewable energy. On track to meet or exceed 2020 goal of 30% #1 #1 in the nation in residential rooftop solar penetration, at 19% (more than double that of the next highest state, California) Hawaiian Electric 2019 was a milestone year for Hawaiian Electric. We added a record amount of solar to our grids, maintained our position as number one in the nation for residential rooftop solar penetration, and, along with the state of Hawai‘i, received national recognition for leadership in the transformation to a clean energy, carbon neutral economy. We were also proud to be named “Utility of the Year” by Utility Dive, an independent industry publication. In December, we announced that Scott Seu would succeed Alan Oshima as our utility’s next President and CEO, which became effective February 2020. Scott has been a leader in the utility’s transformation into a more customer-focused enterprise, and under his leadership, we are confident that the utility can continue its success in partnering with our many stakeholders to achieve our state’s clean energy targets. We made important strides on key priorities of our multi-year strategic transformation plan, which focuses on delivering affordable, reliable, renewable energy; providing more value to customers; strengthening our relationships with communities; building resilience; and maintaining our financial strength. We saw a 21% increase in solar capacity, our largest maintaining our financial strength. We saw a 21% increase in solar capacity, our largest single-year increase ever, driven by new utility-scale projects and a nearly 5% increase in rooftop solar. Utility-scale projects placed in service included our West Loch solar project, which is now delivering the lowest cost solar in the state. We reached over 28% of energy sales from renewables, and we are well-positioned to integrate even more renewable energy onto our grids in the coming years. Regulators approved seven contracts for the lowest cost solar-plus-storage projects yet seen in Hawai‘i, and we launched one of the industry’s largest procurement efforts for renewables, with the successful bidders to be named later in 2020. Scott W. H. Seu Scott W. H. Seu President and CEO, Hawaiian Electric President and CEO, Hawaiian Electric Prior to his appointment as President and CEO on Prior to his appointment as President and CEO on February 15, 2020, Scott served as Hawaiian Electric’s February 15, 2020, Scott served as Hawaiian Electric’s Senior Vice President for Public Affairs. Scott has held Senior Vice President for Public Affairs. Scott has held leadership positions across the utility since 1993, including in leadership positions across the utility since 1993, including in environmental management, customer programs, renewable environmental management, customer programs, renewable energy development and system operations. energy development and system operations. 2 We strive to improve our customers’ experience, and in the fourth quarter we achieved customer satisfaction scores that placed us in the top third of the industry. We continue to develop new programs for customers to benefit from the clean energy transformation. These include our Project Footprint campaign to inspire customers to adopt sustainable practices and contribute to Hawai‘i’s renewable energy goals. In 2019, Project Footprint gained national recognition and gained numerous rewards for its innovative approach to customer engagement. Community engagement drove much of our resource planning and resilience work in 2019, providing valuable customer and stakeholder insights to such varied initiatives as Integrated Grid Planning and a series of resilience and preparedness workshops we led for the windward communities of Oahu. Stakeholder engagement has also been central to the evolution of our regulatory framework. In 2019, regulators, the utility and stakeholders began the design phase of Performance-based Regulation, or PBR, which will be implemented starting in 2021. We look forward to continued collaboration with participants as we move toward implementation. Below: Community engagement is a central part of Hawaiian Electric’s strategy, and it is essential in achieving our clean energy goals in a way that is affordable, safe, reliable and resilient. In 2019 Hawaiian Electric held numerous forums across our islands to engage directly with customers and other stakeholders on issues such as renewable energy, resilience and emergency preparedness. “Collaborating with communities to strengthen resilience—working with community leaders, as well as our partners in government and the private sector to prepare for the impacts of weather and other emergencies—is one of the many reasons I’m proud of our company’s role in the community.” Brandi Crabbe Community Relations Specialist Hawaiian Electric 3 HAWAIIAN ELECTRIC 2019 HIGHLIGHTS 21% 2019 saw our largest ever increase in solar generation capacity, which increased 21% over 2018 900 MW 500 GWh 210 MW Launched one of the largest ever utility renewables procurement efforts for up to 900 MW renewables, 500 GWh storage and 210 MW grid services 7 PPAs 260 MW 1 GWh Secured lowest cost renewables to date for our customers: 7 PPAs approved representing 260 MW solar and 1 GWh storage $109 million in customer savings Completed 20 MW, company-owned West Loch solar project, which is expected to save customers $109 million and reduce fossil fuel usage by 3 million gallons annually over its 25-year life, while delivering the lowest-cost renewable energy to date in the state. We also advanced efforts to improve the utility’s culture and efficiency, and a key accomplishment in 2019 was completing consolidation of functions and branding under our “One Company” initiative. Our three utilities across our five-island territory are now operating under a single name, “Hawaiian Electric.” Below: Connecting to the ‘aina (land) at Ka‘ala Farm—Hawaiian Electric employees and their families and friends were among the 150 volunteers who joined The Trust for Public Land to open lo‘i (taro flats) and plant kalo (taro) at Ka‘ala Farm, the nonprofit organization focused on restoring ancient, abandoned lo‘i kalo in an area that once served as a “poi bowl” for O‘ahu. 4 48439 Merrill_HEI-031020_INSERT.indd 4 3/11/20 10:05 AM American Savings Bank ASB continued its record of solid performance in 2019. We performed well through a challenging interest rate environment for banks, highlighting the consistency, stability and resiliency of the business. ASB grew earnings while delivering solid loan and core deposit growth, and remaining relentlessly focused on making banking easy for customers. In 2019, ASB invested nearly $2 billion in our community—providing the capital to help customers grow their businesses, plan for retirement or their children’s education, buy a first home, or invest in energy efficiency and renewable energy systems. In April, we celebrated the grand opening of our new ASB Campus. At 11-stories and 373,000 square feet, the ASB Campus is the first new office building in the downtown Honolulu area in the past 25 years. It brings together more than 650 team members previously spread out across five separate office locations. Being together under one roof allows team members to work even better together to carry out the bank’s vision of making dreams possible for Hawai‘i’s families, businesses and communities. We’re already seeing the benefits of the innovative open floorplans, teammate training center, and variety of collaboration spaces, which have facilitated faster decisions, process improvements and greater efficiency. ASB’s focus on its teammates and their work environment shows why it again won several workplace awards in 2019, including Hawaii Business magazine’s Best Places to Work (for the 11th year in a row); Fortune’s Great Places to Work (Best Workplaces for Diversity List), and Working Mother’s Multicultural Workplaces List. Below: In April 2019, American Savings Bank unveiled the ASB Campus—the first new office building in downtown Honolulu in nearly 25 years. The 11-story, 373,000-square-foot Campus is located at 300 N. Beretania Street, directly across from ‘A‘ala Park. “Our locally-owned and operated bakery has served the state of Hawai‘i with quality food products and services since 1984. By partnering with American Savings Bank, we were able to secure a loan to install rooftop solar on our facilities in Honolulu. We are proud to partner with another Hawai‘i-based company to play a part in helping our state achieve its goal towards clean energy.” Brandon Lam President La Tour Bakehouse 5 ASB 2019 HIGHLIGHTS $1.8 billion invested in our community in 2019 $8.7 billion loaned to Hawai‘i customers over the last five years 11 consecutive years on Hawaii Business magazine’s Best Places to Work list 15,025 Seeds of Service volunteer hours (27% increase over 2018) Above: ASB continues to gain recognition as a great place to work. The bank received numerous recognitions in 2019, including Hawaii Business magazine’s Best Places to Work (for the 11th year in a row); Fortune’s Great Places to Work (Best Workplaces for Diversity List), and Working Mother’s Multicultural Workplaces List. The bank’s investment in the campus neighborhood has helped improve Honolulu’s urban core for the whole community, and ASB’s teammates have continued to give back to the community in numerous ways. In 2019, teammates contributed more than 15,000 volunteer hours and the bank donated more than $1.15 million dollars to local non-profits statewide. Additionally, more than 1,000 local students across the islands participated in ASB’s 2019 KeikiCo business plan competition last fall, which resulted in awards totaling $190,000 to 14 local schools. Below: ASB’s Seeds of Service program encourages ASB teammates to give their time and talent to schools and community organizations. Since the program’s inception, ASB teammates have donated more than 63,000 hours of volunteer service to schools and non-profit organizations on O‘ahu, Hawai‘i Island, Maui, Moloka‘i and Kaua‘i. 6 48439 Merrill_HEI-031020_INSERT.indd 6 3/11/20 10:05 AM Above: The Pacific Current rooftop solar system and EverCharge EV charging station power the Harry and Jeanette Weinberg Ho‘okupu Center while encouraging EV adoption. Pacific Current 2019 marked Pacific Current’s first year with its own management team in place. Under the new team’s leadership, Pacific Current continued to invest in projects advancing Hawai‘i’s sustainability goals, while optimizing the existing portfolio. In November, Pacific Current’s first investment, the Hamakua plant, received its first shipment of locally-sourced biodiesel as part of its fuel needs. We also launched the EverCharge Hawai‘i joint venture to improve electric vehicle charging options for multi-unit dwellings and high-rise office buildings, encouraging broader electric vehicle adoption. Construction for the University of Hawai‘i solar-plus-storage projects also moved forward, and we will start seeing those projects become operational in 2020. We’re proud that Pacific Current is able to contribute to the sustainability and energy independence of our islands, and also contribute towards the achievement of our state’s renewable energy goals. Commitment to Our Communities HEI has consistently been recognized as one of our state’s most charitable companies. In 2019 our family of companies donated more than $2.4 million in charitable contributions and devoted over 27,000 volunteer hours to the communities we serve. Management and Governance Updates Our Board is committed to ensuring we have the diversity of perspective, skills and expertise to continue to drive value for our stakeholders. The HEI Board recently welcomed the addition of Micah Kane, whose extensive leadership experience and in-depth understanding of the communities HEI serves add to the Board’s oversight of HEI’s Hawai‘i-focused strategies, and Eva Zlotnicka, whose investment expertise on sustainability matters and experience overseeing ambitious strategic initiatives will contribute to our efforts to advance Hawai‘i’s sustainability goals. Finally, I would like to thank Alan Oshima for his tremendous leadership during a time of great change, as he led our utility through a major transformation and mentored and prepared our next generation of leaders. Looking Ahead I am excited for the opportunities our companies have to continue creating long-term value for shareholders while helping our state meet its broader renewable energy and sustainability goals. We are confident that working together, we and our communities and other stakeholders can achieve our shared renewable energy and carbon neutral future. On behalf of our employees, our executives, and our Board, we extend a big mahalo (thank you) to our shareholders for supporting us and making these goals possible. “The mission of our Hawai‘i-based non-profit, Kupu, is to empower people to bring life to the land and ocean through service while restoring the larger community for a better tomorrow. We were especially thankful to partner with Pacific Current to install rooftop solar and an EverCharge electric vehicle charging station at our Harry and Jeanette Weinberg Ho‘okupu Center, which houses our culinary program. This will allow us to save on our electric bill and significantly reduce our building’s carbon footprint. We’re proud to have worked with a local partner on a project that supports the missions of both organizations as well as the broader sustainability goals of our community and state.” John Leong Chief Executive Officer Kupu Hawai‘i Aloha, Constance H. Lau President and Chief Executive Officer Hawaiian Electric Industries, Inc. 48439 Merrill_HEI-031020_INSERT.indd 7 7 3/11/20 10:06 AM Financial Highlights Years ended December 31 (dollars in millions, except per share amounts) 2019 2018 Operating income1 $ 349 $ 333 Net income (loss) for common stock by segment Electric utility Bank1 Other Net income for common stock1 Core2 net income for common stock1 Diluted earnings per common share1 Core2 diluted earnings per common share1 Return on average common equity1 Core2 return on average common equity1 Dividends per common share Annual dividend yield3 Common shares (millions) December 31 Weighted-average — basic Weighted-average — diluted 157 89 (28 ) 218 218 1.99 1.99 9.8 % 9.8% 1.28 2.7 % 109.0 108.9 109.4 144 83 (24 ) 202 202 1.85 1.85 9.5 % 9.5% 1.24 3.4 % 108.9 108.9 109.1 2017 346 120 67 (22) 165 179 1.52 1.65 7.9% 8.6% 1.24 3.4% 108.8 108.7 108.9 Total Shareholder Return (percent) Dividend Yield (percent) HEI 31.9 57.1 68.2 S&P 500 Index Edison Electric Institute (EEI) Index KBW Regional Banking Index 31.5 53.2 73.9 25.8 45.7 64.4 23.8 3.9 53.0 2019 3-Year 5-Year 10-Year 245.5 256.7 214.0 197.7 6 4 2 0 4.3 3.8 3.7 3.4 3.4 3.4 3.4 3.4 3.0 2.7 Source: S&P Global Inc. HEI NYSE symbol: HE 2015 2016 2017 2018 2019 EEI Index HEI Sources: S&P Global Inc. and EEI (1) 2019 results include an after-tax gain of $5.5 million ($0.05 per diluted share), composed of $10.8 million of gains ($7.9 million after-tax, or $0.07 per diluted share) on sales of real estate associated with ASB’s transition to its new campus, partially offset by $3.2 million ($2.4 million after-tax, or $0.02 per diluted share) of exit costs associated with the move to the new campus. After-tax amounts are computed at ASB’s statutory tax rate of 26.8%. (2) Non-GAAP measure that excludes, for 2017, the tax reform act and related items. See Appendix B to this 2019 Annual Report to Shareholders for the reconciliation of GAAP to non-GAAP measures. (3) At December 31. 8 48439 Merrill_HEI-031020_INSERT.indd 8 3/11/20 10:06 AM Hawaiian Electric Industries, Inc. 2019 Annual Report to Shareholders UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K  ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Specified in Its Charter Hawaiian Electric Industries, Inc. Hawaiian Electric Company, Inc. Commission File Number 1-8503 1-4955 State of Hawaii I.R.S. Employer Identification No. 99-0208097 99-0040500 (State or other jurisdiction of incorporation) 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813 - Hawaiian Electric Industries, Inc. (HEI) 1001 Bishop Street, Suite 2500, Honolulu, Hawaii 96813 - Hawaiian Electric Company, Inc. (Hawaiian Electric) (Address of principal executive offices and zip code) Registrant’s telephone number, including area code: (808) 543-5662 - HEI (808) 543-7771 - Hawaiian Electric Not applicable (Former name or former address, if changed since last report.) Securities registered pursuant to Section 12(b) of the Act: Registrant Hawaiian Electric Industries, Inc. Title of each class Common Stock, Without Par Value Securities registered pursuant to Section 12(g) of the Act: Registrant Hawaiian Electric Industries, Inc. Hawaiian Electric Company, Inc. Trading Symbol HE Name of each exchange on which registered 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 ☒ No ☐ Hawaiian Electric Company, Inc. Yes ☐ No ☒ 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 ☒ Hawaiian Electric Company, Inc. Yes ☐ No ☒ 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 ☒ No ☐ Hawaiian Electric Company, Inc. Yes ☒ 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 ☒ No ☐ Hawaiian Electric Company, Inc. Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Hawaiian Electric Industries, Inc.: Large accelerated filer ☒ Smaller reporting company ☐ Large accelerated filer ☐ Smaller reporting company Accelerated filer ☐ Emerging growth company Non-accelerated filer ☐ ☐ Emerging growth company ☐ Accelerated filer Hawaiian Electric Company, Inc.: Non-accelerated filer ☒ ☐ ☐ 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 ☒ Hawaiian Electric Company, Inc. Yes ☐ No ☒ Aggregate market value of the voting and non- voting common equity held by non-affiliates of the registrants as of June 30, 2019 Number of shares of common stock outstanding of the registrants as of June 30, 2019 February 13, 2020 Hawaiian Electric Industries, Inc. (Without Par Value) Hawaiian Electric Company, Inc. ($6-2/3 Par Value) $4,745,752,027 108,972,492 108,973,328 None 16,751,488 17,048,783 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 2020 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 Information About Our Executive Officers (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. Item 16. 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 Exhibits and Financial Statement Schedules Form 10-K Summary PART IV i Page ii vi 1 17 28 28 28 28 29 30 31 33 69 72 166 166 167 167 168 169 169 170 170 170 182 Defined below are certain terms used in this report: GLOSSARY OF TERMS Terms ABO ACL ADIT AES Hawaii AFS AFUDC ALL AOCI AOS APBO ARO ASB ASB Hawaii ASC ASU Btu CAA CERCLA Chevron CIAC CIS Company Consolidated Financial Statements Definitions Accumulated benefit obligation Allowance for credit losses as determined under the new credit loss standard (ASU No. 2016-13), which requires the measurement of lifetime expected credit losses for financial assets held at the reporting date (based on historical experience, current conditions and reasonable and supportable forecasts) Accumulated deferred income tax balances AES Hawaii, Inc. Available-for-sale Allowance for funds used during construction Allowance for loan losses, as determined under the existing credit loss standard, requires recording the allowance based on an incurred loss model 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 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) and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.). When used in Hawaiian Electric Company, Inc. sections, “Company” refers to Hawaiian Electric Company, Inc. and its direct subsidiaries. HEI’s 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 DBF DG DER Dodd-Frank Act DOH DRIP ECAC ECRC EEPS EGU EIP EPA Community-based renewable energy Decision and order from the PUC 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 ii Terms Definitions GLOSSARY OF TERMS (continued) EPS ERISA ERL ERP/EAM ESG Exchange Act FASB FDIC FDICIA federal FERC FHLB FHLMC FICO Fitch FNMA FRB GAAP GHG GNMA Gramm Act Hamakua Energy Earnings per share Employee Retirement Income Security Act of 1974, as amended Environmental Response Law of the State of Hawaii Enterprise Resource Planning/Enterprise Asset Management Environmental, social and governance 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 2020 Proxy Statement Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., Pacific Current, LLC and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) Selected sections of Proxy Statement for the 2020 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, 2019, 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 HEIRSP HELOC HPOWER HSFO HTM IPP IRP IRR Kalaeloa kV kW kWh LNG LSFO LTIP Maui Electric Results of Operations in Item 7 of this Form 10-K 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 High sulfur fuel oil Held-to-maturity Independent power producer Integrated resource plan Interest rate risk Kalaeloa Partners, L.P. Kilovolt Kilowatt/s (as applicable) Kilowatthour/s (as applicable) Liquefied natural gas Low sulfur fuel oil Long-term incentive plan Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc. iii Terms Mauo MBtu MD&A Merger GLOSSARY OF TERMS (continued) Definitions 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 NEE NEM NII NM NPBC NPPC O&M OCC OPEB OTS OTTI Pacific Current PBO PCB PGV PIMs PPA PPAC PSIPs PUC PURPA PV QF QTL RAM RBA Registrant REIP RFP RHI ROA ROACE RORB RPS S&P SASB SEC 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 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 Power Supply Improvement Plans Public Utilities Commission of the State of Hawaii Public Utility Regulatory Policies Act of 1978 Photovoltaic Qualifying Facility under the Public Utility Regulatory Policies Act of 1978 Qualified Thrift Lender Rate adjustment mechanism Revenue balancing account Each of Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Renewable Energy Infrastructure Program Request for proposals Renewable Hawaii, Inc., a wholly-owned nonregulated subsidiary of Hawaiian Electric Company, Inc. Return on assets Return on average common equity Return on rate base Renewable portfolio standards Standard & Poor’s Sustainability Accounting Standards Board Securities and Exchange Commission iv Terms See SLHCs SOIP Spin-Off SPRBs ST state Tax Act TCFD TDR Tesoro TOOTS Trust III UBC Utilities VIE GLOSSARY OF TERMS (continued) Definitions 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) Task Force on Climate-related Financial Disclosure 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 future Federal government shutdowns, 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 and local developments (including economic conditions and uncertainties; unrest, terrorist acts, wars, conflicts, political protests, deadly virus epidemic, potential pandemic or other crisis; the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade); • 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 regulatory changes advanced or proposed by President Trump and his administration; • weather, natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the increasing effects of climate change, such as more severe storms, flooding, 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, and the risks inherent in changes in the value of the Company’s pension liabilities, including changes driven by interest rates; • changes in laws, regulations (including tax regulations), market conditions, interest rates 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, 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 recovery clauses (ECRCs); • 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 recover increasing costs and earn a reasonable return on capital investments not covered by RAMs; • 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 (PIMs), third-party proposals adopted by the PUC in its implementation of performance-based regulation (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 and avoid or mitigate labor disputes and work stoppages; • 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; • cybersecurity 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 to achieve cost savings consistent with the minimum $246 million in Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) project-related benefits (including $150 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 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 (ALL) and charge-offs; • the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on January 1, 2020, which may result in more volatility in the provision for loan losses prospectively; • changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds; • unanticipated changes from the expected discontinuance of LIBOR and the transition to an alternative reference rate, which may include adverse impacts to the Company’s cost of capital, loan portfolio and interest income on loans; • 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 (Pacific Current), 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; • the impact of activism that could delay the construction, or preclude the completion, of third-party or Utility projects that are required to meet electricity demand and RPS goals; 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 14 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, Maui, Lanai and Molokai. Over the past few years, the three utilities have been working on restructuring their functions and processes across the islands under an initiative to improve operational efficiencies, provide consistent positive customer experience, and reduce cost. This initiative was substantially completed in 2019 and, as of January 1, 2020, the three utilities now operate under one brand, “Hawaiian Electric,” on all five islands served by the utilities, but remain three separate entities. 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 $7.2 billion as of December 31, 2019. ASB provides a wide array of banking and other financial services to consumers and businesses. See also “Bank” section below. Other. The “Other” segment is composed of 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 clean 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 is inactive. 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, and the Company has no control over its accuracy or completeness. Regulation.  HEI and Hawaiian Electric are each holding companies within the meaning of the Public Utility Holding Company Act of 2005 and implementing regulations, which requires holding companies and their subsidiaries to grant the Federal Energy Regulatory Commission (FERC) access to books and records relating to FERC’s jurisdictional rates. FERC granted HEI and Hawaiian Electric a waiver from its record retention, accounting and reporting requirements, effective May 2006. 1 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 14 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 14 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 2019; 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, and Note 1 of the Consolidated Financial Statements. Employees.  The Company had full-time employees as follows: December 31 HEI Hawaiian Electric and its subsidiaries ASB 2019 45 2,670 1,126 3,841 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 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, an indirect wholly owned subsidiary of Pacific Current, 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. Over the past few years, the three utilities have been working on restructuring their functions and processes across the islands under an initiative to improve operational efficiencies, provide consistent positive customer experience, and reduce cost. This initiative was substantially completed in 2019 and, as of January 1, 2020, the three utilities now operate under one brand, “Hawaiian Electric,” on all five islands served by the utilities, but remain three separate entities. In 2019, the electric utilities’ revenues and net income amounted to approximately 89% and 72% respectively, of HEI’s consolidated revenues and net income, compared to approximately 89% and 71% in 2018 and approximately 88% and 73% in 2017, 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 2019 2018 2017 (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 306,368 $ 1,784,982 305,456 $ 1,789,527 304,948 $ 1,592,016 86,576 72,522 360,019 372,034 85,758 71,875 371,713 364,967 85,925 71,352 331,697 323,882 465,466 $ 2,517,035 463,089 $ 2,526,207 462,225 $ 2,247,595 Regulatory mechanisms. Base electric rates are set in rate cases, and each of the three utilities is currently on a triennial rate case 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 kilowatthour (kWh) sales, which have declined, with the exception of 2019, 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 in between rate cases 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 recovery clause (ECRC) and purchased power adjustment clause (PPAC) 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 and Maui Electric capped at $2.5 million and $0.6 million, respectively. Hawaii Electric Light’s ECRC does not have cost risk-sharing mechanism 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 experienced by some electric utilities on the U.S. mainland. In Hawaii, kWh sales 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 3 privately owned customer PV systems. In 2019, kWh sales increased over prior year due to warmer and more humid than average weather and this is the first time kWh sales have increased over prior year since 2007. Significant customers. The Utilities derived approximately 11% of their operating revenues in 2019, 2018 and 2017 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 efficiency, resilience and clean energy objectives. 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 RPS (%) 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 Average annual use per customer account (kWh) Average annual revenue per customer account Average number of customer accounts 2019 2018 2017 2016 2015 2,439.3 2,793.0 3,467.2 40.5 8,740.0 4,972.7 4,168.6 9,141.3 28.4 4.2 1,737 517 2,254 1,601 10,860 1,337.6 409,689 54,233 700 844 465,466 2,410.8 2,810.8 3,425.1 42.1 8,688.8 4,966.4 4,139.3 9,105.7 26.7 4.4 1,739 517 2,256 1,598 10,826 1,420.2 407,505 54,075 696 813 463,089 2,334.5 2,867.9 3,443.3 44.7 8,690.4 4,888.4 4,247.1 9,135.5 26.8 4.7 1,673 551 2,224 1,584 10,812 1,114.3 406,241 53,732 656 1,596 462,225 2,332.7 2,911.5 3,555.1 46.0 8,845.3 4,940.4 4,349.1 9,289.5 25.8 4.6 1,669 551 2,220 1,593 10,710 862.3 402,818 55,089 670 1,585 460,162 2,396.5 2,977.8 3,532.9 49.3 8,956.5 5,124.5 4,308.3 9,432.8 23.2 4.8 1,669 555 2,224 1,610 10,632 1,206.5 400,655 54,878 659 1,608 457,800 $ $ $ 791,398 829,000 884,722 11,915 2,517,035 28.80 32.44 29.68 25.52 29.39 5,967 1,936 408,768 $ $ $ 788,028 843,326 882,443 12,410 2,526,207 29.07 32.69 30.00 25.76 29.47 5,923 1,936 407,044 $ $ $ 691,857 766,921 776,808 12,009 2,247,595 25.86 29.64 26.74 22.56 26.82 5,779 1,713 403,983 $ $ $ 638,776 711,553 720,878 11,306 2,082,513 23.54 27.38 24.44 20.28 24.61 5,806 1,590 401,796 $ $ $ 709,886 798,202 802,366 13,356 2,323,810 25.90 29.62 26.81 22.71 27.05 5,996 1,776 399,674 1 Since May 2018, Puna Geothermal Venture (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, 2019. 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, 2019. 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 Net generating and firm purchased capability (MW) as of December 31, 20191 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 999.5 — 230.8 — — 57.4 456.5 1,744.2 50.1 29.5 — 46.3 56.3 — 60.0 35.9 96.8 — — 113.6 — — 242.2 246.3 1,193.0 192.1 204.3 44.8% 65.4% 26.1% 66.7% 23.2% 62.5% kWh net generated and purchased (millions) 6,833.8 1,122.1 1,118.6 — 9.4 — — — — — 9.4 6.1 54.1% 64.4% 34.4 — 9.8 — 2.2 — — — 1,085.5 145.5 230.8 48.5 169.9 57.4 516.5 12.0 2,254.1 6.0 100.0% 61.7% 32.4 1,601.5 40.7% 65.2% 9,141.3 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, 2019. 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 municipal waste and other biofuels. The rate schedules of the electric utilities contain ECRCs (changed from ECACs 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, 2019. 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, 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 July 31, 2020. 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, 2019. 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. On December 31, 2019, Hawaii Electric Light entered into an Amended and Restated PPA with PGV to, among other things, extend the term by 25 years to 2052 and expand the firm capacity capable of being delivered to 46 MW, subject to PUC approval. See “New renewable PPAs” in the “Developments in renewable energy efforts” section in Electric Utility’s MD&A. 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 facility consists of two oil-fired combustion turbines and a steam turbine that utilizes waste heat from the combustion turbines, which primarily burns naphtha (a mixture of liquid hydrocarbons) and small amounts of biodiesel beginning in November 2019. 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, however, the approval was appealed. The Supreme Court issued a decision remanding the matter to the PUC for further proceedings. 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 ECRCs (changed from ECACs 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 ECRC 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. Hawaiian Electric’s Schofield Generating Station consumes mostly B99 grade biodiesel, but is permitted to also burn ultra low sulfur diesel (ULSD). Hawaii Electric Light’s and Maui Electric’s steam generating units burn high sulfur fuel oil (HSFO) 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 ULSD. See “Fuel contracts” in Electric utility’s MD&A. 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 2019, 2018 and 2017: 2019 2018 2017 Hawaiian Electric $/Barrel ¢/MBtu Hawaii Electric Light ¢/MBtu $/Barrel Maui Electric Consolidated $/Barrel ¢/MBtu $/Barrel ¢/MBtu 81.02 86.11 67.96 1,304.8 1,371.8 1,087.1 81.96 89.81 68.02 1,354.0 1,489.5 1,125.2 86.58 93.60 72.29 1,454.8 1,573.6 1,214.6 82.17 87.90 68.78 1,337.6 1,420.2 1,114.3 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: 2019 2018 2017 Hawaiian Electric % LSFO % Biodiesel/Diesel 7 4 5 93 96 95 Hawaii Electric Light % HSFO 44 39 43 % Diesel 56 61 57 Maui Electric % HSFO 24 23 23 % Diesel 76 77 77 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 64% of the net energy they generate will come from fossil fuel oil in 2020 compared to 66% in 2019. 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 HSFO and diesel. The PPAs with AES Hawaii and Hamakua Energy require that they maintain certain minimum fuel inventory levels. Rates. Hawaiian Electric, Hawaii Electric Light and Maui Electric are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See “Regulation” below. General rate increases require the prior approval of the PUC after public and contested case hearings. Rates for Hawaiian Electric and its subsidiaries include ECRCs (changed from ECACs 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 Memorandum of Understanding (MOU) recognizing that Hawaii is embarking on the next phase of its clean energy future. The MOU provides the framework for a comprehensive, sustained effort to better realize its vast renewable energy potential and allow Hawaii to push forward in three main areas: the power sector, transportation and energy efficiency. This next phase is focused on stimulating deployment of clean energy infrastructure as a catalyst for economic growth, energy system innovation and test bed investments. Energy efficiency. The PUC issued an order on January 3, 2012 approving a framework for Energy Efficiency Portfolio Standards (EEPS) that set 2008 as the initial base year for evaluation and linearly allocated the 2030 goal to interim incremental reduction goals of 1,375 GWH by 2015 and 975 GWH by each of the years 2020, 2025 and 2030. Pursuant to the PUC’s EEPS framework, the PUC has contracted with a public benefits fee administrator to operate and manage energy 7 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 July 2019 the Utilities filed a study analyzing data regarding the critical backbone for electric vehicle charging needs in their service territories. In October 2019, the Utilities filed their EoT Workplan, establishing a schedule to continue implementation of the EoT roadmap with a focus on EV rate design and make-ready charging infrastructure in the near-term. 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 and 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 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 Notes 1 and 3 of the Consolidated Financial Statements, which are incorporated herein by reference), the Utilities believe that each subsidiary has appropriately responded to environmental conditions 8 requiring action and that, as a result of such actions, such environmental conditions will not have a material adverse effect on the capital expenditures, earnings and competitive position of the Utilities. 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, where there may be a connection to surface water, discharges from underground injection control wells may require National Pollution Discharge Elimination System permits. This case was appealed to the U.S. Supreme Court who heard the matter in November of 2019. A final decision is expected in the first quarter of 2020. 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. 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, 2019, 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 Hill/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 Molokai LSFO / Diesel LSFO Diesel N/A Biodiesel / ULSD Renewable (Solar) N/A ULSD Diesel / ULSD HSFO / Diesel HSFO / ULSD ULSD HSFO Diesel / ULSD ULSD ULSD 480.8 620.5 129.0 — 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 Active 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. 2 Hawaiian Electric has a 35-year land 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 land lease on 102 acres, effective July 1, 2017, with the Secretary of the Navy. 4 The plants are situated on Hawaii Electric Light-owned land having a combined area of approximately 44 acres. The distributed generators are located within Hawaii Electric Light-owned substation sites having a combined area of approximately four acres. 5 The four plants are situated on Maui Electric-owned land having a combined area of 60.7 acres. As of December 31, 2019, 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) Oahu Oahu Oahu Oahu Hawaii Hawaii Maui Maui Fuel Type LSFO LSFO Diesel Biodiesel HSFO Diesel HSFO Diesel Capacity (barrels in thousands) Generation Serviced 1,000 770 132 11 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 HSFO storage capacity for Hawaii Electric Light-owned fuel off-site at Island Energy Services, LLC (Island Energy)-owned terminalling facilities. 2 There are an additional 56,358 barrels of diesel oil storage capacity off-site at Aloha Petroleum, Ltd. (Aloha Petroleum)-owned terminalling facilities. 10 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, land for office spaces and storage in Pearl City, 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 $7.2 billion and deposits of $6.3 billion, as of December 31, 2019. ASB is a full-service community bank that serves 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. In 2019, ASB’s revenues and net income amounted to approximately 11% and 41% of HEI’s consolidated revenues and net income, respectively, compared to approximately 11% and 41% in 2018 and approximately 12% and 41% in 2017. At the time of HEI’s acquisition of ASB, HEI agreed with the Office of Thrift Supervision (OTS), Department of Treasury’s 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, 2019, 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 11 2019 2018 2017 9.30% 8.86% 9.10% 1.25 13.48 1.20 13.51 1.02 11.20 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 15 of the Consolidated Financial Statements. The demand for loans is primarily dependent on the Hawaii real estate market, business conditions, interest rates and loan refinancing activity. Residential mortgage lending. ASB originates fixed rate and adjustable rate loans secured by single family residential property, including investor-owned properties, with maturities of up to 30 years. ASB’s general policy is to require private mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner-occupied residential property purchases, the loan-to-value ratio may not exceed 75% 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. 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, 2019, 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. 12 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 compete effectively, 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 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, 2019, ASB was in compliance with OCC minimum regulatory capital requirements and was “well-capitalized” within the meaning of OCC prompt corrective action regulations and FDIC capital regulations, as follows: • • ASB met applicable minimum regulatory capital requirements (noted in parentheses) as of December 31, 2019 with a Tier 1 leverage ratio of 9.1% (4.0%), a common equity Tier 1 capital ratio of 13.2% (4.5%), a Tier 1 capital ratio of 13.2% (6.0%) and a total capital ratio of 14.3% (8.0%). ASB met the capital requirements to be generally considered “well-capitalized” (noted in parentheses) as of December 31, 2019 with a Tier 1 leverage ratio of 9.1% (5.0%), a common equity Tier 1 capital ratio of 13.2% (6.5%), a Tier 1 capital ratio of 13.2% (8.0%) and a total capital ratio of 14.3% (10.0%). The purpose of the prompt corrective action capital requirements is to establish thresholds for varying degrees of oversight and intervention by regulators. Declines in levels of capital, depending on their severity, will result in increasingly stringent mandatory and discretionary regulatory consequences. Capital levels may decline for any number of reasons, including reductions that would result if there were losses from operations, deterioration in collateral values or the inability to dispose of real estate owned (typically acquired by foreclosure). The regulators have substantial discretion in the corrective actions they might direct and could include restrictions on dividends and other distributions that ASB may make to HEI (through ASB Hawaii) and the requirement that ASB develop and implement a plan to restore its capital. Under an agreement with regulators entered into by HEI when it acquired ASB, HEI currently could be required to contribute to ASB up to an additional $28.3 million of capital, if necessary, to maintain ASB’s capital position. 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, 2019, ASB met the applicable capital requirements, including the 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. 13 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). 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. 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 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, 2019, ASB’s unused FHLB of Des Moines borrowing capacity was approximately $2.3 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, 2019, 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 14 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, 2019, 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, 2019, 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, 2019, and at all times during 2019, 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. 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, 2019, ASB was required and owned capital stock in the FHLB of Des Moines in the amount of $8.4 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 a “satisfactory” 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. 15 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 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, 2019 Oahu Maui Hawaii Kauai Molokai Number of branches Leased Owned Total 9 2 3 2 — 16 25 4 2 1 1 33 34 6 5 3 1 49 As of December 31, 2019, the net book value (NBV) of branches and office facilities was $182 million ($175 million represents the NBV of the land and improvements for the branches and office facilities owned by ASB and $7 million represents the NBV of ASB’s leasehold improvements). As of December 31, 2018, the NBV of branches and office facilities of $190 million ($184 million represents the 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 leases expire on various dates through December 2040, but many of the leases have extension provisions. As of December 31, 2019, ASB owned 111 automated teller machines. New Headquarters. In 2019, ASB moved into its new headquarters, which it owns, in downtown Honolulu. The headquarters has approximately 370,000 square feet of space on eleven floors and consolidated five separate offices into one building where approximately 600 employees are working. In fourth quarter of 2019, ASB sold two office facilities as a result of the consolidation of employees into the new headquarters and recognized a pretax gain of $10.8 million. 16 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, 2019 under the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI (HEI Diversified Inc.) 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. In addition, the Hawaii economy could be directly or indirectly affected by 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 and local developments (including economic conditions and uncertainties; unrest, terrorist acts, wars, conflicts, political protests, deadly virus epidemic, potential pandemics, or other crisis; the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade). The recent outbreak of the coronavirus, COVID-19, first identified in Wuhan, Hubei Province, China, has the potential to impact economic conditions in Hawaii, for example, through a reduction of tourism and business travel to Hawaii. Further, a prolonged outbreak could potentially impact the ability of the Company’s customers, contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, which could adversely affect the Company’s businesses. For instance, restrictions on business activities due to COVID-19 may disrupt the global renewable energy supply chain that relies on Chinese manufacturing capacity for key components (such as solar modules, inverters, wind turbine components) creating project delays or material price increases for Hawaii renewable projects and procurement processes, which could potentially jeopardize the Company’s ability to achieve its RPS goals. While the Company has not been materially impacted by COVID-19 to date, the extent of the outbreak and its future impact on the Company’s businesses and its business partners is uncertain and cannot be reasonably estimated at this time. 17 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. 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. 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, 2019, 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 18 adverse economic, political or business developments or natural disasters affecting Hawaii and affect 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 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 sets 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. A data breach 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 and the Company 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 Company’s 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 19 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 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. 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 $246 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 have a material adverse impact the Utilities’ and Company’s 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, any of which could have a material adverse effect on the Utilities’ and the Company’s financial condition and results of operations. 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 and the Company’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 20 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. Some of the insurance coverages have substantial deductibles or has limits on the maximum amounts that may be recovered. In common with other companies in its line of business, the Utilities’ overhead and underground transmission and distribution systems (with the exception of substation buildings and contents), which have a replacement value roughly estimated at $8 billion, are largely not insured against loss or damage because the amount of transmission and distribution system insurance capacity 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 did not allow the affected Utilities to recover from ratepayers restoration costs and revenues lost from business interruption, the lost revenues and repair expenses could result in a significant decrease in HEI’s consolidated net income or in significant net losses for the affected periods. ASB generally does not obtain credit enhancements, such as mortgagor bankruptcy insurance, but does require standard hazard and hurricane insurance and may require flood insurance for certain properties. ASB is subject to the risks of borrower defaults and bankruptcies, special hazard losses not covered by the required insurance and the insurance company’s inability to pay claims on existing policies. Increased federal and state environmental regulation will require an increasing commitment of resources and funds and could result in construction delays or penalties and fines for non-compliance. HEI and its subsidiaries are subject to federal, state and local environmental laws and regulations relating to air quality, water quality, hazardous substances, waste management, natural resources and health and safety, which regulate, among other matters, the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous and toxic wastes and substances. 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 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 that could have a material adverse on the Company’s financial condition or results of operations. Adverse tax rulings or developments or changes in tax legislation 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. Additionally, changes in tax legislation or IRS interpretations could increase the Company’s tax burden and adversely affect the Company's financial position, results of operations, and cash flows. 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. 21 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 $715 million as of December 31, 2019), net of regulatory liabilities (amounting to $972 million as of December 31, 2019), would be charged to the statement of income in the period of discontinuance. Changes in accounting principles can also impact HEI’s consolidated financial statements. For example, if management determines that a PPA requires the consolidation of the IPP in the 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. 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 will adopt the new accounting principle using an effective date of January 1, 2020, and is in the process of finalizing its analysis. The Company estimates that the increase in the allowance for credit losses as of the adoption date will be between $18 million to $22 million. Electric utility risks. The following risks are generally specific to Hawaiian Electric, but could have a material adverse effect on the Company’s consolidated results of operations, financial condition and liquidity. 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 ECRC (changed from ECAC 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. See “Regulatory mechanisms” in Electric Utility’s Business. 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. See “Performance-based regulation proceeding” in Note 3 of the Consolidated Financial Statements. 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 22 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 recovery clauses. The rate schedules of each of the Utilities include ECRCs (changed from ECACs 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. 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 rate cases for the Utilities, the PUC approved revised ECRCs for the Utilities, which transferred the remaining fuel and purchased energy expenses recovery from base rates to the ECRCs. Effective January 1, 2019, ECRC for Hawaiian Electric 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. Effective September 1, 2019, the ECRC for Maui Electric reflects 98/2% risk-sharing split between ratepayers and Maui Electric, with an annual maximum exposure cap of $0.6 million. Hawaii Electric Light’s ECRC does not have a risk-sharing split. See “Most recent rate proceedings” in Note 3 of the Consolidated Financial Statements. A change in, or the elimination of, the 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 72% of the net energy generated or purchased by the Utilities in 2019 was generated from the burning of fossil fuel oil, and purchases of power by the Utilities provided about 46% of their total net energy generated and purchased for the same period. Failure or delay by 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 and third-party purchased power projects may be significantly impacted by stakeholder activism. The potential impact of stakeholder activism could increase total utility project costs, and delay the permitting, construction and overall timing or preclude the completion of third-party or utility projects that are required to meet electricity demand, 23 resilience and reliability objectives, and RPS goals. If a utility project cannot be completed, the project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income. Electric utility generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated and/or increased operation and maintenance expenses and increased power purchase costs. Operation of electric generating facilities involves certain risks which can adversely affect energy output and efficiency levels. Included among these risks are facility shutdowns or power interruptions due to insufficient generation or a breakdown or failure of equipment or processes. In addition, operations could be negatively impacted by interruptions in fuel supply, inability to negotiate satisfactory collective bargaining agreements when existing agreements expire or other labor disputes, inability to comply with regulatory or permit requirements, disruptions in delivery of electricity, operator error and catastrophic events such as earthquakes, tsunamis, hurricanes, fires, explosions, floods or other similar occurrences affecting the Utilities’ generating facilities or transmission and distribution systems. The Utilities may be adversely affected by new legislation or administrative actions. Congress, the Hawaii legislature and governmental agencies periodically consider legislation and other initiatives that could have uncertain or negative effects on the Utilities and their customers. Congress, the Hawaii legislature and governmental agencies have adopted, or are considering adopting, a number of measures that will significantly affect the Utilities, as described below. Renewable Portfolio Standards law. In 2015, Hawaii’s RPS law was amended to require electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020, 2030, 2040 and 2045 respectively. Energy savings resulting from energy efficiency programs do not count toward the RPS after 2014. The Utilities are committed to achieving these goals and met the 2015 RPS; however, due to the exclusion of energy savings in calculating RPS after 2014 and risks such as potential delays in IPPs being able to deliver contracted renewable energy, it is possible the Utilities may not attain the required renewable percentages in the future, and management cannot predict the future consequences of failure to do so (including potential penalties to be assessed by the PUC). On December 19, 2008, the PUC approved a penalty of $20 for every MWh that an electric utility is deficient under Hawaii’s RPS law. The PUC noted, however, that this penalty may be reduced, in the PUC’s discretion, due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated, as described in the RPS law and in an RPS framework adopted by the PUC. In addition, the PUC ordered that the Utilities will be prohibited from recovering any RPS penalty costs through rates. Renewable energy. In 2007, a measure was passed by the Hawaii legislature stating that the PUC may consider the need for increased renewable energy in rendering decisions on utility matters. Due to this measure, it is possible that, if energy from a renewable source is more expensive than energy from fossil fuel, the PUC may still approve the purchase of energy from the renewable source, resulting in higher costs. Global climate change and greenhouse gas emissions reduction. National and international concern about climate change and the contribution of GHG emissions (including carbon dioxide emissions from the combustion of fossil fuels) to climate change have led to federal legislative and regulatory proposals and action by the state of Hawaii to reduce GHG emissions. In July 2007, the State Legislature passed Act 234, which requires a statewide reduction of GHG emissions by January 1, 2020 to levels at or below the statewide GHG emission levels in 1990. On June 20, 2014, the Governor signed the final rules required to implement Act 234 and these rules went into effect on June 30, 2014. In general, Act 234 and the GHG rule require affected sources that have the potential to emit GHGs in excess of established thresholds to reduce their GHG emissions by 16% below 2010 emission levels by 2020. In accordance with State requirements, the Utilities submitted an Emissions Reduction Plan (ERP) to the DOH on June 30, 2015. The Utilities submitted a revised ERP on October 17, 2018 and subsequent revisions on May 15, 2019 and July 26, 2019, 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. As of December 31, 2019, the permits that were pending that would have incorporated the ERP have not been approved, and are subject to additional public review and potential challenge. Additionally, the loss of the PGV facility on Hawaii Island, unseasonable weather and the delay of additional renewable projects will make these goals more challenging in the immediate future. It is expected that with the advent of additional renewable projects and the application to the PUC with respect to the PGV project, the goals should be attainable. 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. 24 Performance-based regulation 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 to investigate performance-based regulation for the Utilities. See “Performance-based regulation proceedings” in Note 3 of the Consolidated Financial Statements. 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 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. The implementation of these or other programs may adversely impact the results of operations, financial condition and liquidity of the Utilities. Bank risks. The following risks are generally specific to ASB, but could have a material adverse effect on the Company’s consolidated results of operations, financial condition and liquidity. 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 (e.g., a flat or an inverted yield curve) or between different interest rate indices, and the duration and severity of the changes in market interest rates 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 40% of ASB’s loan portfolio as of December 31, 2019 and do not re-price with movements in interest rates. ASB continues to face a challenging interest rate environment. 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 25 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; 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. 26 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, 2019 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 2019, ASB’s HELOC and residential 1-4 family portfolios grew by 12% and 2%, 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 pursuing a strategy that included expanding its commercial, commercial real estate and consumer lines of business. Commercial and commercial real estate 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, ASB 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 ASB’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). 27 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. ITEM 1B. UNRESOLVED STAFF COMMENTS HEI: None. Hawaiian Electric: Not applicable. ITEM 2. PROPERTIES HEI and Hawaiian Electric: See the “Properties” sections under “HEI,” “Electric utility” and “Bank” in Item 1. Business above. ITEM 3. LEGAL PROCEEDINGS HEI and Hawaiian Electric: HEI 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. 28 INFORMATION ABOUT OUR EXECUTIVE OFFICERS (HEI) The executive officers of HEI are listed below. Messrs. Seu 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 67 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, 5/06 to 5/19 ASB Hawaii Director since 5/06 ASB Chairman of the Board since 5/06, Risk Committee member since 2012 and Director since 1999 · ASB Chief Executive Officer, 6/01 to 11/10, and President, 6/01 to 1/08 · ASB Senior Executive Vice President and Chief Operating Officer and Director, 12/99 to 5/01 · HEI Power Corp. Financial Vice President and Treasurer, 5/97 to 8/99 · HEI Treasurer, 4/89 to 10/99, and HEI Assistant Treasurer, 12/87 to 4/89 · Hawaiian Electric Treasurer 12/87 to 4/89 and Assistant Corporate Counsel, 9/84 to 12/87 Gregory C. Hazelton 55 HEI Executive Vice President and Chief Financial Officer since 4/17 HEI Treasurer, 3/18 to 11/19 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 Scott W. H. Seu 54 Richard F. Wacker 57 Hawaiian Electric President and Chief Executive Officer since 2/20 Hawaiian Electric Director since 2/20 · Hawaiian Electric Senior Vice President, Public Affairs, 1/17 to 2/20 · Hawaiian Electric Vice President, System Operation, 5/14 to 1/17 · Hawaiian Electric Vice President, Energy Resources and Operations, 1/13 to 5/14 · Hawaiian Electric Vice President, Energy Resources, 8/10 to 12/12 · Hawaiian Electric Manager, Resource Acquisition Department, 3/09 to 8/10 · Hawaiian Electric Manager, Energy Projects Department, 5/04 to 3/09 · Hawaiian Electric Manager, Customer Installations Department, 1/03 to 5/04 · Hawaiian Electric Manager, Environmental Department, 4/98 to 12/02 · Hawaiian Electric Principal Environmental Scientist, 1/97 to 4/98 · Hawaiian Electric Senior Environmental Scientist, 5/96 to 12/96 · Hawaiian Electric Environmental Scientist, 8/93 to 5/96 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. 29 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES HEI: Certain of the information required by this item is incorporated herein by reference to Note 14, “Regulatory restrictions on net assets” and Note 17, “Quarterly information (unaudited)” of the Consolidated Financial Statements and “Item 6. Selected Financial Data” and “Equity compensation plan information” under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K. 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, 2020, was 5,564. On February 11, 2020, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.32 per share to $0.33 per share, starting with the dividend in the first quarter of 2020. HEI currently expects to maintain the dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company, and the current and expected future economic conditions. 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, 2019 November 1 to 30, 2019 December 1 to 31, 2019 Total 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 23,372 11,248 148,516 183,136 $ $ $ $ 44.80 43.55 44.48 44.47 — — — — NA 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,” 154,786 of the 183,136 shares were purchased for the DRIP; 23,287 of the 183,136 shares were purchased for the HEIRSP; and the remaining of the183,136 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 2019 and 2018 were as follows: Quarters ended (in thousands) March 31 June 30 September 30 December 31 $ 2019 2018 $ 25,313 25,313 25,313 25,313 25,826 25,826 25,827 25,826 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 14 of the Consolidated Financial Statements. 30 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) 2019 2018 2017 2016 2015 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 $ 2,874,601 $ 2,860,849 $ 2,555,625 $ 2,380,654 $ 2,602,982 217,882 201,774 165,297 248,256 159,877 2.00 1.99 9.8% 1.85 1.85 9.5% 1.52 1.52 7.9% 2.30 2.29 12.4% 1.50 1.50 8.6% $ 13,745,251 $ 13,104,051 $ 12,534,160 $ 11,881,981 $ 11,275,931 6,271,902 115,110 1,964,365 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 34,293 34,293 34,293 34,293 34,293 2,280,260 2,162,280 2,097,386 2,066,753 1,927,640 51% 52% 53% 56% 53% Book value per common share * $ 20.92 $ 19.86 $ 19.28 $ 19.03 $ 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 (thousands) Shareholders *** Employees * 1.28 64% 224% 23.5x 108,973 108,949 24,766 3,841 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 17.94 1.24 82% 161% 19.3x 107,460 106,418 27,927 3,918 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, 2020, HEI had 5,564 registered shareholders (i.e., holders of record of HEI common stock), 22,060 DRIP participants and total shareholders of 24,651. 2019 results includes $10.8 million of gains ($7.9 million after-tax at ASB’s statutory tax rate of 26.8%) on sales of real estate associated with ASB’s transition to its new campus. The gains were partially offset by $3.2 million ($2.4 million after-tax at ASB’s statutory tax rate of 26.8%) of exit costs associated with the move to the new campus. 2018 and 2019 results include the impact of the lower federal corporate tax rate as a result of the Tax Act. 2018 also reflects certain tax return adjustments relating to the benefit associated with additional tax deductions taken in the Company’s 2017 tax returns in conjunction with the rate differential provided in the Tax Act. The lower tax rate in 2018 and 2019 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 and $20 million ($11 million, net of tax impacts) lower in RAM revenues than prior year due to the expiration of the 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2015 to 2016 at Hawaiian Electric. Results for 2016 and 2015 include merger- and spin-off-related income/(expenses), net of tax impacts, of $60 million and ($16 million), respectively. 31 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 2019 2018 2017 2016 2015 $ 2,545,942 $ 2,546,525 $ 2,257,566 $ 2,094,368 $ 2,335,166 156,840 143,653 119,951 142,317 135,714 $ 7,485,178 $ 7,092,483 $ 6,717,311 $ 6,327,102 $ 6,037,712 (2,690,157) (2,577,342) (2,476,352) (2,369,282) (2,266,004) $ 4,795,021 $ 4,515,141 $ 4,240,959 $ 3,957,820 $ 3,771,708 $ 6,388,682 $ 5,967,503 $ 5,630,613 $ 5,431,903 $ 5,166,123 Current portion of long-term debt $ 95,953 $ — $ 49,963 $ Short-term borrowings from non-affiliates 88,987 25,000 4,999 — $ — — — 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. 1,401,714 1,418,802 1,318,516 1,319,260 1,278,702 2,047,352 1,957,641 1,845,283 1,799,787 1,728,325 34,293 34,293 34,293 34,293 34,293 $ 3,668,299 $ 3,435,736 $ 3,253,054 $ 3,153,340 $ 3,041,320 43.3 0.9 55.8 42.0 1.0 57.0 42.2 1.1 56.7 41.8 1.1 57.1 42.1 1.1 56.8 HEI owns all of Hawaiian Electric’s common stock. Therefore, per share data is not meaningful. 2018 and 2019 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. 2018 also reflects certain tax return adjustments relating to the benefit associated with additional tax deductions taken in the Company’s 2017 tax returns in conjunction with the rate differential provided in the Tax Act. The lower tax rate in 2018 and 2019 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: 1) the expiration of the 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2015 to 2016 at Hawaiian Electric, and 2) 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 “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. 32 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 “Cautionary Note Regarding 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. 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. Environmental, social and governance risks and opportunities. Environmental, social and governance (ESG) considerations have long been an integral part of HEI’s strategy to be a “catalyst for a better Hawaii” for the benefit of all stakeholders. The Company firmly believes that effective management of its ESG risks and opportunities creates a strategic business advantage; improves the lives of our employees, through focus on employee health, wellness, safety, empowerment and increased engagement; improves the sustainability, well-being and resilience of our communities, the state and the environment; and ultimately leads to sustained long-term value creation for our investors. The HEI Board of Directors is responsible for the oversight of the Company’s enterprise risk management (ERM) programs, which are designed to address all material risks and opportunities, including ESG considerations. The Board of Directors has delegated the day-to-day responsibility to execute on these action plans to management. The Company believes ESG considerations are embedded in our daily actions and drive how we engage with our employees, communities, and shareholders. The Company intends to leverage the frameworks developed by the Task Force on Climate-related Financial Disclosure (TCFD) and the Sustainability Accounting Standards Board (SASB) to communicate our approach and progress on ESG matters in future filings. We are committed to achieving a renewable, sustainable energy future, providing leadership in corporate social responsibility, and adhering to governance best practices. To learn more about our ESG initiatives please visit www.hawaiianelectric.com/clean-energy-hawaii/sustainability-report and www.asbhawaii.com/corporate-social-responsibility. Later this year, HEI will be issuing a consolidated sustainability report, which will be posted on our website at www.hei.com. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. 33 HEI consolidated results of operations. (dollars in millions, except per share amounts) Revenues Operating income Net income for common stock Net income (loss) by segment: Electric utility Bank Other Net income for common stock Basic earnings per share Diluted earnings per share Dividends per share Weighted-average number of common shares outstanding (millions) Dividend payout ratio 2019 % change $ $ $ $ $ $ 2,875 349 218 157 89 (28) 218 2.00 1.99 1.28 108.9 64% — $ 5 8 $ $ $ $ $ 9 8 (15) 8 8 8 3 — 2018 % change 12 (4) 22 2,861 333 202 $ 144 83 (24) 202 1.85 1.85 1.24 108.9 67% $ 20 23 (13) $ 22 $ 22 22 $ — $ — 2017 2,556 346 165 120 67 (22) 165 1.52 1.52 1.24 108.7 82% In 2019, net income for HEI common stock increased 8% to $218 million ($1.99 diluted earnings per share), compared to $202 million ($1.85 diluted earnings per share) in 2018, due to $13 million and $6 million higher net income at the Utilities and ASB, respectively, partially offset by $4 million higher net loss at the “other” segment. The increase in the Utilities’ 2019 net income compared to 2018 was principally due to higher RAM and rate increases and higher MPIR revenues, partially offset by higher O&M expenses and depreciation. The increase in ASB’s net income was primarily due to gains on sale of properties exited in connection with ASB’s move to its new campus and higher net interest income as a result of an increase in earning asset balances and yields, partially offset by higher provision for loan losses and higher compensation and occupancy expenses. See “Electric utility,” “Bank,” and “HEI Consolidated—Other segment” sections below for additional information on year-to- year fluctuations. The Company’s effective tax rate (combined federal and state income tax rates) was lower at 19% in 2019, compared to 20% in 2018, primarily due to tax benefits of bank owned life insurance and increases in tax credit investments. For a discussion of 2017 results, please refer to the “HEI consolidated results of operations” section in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—HEI Consolidated,” in the Company’s 2018 Form 10-K. 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 2019 2018 Increase (decrease) Primary reason(s) $ (17) $ (16) $ (1) Lower Pacific Current operating income ($3 million in 2019 vs $4 Interest expense & other (21) (16) (5) million in 2018) due to higher Pacific Current administrative and general expenses. HEI corporate expenses were comparable year-over-year ($19 million in 2019 and 2018). Increase due to higher average borrowings and higher average interest rates. Average borrowings increased due primarily to $100 million tranche B private placement drawn in December 2018 to fund a contribution of utility equity. Income tax benefit 10 8 2 Higher tax benefit due to an increase in pretax losses Net loss $ (28) $ (24) $ (4) 1 Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation. 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 2019 with growth in both visitor spending and arrivals. Visitor expenditures increased 1.4% and arrivals increased 5.4% compared to 2018, although the average length of 34 stay decreased by -2.3% over 2018. The Hawaii Tourism Authority reported an increase in total trans-Pacific air seat capacity of 2.9% in 2019 compared 2018. Hawaii’s unemployment rate remained steady at 2.6% in December 2019, which was the same as the 2.6% rate a year ago in December 2018 and lower than the national unemployment rate of 3.5%. Hawaii real estate activity, as indicated by the home resale market, experienced growth in median sales prices for condominiums and decrease in median sale prices for single family homes in 2019. Median sales prices for single family residential homes were lower by 0.1% and were higher by 1.2% for condominiums on Oahu through December 2019 over the same time period in 2018. The number of closed sales for single family residential homes was up by 3.9% and for condominiums was down 4.8% through December of 2019 compared to same time period of 2018. Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Following price increases throughout the first half of 2019, the price of crude oil has dropped slightly and remained fairly stable in the second half of 2019. At its December 2019 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 1.5% to 1.75% to encourage maximum employment and price stability. The FOMC will continue to will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures. Hawaii’s economy slowed toward the end of 2019 as the population continued to decline, which impacted nonfarm payroll growth. However, the construction industry continues to perform well and visitor arrivals continue to increase, which is expected to help support the economy in maintaining a positive, but subdued, growth path. It is unknown at this time what effects, if any, the coronavirus COVID-19 will have on Hawaii’s visitor industry or its economy. 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. 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 2019 2018 $ $ 186 1,964 34 2,280 4,464 4% $ 44 1 51 100% $ 74 1,880 34 2,162 4,150 2% 45 1 52 100% 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, 2019 Average balance End-of-period balance December 31, 2018 $ $ 41 — — $ 97 — 150 49 — 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—Liquidity and capital resources” below. The maximum amount of HEI’s short-term borrowings in 2019 was $102 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, 2019. HEI periodically utilizes long-term debt, historically unsecured 35 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, 2019. 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 20, 2020, the Fitch, Moody’s and S&P ratings of HEI were as follows: Long-term issuer default, long-term and issuer credit, respectively Commercial paper Outlook Fitch Moody’s WR* BBB P-3 F3 Positive Stable S&P** BBB- A-3 Positive * 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–Liquidity and capital resources’ below. ** On February 20, 2020, S&P revised HEI’s outlook to positive and affirmed HEI’s issuer credit and commercial paper ratings. 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. There were no new issuances of common stock through the Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan (DRIP), Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) or the ASB 401(k) Plan in 2019, 2018, or 2017 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock. Operating activities provided net cash of $512 million in 2019 and $499 million in 2018. Investing activities used net cash of $542 million in 2019 and $792 million in 2018. In 2019, net cash used in investing activities was primarily due to capital expenditures, net increase in loans held for investment, purchases of available-for-sale and held-to-maturity investment securities and stock from Federal Home Loan Bank and contributions to low-income housing investments, partly offset by receipt of repayments from available-for-sale and held-to-maturity investment securities, redemption of stock from Federal Home Loan Bank and proceeds from sale of available-for-sale investment securities and real estate held for sale. 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, proceeds from the sale of commercial loans, redemption of stock from Federal Home Loan Bank and repayments from held-to-maturity investment securities. Financing activities provided net cash of $88 million in 2019 and $200 million in 2018. In 2019, net cash provided by financing activities included proceeds from issuance of long-term debt and short-term debt, net increases in deposits and short- term borrowings, partly offset by payment of common and preferred stock dividends, repayment of long-term debt and funds transferred for redemption of long -term debt and repayment of short-term debt. 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. For a discussion of 2017 operating, investing and financing activities, please refer to the “Liquidity and capital resources” section in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—HEI Consolidated,” in the Company’s 2018 Form 10-K. 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 “Liquidity and capital resources” sections below.) During 2019, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $101 million and $56 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 36 dividends on its common stock or its ability to meet its debt or other cash obligations. See Note 14 of the Consolidated Financial Statements. Forecasted HEI consolidated “net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2020 through 2022 consists primarily of the net capital expenditures of the Utilities, estimated to range from $1.1 billion to $1.3 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” below), approximately $50 million will be required in 2021 and $150 million in 2022 to repay HEI-issued private placement notes maturing in March 2021 and November 2022, which are expected to be repaid with the proceeds from the issuance of commercial paper, bank borrowings, other medium- or long-term debt, common stock and/or dividends from subsidiaries. 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 2020 through 2022 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). 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, 2019 (in millions) Contractual obligations Investment in qualifying affordable housing projects Time certificates Short-term borrowings Other bank borrowings Long-term debt Interest on CDs, other bank borrowings, short-term loan and long-term debt Operating leases PPAs classified as leases Other operating leases Service bureau contract, maintenance agreements and other Hawaiian Electric open purchase order obligations1 Hawaiian Electric fuel oil purchase obligations (estimate based on fuel oil price at December 31) Hawaiian Electric power purchase–minimum fixed capacity charges not classified as leases Total (estimated) Less than 1 year 1-3 years 3-5 years More than 5 years Total $ $ 13 503 186 115 102 86 63 12 20 54 7 9 200 — — 267 158 105 16 18 19 15 $ — $ 64 — — 159 130 $ 1 3 — — 1,446 718 — 9 4 1 — — 9 1 — — 23 770 186 115 1,974 1,092 168 46 43 74 22 51 1,212 $ 76 885 $ 76 443 $ $ 241 2,419 $ 444 4,959 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, 2019, 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 10 of the Consolidated Financial Statements for 2020 estimated contributions. There were no material uncertain tax positions as of December 31, 2019. 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,” and Note 8, “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, 37 results of operations, liquidity, capital expenditures or capital resources that are material to investors, including the following types of off-balance sheet arrangements: 1. 2. 3. 4. obligations under guarantee contracts, 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, obligations under derivative instruments, and 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; fair value; and asset retirement obligations. Management considers an accounting estimate to be material if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on the Company’s results of operations or financial condition. In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that the policies discussed below are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments. The policies affecting both of the Company’s two principal segments are discussed below and the policies affecting just one segment are discussed in the respective segment’s section of “Material estimates and critical accounting policies.” Management has reviewed the material estimates and critical accounting policies with the HEI Audit & Risk Committee and, as applicable, the Hawaiian Electric Audit & Risk 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 10 of the Consolidated Financial Statements, sensitivities of the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO) as of December 31, 2019, 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 Change in assumption in basis points Impact on HEI Consolidated PBO or APBO Impact on Consolidated Hawaiian Electric PBO or APBO ‘+/- 50 $(177)/$202 $(167)/$190 ‘+/- 50 $(14)/$15 $(13)/$15 Also, see Notes 1 and 10 of the Consolidated Financial Statements. 38 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 1, 3 and 4 of the Consolidated Financial Statements. Income taxes.  Deferred income tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities using tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management evaluates its potential exposures from tax positions taken that have or could be challenged by taxing authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other jurisdictions) and advice from its tax advisors. Management believes that the Company’s provision for tax contingencies is reasonable. However, the ultimate resolution of tax treatments disputed by governmental authorities may adversely affect the Company’s current and deferred income tax amounts. See Note 12 of the Consolidated Financial Statements. Following are discussions of the electric utility and bank segments. Additional segment information is shown in Note 2 of the Consolidated Financial Statements. The discussion concerning Hawaiian Electric should be read in conjunction with its consolidated financial statements and accompanying notes. 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, resilient, 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 energy 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 30%, 40%, 70% and 100% by December 31, 2020, 2030, 2040 and 2045, respectively.  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 two years early. The Utilities’ RPS for 2019 was approximately 28% and the Utilities are on track to achieve the 2020 RPS goal of 30%. The Utilities will continue to actively procure additional renewable energy post-2020 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See “Developments in renewable energy efforts” below). Also, since the Hawaii Clean Energy initiative was launched in 2008, the Utilities have continued to reduce the fuel to produce electricity. The fuel consumption in 2019 was approximately 82.5 million gallons less than that consumed in 2008. 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 2019, the Utilities have achieved a 18% decrease in greenhouse gas emissions compared to 2010. If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2019, a 1% shortfall in meeting the 2020 RPS requirement of 30% would translate into a penalty of approximately $1.75 million. The PUC has the discretion to reduce the penalty 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. In addition to penalties under the RPS law, failure to meet the 39 mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject Hawaiian Electric and Maui Electric to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. Currently, the fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the two utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of $3.1 million. The Utilities are fully aligned with, and supportive of, state policy to achieve a 100% renewable energy future and have made significant progress in its transformation. This alignment with state policy is reflected in management compensation programs and the Utilities’ long-range plans, which include aspirational targets in order to catalyze action and accelerate the transition away from fossil fuels at a pace more rapid than dictated by current law. The long-range plans, including aspirational targets, serve as guiding principles in the Utilities’ continued transformation, and are updated regularly to adapt to changing technology, costs and other factors. While there is no financial penalty for failure to achieve the Utilities’ long-range aspirational objectives, the Utilities recognize that there is an environmental and social cost from the continued use of fossil fuels. The state’s policy is supported by the regulatory framework and 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 generally declined (with the exception of 2019), 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 rate adjustment mechanism to provide revenues for escalation in certain O&M expenses and rate base changes between rate cases, and 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 “Decoupling” in Note 3 of the Consolidated Financial Statements. Integrated Grid Planning. 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. The PUC opened a docket to review the IGP process that the Utilities had proposed, and the resulting plans. In March 2019, the PUC accepted the Utilities’ IGP Work plan submitted on December 14, 2018, which describes the timing and scope of major activities that will occur in the IGP process. The IGP utilizes an inclusive and transparent Stakeholder Engagement model to provide an avenue for interested parties to engage with the Companies and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisor Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated Demand Response (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 allowance for funds used during construction, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. On October 30, 2019, the Utilities filed the final cost report, reflecting total project costs of $3.7 million. On February 27, 2020, the PUC approved the Utilities’ request to recover deferred and other related costs of DR Management System through REIP Surcharge effective March 1, 2020 until such costs are included in determining base rates. 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. In 2019, the Utilities signed a multi-year Grid Services Purchase Agreement with a third party aggregator. 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 $22 million has been executed (PUC approval obtained on August 9, 2019) and is expected to not only deliver benefit through efficient grid operations but also avoided fuel costs over that 5-year period. The Utilities will select the next set of aggregators in the first quarter of 2020. 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. 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 40 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 Phase 1, which received PUC approval on March 25, 2019. The estimated cost for this initial phase is approximately $86 million and is expected to be incurred over five years. The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System as part of the second phase of their Grid Modernization implementation. The estimated cost for the implementation over five years of the Advanced Distribution Management System, which includes capital, deferred and O&M costs, is $46 million. Additional applications will be filed later to implement subsequent phases of the strategy. On December 30, 2019, the PUC suspended the Utilities’ application for the Advanced Distribution Management System pending the Utilities’ filing of a supplemental application for the broad deployment of field devices. Community-based renewable energy. In December 2017, the PUC adopted a community-based renewable energy (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 photovoltaic (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 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. The PUC held an informal technical conference on July 5, 2019 to review progress and status to the first phase and to solicit recommendations for the second phase. On August 19, 2019, the Utilities and the Joint Parties submitted their comments and recommendations for the second phase. Microgrid services tariff proceeding. In July 2018, the PUC issued an order instituting a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 of 2018. The PUC granted motions to intervene in the docket by eight parties (there are currently six parties) and completed its initial procedural schedule in March 2019. In August 2019, the PUC issued an order stating that the focus for the remainder of the docket is to facilitate the ability of microgrids to disconnect from the grid and provide backup power to customers and critical energy uses during contingency events. The PUC also required the parties to form two Working Groups: (1) a Market Facilitation Working Group to recommend draft tariff language for the Microgrid Services Tariff; and (2) an Interconnection Standards Working Group to develop a new section of Rule 14H specific to interconnection and islanding/reconnection of microgrids. The Utilities are to file a Draft Microgrid Services Tariff and Rule 14H Updates by March 30, 2020. Decoupling. See “Decoupling” in Note 3 of the Consolidated Financial Statements for a discussion of decoupling. As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility’s rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2019, 2018 and 2017 did not trigger the earnings sharing mechanism for the Utilities. Regulated returns. Actual and PUC-allowed returns, as of December 31, 2019, were as follows: % Rate-making Return on rate base (RORB)* Year ended December 31, 2019 Utility returns PUC-allowed returns Difference Hawaiian Electric 6.90 7.57 Hawaii Electric Light 5.97 7.52 Maui Electric Hawaiian Electric Maui Electric Hawaiian Electric 6.37 7.43 8.02 9.50 7.00 9.50 7.79 9.50 8.80 9.50 ROACE** Hawaii Electric Light Rate-making ROACE*** Hawaii Electric Light 6.72 9.50 Maui Electric 7.95 9.50 (1.55) (0.67) (1.55) (1.06) (1.48) (2.50) (1.71) (0.70) (2.78) * 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. 41 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, and O&M increases and return on capital additions since the last rate case in excess of indexed escalations. Results of operations. 2019 vs. 2018 2019 2,546 $ 2018 2,547 $ 721 633 482 456 254 197 761 639 461 444 242 180 157 144 7.8% 7.6% 82.17 8,740 2,670 87.90 8,689 2,704 Increase (decrease) (dollars in millions, except per barrel amounts) $ (1) $ Revenues. Net decrease largely due to: net of lower fuel prices and higher kWh generated11 net of lower purchased power energy costs and higher kWh purchased2 higher electric rates (45) (6) 26 16 MPIR for Schofield Generating Station 3 2 2 1 7 7 3 2 2 higher PIM award due to low-cost variable renewable procurement, better reliability and call center performance billing to a third party for mutual assistance work reimbursement higher state refundable credit due to reduction in amortization period pole attachment revenues Fuel oil expense.1 Net decrease due to lower fuel oil prices offset in part by higher kWh generated Purchased power expense1,2. Net decrease largely due to lower purchased power energy price offset in part by higher kWh purchased Operation and maintenance expense. Increase largely due to: higher outside services for system support (Asset management, Energy Management, Enterprise Resources and Grid Modernization systems) higher generation overhaul costs reset of pension costs included in rates as part of rate case decisions higher preventive/corrective maintenance expense for generation facilities higher medical premium costs Other expenses. Increase due to higher depreciation expense for plant investments in 2018 Operating income. Increase due to higher electric rates, offset in part by higher operation and maintenance, and depreciation expenses Income before income taxes. Increase due to higher electric rates, lower interest expense related to the hybrid securities redemption replaced with lower cost debt and refinancing of revenue bonds and higher AFUDC, offset in part by higher operation and maintenance and depreciation expense Net income for common stock. Increase due to higher electric rates and MPIR revenues, offset in part by higher operating expenses (40) (6) 21 12 12 17 13 0.2% (5.73) 51 (34) Return on average common equity Average fuel oil cost per barrel Kilowatthour sales (millions) 3 Number of employees (at December 31) 1 The rate schedules of the electric utilities currently contain ECRCs (changed from ECACs in 2019) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers. 2 The rate schedules of the electric utilities currently contain PPACs through which changes in purchase power expenses (except purchased energy costs) are passed on to customers. 3 kWh sales were higher in 2019 when compared to the prior year due largely to warmer humid weather in 2019 than 2018. Hawaiian Electric’s effective tax rate (combined federal and state income tax rates) in 2019 and 2018 was comparable at 19%. Income tax expense for 2019 reflects higher amortization in 2019 versus 2018 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in federal income tax rate, while 2018 income tax expense reflects certain tax return adjustments recorded in 2018 relating to the benefit associated with additional tax deductions taken in the Company’s 2017 tax returns in conjunction with the rate differential provided in the Tax Act. For a discussion of 2017 results, please refer to the “Results of operations” section in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—Electric utility,” in the Company’s 2018 Form 10-K. 42 The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of December 31, 2019 amounted to $4 billion, of which approximately 29% related to generation PPE, 62% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 9% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission. 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 decision and order (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. Hawaiian Electric filed for a rate increase based on a 2020 test year in August 2019. Hawaii Electric Light filed its 2019 test year rate case in December 2018. Interim rates for Hawaii Electric Light’s 2019 rate case became effective on January 1, 2020, based on an interim order issued in November 2019 maintaining revenues at current effective rates. Final rates for Maui Electric’s 2018 rate case were effective on June 1, 2019 based on ruling in a D&O issued on March 18, 2019. Rates resulting from the March 2019 D&O were lower than what had been allowed in the interim order and Maui Electric refunded approximately $0.5 million to customers in June and July 2019. Test year (dollars in millions) Hawaiian Electric 20171 Request Interim increase Interim increase with Tax Act Final increase 2020 Request Hawaii Electric Light 20162 Request Interim increase Interim increase with Tax Act Final increase 20193 Request Interim increase Maui Electric 20184 Request Interim increase Final increase Date (filed/ implemented) Amount % over rates in effect ROACE (%) RORB (%) Rate base Common equity % Stipulated agreement reached with Consumer Advocate 12/16/16 $ 106.4 2/16/18 4/13/18 9/1/18 36.0 (0.6) (0.6) 6.9 2.3 — — 10.60 9.50 9.50 9.50 8.28 7.57 7.57 7.57 $ 2,002 1,980 1,993 1,993 57.36 57.10 57.10 57.10 8/21/19 $ 77.6 4.1 10.50 7.97 $ 2,477 57.15 9/19/16 8/31/17 5/1/18 10/1/18 $ 19.3 9.9 1.5 — 12/14/18 $ 13.4 1/1/20 0.0 10/12/17 $ 8/23/18 6/1/19 30.1 12.5 12.2 6.5 3.4 0.5 — 3.4 0.0 9.3 3.8 3.7 10.60 9.50 9.50 9.50 10.50 9.50 10.60 9.50 9.50 $ $ 8.44 7.80 7.80 7.80 8.30 7.52 8.05 $ 7.43 7.43 479 482 481 481 537 534 473 462 454 57.12 56.69 56.69 56.69 56.91 56.83 56.94 57.02 57.02 Yes Yes 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 D&O was issued on June 22, 2018. 2 Final D&O was issued on June 29, 2018. 3 The Interim D&O issued on November 13, 2019 approved an adjustment to base rates to maintain revenues at current effective rates. 4 A D&O issued on May 16, 2019 approved Maui Electric’s revised revenue requirements filed based on the March 2019 D&O and final rates which took effect on June 1, 2019. 43 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 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 of 2018 to initiate the return of the 2018 excess to customers over various amortization periods. In addition, rates were adjusted in 2018 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 (except for 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. Performance-based regulation. See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Consolidated Financial Statements. Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Consolidated Financial Statements and the following: New renewable PPAs. • • • • • In 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. NPM has now received its Habitat Conservation Permit and is constructing the project. Life of the Land (LOL) filed a Motion for Relief to argue the PPA approval was invalid and should be revised. The Utilities and the Consumer Advocate filed an opposition to this motion for relief. A hearing on the motion for relief was held on November 22, 2019. The PUC has not yet ruled. 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, whose controlling investor is Global Infrastructure Partners. On September 19, 2019, Lanikuhana Solar and Waipio PV projects achieved commercial operations. On November 20, 2019, Kawailoa Solar, LLC achieved commercial operations. 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. The project is expected to be in service in 2020. In November 2018, Hawaiian Electric filed with the PUC a PPA for Renewable As-Available Energy dated October 22, 2018 between Hawaiian Electric and EE Ewa, LLC (Palehua) for a proposed 46.8 MW wind farm on Oahu, subject to PUC approval. On September 6, 2019, the PUC issued an order dismissing without prejudice Hawaiian Electric’s application for a waiver of the proposed Palehua wind project from the PUC’s framework for competitive bidding and approval of the PPA. Due to the foregoing, the PPA has been declared null and void. On December 31, 2019, Hawaii Electric Light and PGV entered into an Amended and Restated Power Purchase Agreement (ARPPA), subject to approval by the PUC. The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. The existing PPA (except for lower-tiered pricing for certain energy dispatched above 30 MW) will remain in effect until it is superseded by the ARPPA when the expanded capacity is in commercial operation. 44 Tariffed renewable resources. • • As of December 31, 2019, there were approximately 471 MW, 104 MW and 118 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, 2019, an estimated 29% of single-family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 18% of the Utilities’ total customers have solar systems. The Utilities began accepting energy from feed-in tariff projects in 2011. As of December 31, 2019, there were 34 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 2021. 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 2020, 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. In December 2018, the Utilities executed a total of seven renewable generation PPAs utilizing photovoltaic technology paired with a battery storage system for a total of 262MW, of which six PPAs were approved by the PUC in March 2019 and one PPA for Maui Electric is still under PUC review. In February 2019, Hawaiian Electric filed an additional PPA for a proposed 12.5 MW PV plus battery storage project, which was approved by the PUC on August 20, 2019. Summarized information for a total of 8 PPAs, including one for Maui Electric that is pending PUC approval, is as follows: Utilities Hawaiian Electric Hawaii Electric Light Maui Electric Total Number of contracts Total photovoltaic size (MW) BESS Size (MW/ MWh) Guaranteed commercial operation dates Contract term (years) Total projected annual payment (in millions) 4 2 2 8 139.5 139.5/558 9/30/21 & 12/31/21 20 & 25 $ 60 75 60/240 75/300 7/20/21 & 6/30/22 7/20/21 & 6/30/22 274.5 274.5 /1,098 25 25 $ 30.9 14.1 17.6 62.6 In March 2019 and August 2019, the Utilities received PUC approval to recover the total projected annual payment of $57.8 million for 7 PPAs through the PPAC to the extent such costs are not included in base rates. The remaining $4.8 million of total projected annual payments for the remaining PPA is pending PUC approval. • In continuation of its February 2018 request for proposal process, the Utilities issued its Stage 2 Renewable RFPs for Oahu, Maui and Hawaii Island and Grid Services RFP on August 22, 2019. This procurement plan sought approximately 900 MW of renewable energy, including 594 MW on Oahu, 135 MW on Maui and a range between 32 to 203 MW on Hawaii Island. This second phase, as approved by the PUC, was open to all renewable and storage resources, including efforts to add more renewable generation, renewable plus storage, standalone storage and grid services. The scope of these RFPs has been expanded to accelerate renewable energy procurements beyond the remainder of the 2022 targets identified in Stage 1 to include the energy requirement associated with the planned retirement of the Kahului Power Plant on Maui and the upcoming expiration of the agreement for the AES Hawaii facility on Oahu. For the Grid Services RFP, the targets had been expanded in alignment with the Renewable RFPs. 45 Utility proposals were submitted on November 4, 2019. Proposals from third parties for these RFPs were submitted on November 5, 2019. Final awards for the renewable projects are scheduled to be made in May 2020. Final awards for the grid services projects were made starting in January 2020. • On November 27, 2019, the Utilities issued RFPs for renewable generation paired with energy storage on the islands of Lanai and Molokai. Projects may come online as early as 2022. The Utilities are seeking PV paired with storage or small wind (specified as 100 kW turbines or smaller) on Molokai and PV paired with storage on Lanai. Proposals for the Molokai RFP were received on February 14, 2020, and are currently being evaluated by the Utilities. The Lanai RFP has been temporarily postponed, while the Utilities reevaluate the system needs. The Utilities expect to issue an update to the Lanai RFP no later than March 10, 2020. 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 “Item 1. Business” and Note 3, and “Major tax developments” in Note 12 of the Consolidated Financial Statements. Impact of lava flows. In May 2018, a lava eruption occurred within the Leilani Estates subdivision and resulted in the shutdown of independent power producer PGV’s geothermal facilities. The financial impact to Hawaii Electric Light has not been material. In March 2019, Hawaii Electric Light and PGV entered into a Rebuild Agreement, which sets forth the parties’ respective responsibilities associated with restoration of facilities and reconnection of the PGV facility to the electric grid. In June 2019, Hawaii Electric Light filed an application requesting approval to reconstruct the necessary transmission lines. In December 2019, Hawaii Electric Light filed an application for approval of an amended and restated PPA with PGV. See “New renewable PPAs” in the “Developments in renewable energy efforts” section above for additional information on the amended and restated PPA. Army privatization. On September 27, 2019, Hawaiian Electric was awarded a 50-year contract to own, operate and maintain the electric distribution system serving the U.S. Army’s 12 installations on Oahu, including Schofield Barracks, Wheeler Army Airfield, Tripler Army Medical Center, Fort Shafter, and Army housing areas. Hawaiian Electric will acquire, subject to PUC approval, the Army’s existing distribution system for a purchase price of $16.3 million and will pay the Army in the form of a monthly credit against the monthly utility services charge over the 50-year term of the contract. Hawaiian Electric filed an application with the PUC for approval of the Army privatization contract on October 25, 2019. If approved by the PUC in 2020, Hawaiian Electric would take ownership and all responsibilities for operation and maintenance of the system in late 2021 for a 50-year term, which would start after the mutually agreed upon one-year transition period. Under the contract, Hawaiian Electric will make initial capital upgrades over the first six years of the contract and replacements of aging infrastructure over the 50-year term. In addition to its regular monthly electricity bill, the Army will pay Hawaiian Electric a monthly utility services charge to cover operations and maintenance expenses and provide recovery for capital upgrades, capital replacements, and the existing distribution system based on a rate of return determined by the PUC for regulated utility investments, as well as depreciation expense. A preliminary assessment estimated the capital needs of approximately $40 million in the first six years of the contract. The annual impact on Hawaiian Electric’s earnings is not expected to be material and will depend on a number of factors, including the amount and timing of capital upgrades and capital replacement. Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii), for the Utilities’ low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. This contract is a requirement contract with no minimum purchases. 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 previous fuel contracts with Island Energy Services, LLC, terminated on April 27, 2019, as agreed with IES under a mutual termination and release agreement entered into in November 2018. The costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs. Liquidity and capital resources. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures, investments, debt repayments, retirement benefit plan contributions and other cash requirements in the foreseeable future. 46 Hawaiian Electric’s consolidated capital structure was as follows: December 31 (dollars in millions) Short-term borrowings1 Long-term debt, net Preferred stock Common stock equity 2019 2018 $ $ 89 1,498 34 2,047 3,668 2% $ 41 1 56 100% $ 25 1,419 34 1,958 3,436 1% 41 1 57 100% 1 Short-term borrowings as of December 31, 2019 reflect the impact of funding for a senior note of $82 million included in long-term debt, net, which was paid off on January 1, 2020 (see Note 6 of the Consolidated Financial Statements). Information about 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, 2019 Average balance End-of-period balance December 31, 2018 $ $ 44 — — — $ 39 — — 200 — — — 200 1 The maximum amount of external short-term borrowings by Hawaiian Electric during 2019 was $158 million. At December 31, 2019, Hawaiian Electric had short-term borrowings from Hawaii Electric Light of $8 million and Maui Electric had short-term borrowings from Hawaiian Electric of $27.7 million, which intercompany borrowings are eliminated in consolidation. In addition to the short-term borrowings above, Hawaiian Electric drew $50 million on December 23, 2019 on a 364-day term loan facility (see Note 5 of the Consolidated Financial Statements). 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 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, 2019. See Note 5 of the Consolidated Financial Statements. Credit ratings. Moody’s and S&P (Rating Agencies) revised Hawaiian Electric’s rating outlook to “positive” from “stable” on October 21, 2019 and February 20, 2020, respectively. The revision to the rating outlook was primarily based on the progress of regulatory reform for the Utilities. The Rating Agencies indicated that future upgrades or downgrades in ratings action are dependent on a variety of factors, including changes in its cash flow from operations ratios and improvements in the regulatory environment, specifically, a credit-supportive decision in the performance-based regulation proceeding. See “Performance-based regulation proceeding” in Note 3 of the Consolidated Financial Statements. 47 As of February 20, 2020, the Fitch, Moody’s and S&P ratings of Hawaiian Electric were as follows: Long-term issuer default, long-term and issuer credit, respectively Commercial paper Senior unsecured debt/special purpose revenue bonds Cumulative preferred stock (selected series) Outlook Fitch BBB+ F2 A- * Stable Moody’s Baa2 P-2 Baa2 Ba1 Positive S&P** BBB- A-3 BBB- * Positive * Not rated. ** On February 20, 2020, S&P revised Utilities’ outlook to positive and affirmed Utilities’ issuer credit and commercial paper ratings. 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. SPRBs. 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. On February 26, 2019, the PUC approved Hawaiian Electric and Hawaii Electric Light’s request to issue refunding 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. Pursuant to this approval, on July 18, 2019, the Department of Budget and Finance of the State of Hawaii (DBF) issued, at par, Refunding Series 2019 SPRBs in the aggregate principal amount of $150 million with a maturity of July 1, 2039. See Note 6 of the Consolidated Financial Statements. On May 24, 2019, the PUC approved the Utilities’ request 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. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 million with a maturity of October 1, 2049. As of December 31, 2019, Hawaiian Electric and Hawaii Electric Light had $30.8 million and $0.1 million of undrawn funds remaining with the trustee, respectively. Maui Electric received all bond proceeds at closing and had no undrawn funds as of December 31, 2019. See Note 6 of the Consolidated Financial Statements. On June 10, 2019, the Hawaii legislature authorized the issuance of up to $700 million of SPRBs ($400 million for Hawaiian Electric, $150 million for Hawaii Electric Light and $150 million for Maui Electric), with PUC approval, prior to June 30, 2024, to finance the Utilities’ multi-project capital improvement programs. Bank loans. On December 23, 2019, Hawaiian Electric entered into a 364-day, $100 million term loan credit agreement that matures on December 21, 2020. Hawaiian Electric drew the first $50 million on December 23, 2019 and has until March 23, 2020 to draw the remaining $50 million, if needed. Taxable debt. On January 31, 2019, the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018 (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 (QUIDS) prior to maturity. In addition, the January 2019 Approval authorized the Utilities 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. 48 Pursuant to the January 2019 Approval, on May 13, 2019, the Utilities issued through a private placement, $50 million of unsecured senior notes bearing taxable interest ($30 million for Hawaiian Electric, $10 million for Hawaii Electric Light and $10 million for Maui Electric) to refinance the Utilities’ 2004 QUIDS. See Note 6 of the Consolidated Financial Statements. See summary table below. (in millions) Total “up to” amounts of taxable debt authorized through 2022 Less: Taxable debt authorized and issued in 2018 under April 2018 Approval Taxable debt issuance to refinance the 2004 QUIDS Remaining authorized amounts Hawaiian Electric Hawaii Electric Light $ $ 410 $ 75 30 305 $ Maui Electric 130 150 $ 15 10 125 $ 10 10 110 Equity. In October 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 2019, Hawaiian Electric sold $35.5 million of its common stock to HEI and Maui Electric sold $4.9 million of its common stock to Hawaiian Electric. Hawaii Electric Light did not issue common stock in 2019. See summary table below. (in millions) Total “up to” amounts of common stock authorized to issue and sell through 2021 Supplemental increase authorized Total “up to” amounts of common stock authorized to issue and sell through 2022 Common stock authorized and issued in 2017, 2018 and 2019 Remaining authorized amounts Hawaiian Electric Hawaii Electric Light Maui Electric $ $ 150.0 $ 10.0 $ 280.0 430.0 120.2 309.8 $ 100.0 110.0 — 110.0 $ 10.0 100.0 110.0 11.2 98.8 Cash flows. (in thousands) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities 2019 Cash Flows Compared to 2018: Years ended December 31 $ 2019 $ 423,956 (408,524) (9,415) 2018 393,613 (405,182) 34,929 Change $ 30,343 (3,342) (44,344) Net cash provided by operating activities: The increase in net cash provided by operating activities was primarily driven by higher cash receipts from customers due to higher electric rates. Net cash used in investing activities: The increase in net cash used in investing activities was primarily driven by an increase in capital expenditures related to construction activities. Net cash provided by financing activities: The decrease in net cash provided by financing activities was primarily driven by lower proceeds from common stock issuance. For a discussion of 2017 operating, investing and financing activities, please refer to the “Liquidity and capital resources” section in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—Electric utility,” in the Company’s 2018 Form 10-K. Forecast capital expenditures. For the three-year period 2020 through 2022, the Utilities forecast up to $1.3 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 2020 to 2022 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations). 49 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, 2019 (in millions) Short-term borrowings Long-term debt Interest on long-term debt Operating leases PPAs classified as leases Other leases Open purchase order obligations 1 Fuel oil purchase obligations (estimate based on fuel oil price at December 31) Purchase power obligations-minimum fixed capacity charges not classified as leases Total (estimated) $ $ Payments due by period 3-5 years More than  5 years Less than 1 year 1-3 years $ — $ 100 111 — $ 1,257 691 — 3 1 — — 2 — — Total 89 1,505 984 168 20 74 22 89 96 61 63 7 54 7 — $ 52 121 105 8 19 15 76 398 51 428 $ 76 291 $ 241 2,191 $ 444 3,308 $ 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, 2019, the fair value of the assets held in trusts to satisfy the obligations of the Utilities’ retirement benefit plans did not exceed the retirement benefit plans’ benefit obligation. Minimum funding requirements for retirement benefit plans have not been included in the table above. See Note 10 of the Consolidated Financial Statements for retirement benefit plan obligations and estimated contributions for 2020. There were no material uncertain tax positions as of December 31, 2019. See “Biofuel sources” in the “Developments in renewable energy efforts” section above for additional information for fuel oil purchase obligation. See Notes 3 and 8 of the Consolidated Financial Statements for a discussion of power purchase commitments and operating leases obligations, respectively. 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, distributed generation, grid modernization, 50 electrification of transportation, implement predictive analytics using artificial intelligence machine learning algorithms to help assess the state of health of utility assets and prevent premature failure, and the diversification of 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 and will support a more reliable, flexible and resilient utility grid. 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. Off-balance sheet arrangements. See “Off-balance sheet arrangements” above in HEI Consolidated section. Material estimates and critical accounting policies. Also see “Material estimates and critical accounting policies” above in HEI Consolidated section. 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, 2019, the consolidated regulatory liabilities and regulatory assets of the Utilities amounted to $972 million and $715 million, respectively, compared to $950 million and $833 million as of December 31, 2018, 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, 2019 is probable. This determination assumes continuation of the current political and regulatory climate in Hawaii and is subject to change in the future. Management believes that the operations of the Utilities currently satisfy the criteria for regulatory accounting. If events or circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory assets, net of regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may result in a material adverse effect on the Company’s and the Utilities’ results of operations, financial condition and liquidity. Revenues.  Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to 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, 2019, Unbilled revenues amounted to $117 million and the RBA refunds recognized in 2019 amounted to $11 million. The rate schedules of the Utilities include ECRCs (changed from ECACs 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 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. Asset retirement obligations. The Utilities recognize asset retirement obligations (AROs), which represent the present value of expected costs to retire long-lived assets from service, provided a legal obligation exists and a reasonable estimate of the fair value and the settlement date can be made. The Utilities’ recognition of AROs have no impact on earnings, as the cost of the AROs are recovered over the life of the asset through depreciation. AROs recognized by the Utilities relate to legal obligations with the retirement of plant and equipment, including removal of asbestos and other hazardous materials. The Utilities estimate the ARO using a discounted cash flow model that relies on significant estimates and assumptions about future decommissioning costs, inflationary rates, and the estimated date of decommissioning. The estimated future cash flows are discounted using a credit-adjusted risk-free rate to reflect the risk associated with decommissioning the assets. The 51 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 Utility-owned generating facilities and certain electric transmission, distribution and telecommunication assets resulting from easements over property not owned by the Utilities. Changes in estimated costs, timing of decommissioning or other assumptions used in the calculation could cause material revision on the recorded liabilities. As of December 31, 2019 and December 31, 2018, the Utilities’ AROs totaled $10 million and $8 million, respectively. 52 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 2019 with assets of $7.2 billion and net income of $89 million, compared to assets of $7.0 billion and net income of $83 million in 2018. 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 making banking easier for the customer 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. 2. 3. 4. deepening customer relationships; building out product and service offerings to open new segments; fully deploying online and remotely-assisted account opening capabilities; and 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 lowering of interest rates across the yield curve as a result of the Federal Reserve Board’s decreases in short-term interest rates have made it challenging to maintain ASB’s net interest margin. The potential for compression of ASB’s margin if interest rates continue to decrease 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 “Item 7A. 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. 2. 3. attracting and retaining low-cost deposits, particularly those in non-interest bearing transaction accounts; diversifying the loan portfolio with higher-spread, shorter-maturity loans and/or variable rate loans; focusing investment growth in securities that exhibit less extension risk (i.e., risk of longer average lives) as rates rise. Results of operations. • 2019 vs. 2018 (in millions) Interest income 2019 2018 $ 266 $ 258 Increase (decrease) 8 $ Primary reason(s) Higher interest income was due to higher average loan portfolio balances and yields, partly offset by a decrease in balances and yields in the investment securities portfolio. ASB’s average loan portfolio balance for 2019 was $231 million higher than 2018’s average loan portfolio balance primarily due to increases in the average HELOC, residential, commercial and consumer loan portfolio balances of $99 million, $59 million, $40 million and $30 million, respectively. The growth in these loan portfolios was consistent with ASB’s portfolio mix targets and loan growth strategy. The 2019 loan portfolio yield increased 5 basis points compared to the prior year loan portfolio yield due to the repricing of adjustable rate loans in the latter part of 2018 and early 2019. The average investment securities portfolio balance decreased by $86 million and the portfolio yield decreased 14 basis points. The decrease in the portfolio balance was due to ASB’s decision to use investment portfolio repayments to fund the growth in the loan portfolio rather than redeploy it into investment securities. The decrease in the investment yields was due to an increase in the amortization of premiums in the investment portfolio. 53 (in millions) Noninterest income 2019 2018 73 56 Increase (decrease) 17 Revenues Interest expense 339 18 314 15 Provision for loan losses 24 15 Noninterest expense 185 177 Expenses Operating income 227 112 207 107 Net income 89 83 25 3 9 8 20 5 6 Primary reason(s) Noninterest income was higher in 2019 compared to 2018 primarily due to a gain on sale of real estate, an increase in mortgage banking income and higher bank-owned life insurance payouts. ASB sold two office facilities that were no longer needed when ASB moved into its new campus headquarters, which resulted in a gain on sale of real estate of $10.8 million. There were no such sales in 2018. The increase in mortgage banking income was due to an increase in loan sales into the secondary market as a result of higher residential mortgage loan production in 2019 compared to 2018. The higher bank-owned life insurance income was due to higher proceeds from life insurance policies received in 2019 compared to the previous year. The increase in revenues was due to higher interest and noninterest income. Higher interest expense was primarily due to an increase in term certificate balances and increased deposit rates. Average deposit balances for 2019 increased by $155 million compared to 2018 due to an increase in core deposits and time certificates of $134 million and $21 million, respectively. Average cost of deposits for 2019 was 27 basis points, or 4 basis points above the average cost of deposits for 2018. The other borrowings average balance decreased by $28 million primarily due to a decrease in repurchase agreements. Average cost of other borrowings for 2019 was 1.42%, or 32 basis points above the average cost of borrowings for 2018. The provision for loan losses for 2019 increased by $8.7 million compared to the provision for loan losses in 2018. The provision for loan losses in 2019 was primarily for additional loss reserves for the consumer and credit scored loan portfolios to cover net charge-offs, and reserves for an impaired commercial credit, partly offset by the release of reserves resulting from recoveries of previously charged-off loans. The provision for loan losses for 2018 was primarily for additional loss reserves for the consumer loan portfolio as a result of growth and increased net charge-offs, partly offset by the release of reserves for the commercial, commercial real estate and HELOC loan portfolios as a result of improved credit trends. Higher noninterest expense was primarily due to higher compensation and employee benefit costs, and increases in occupancy and equipment expenses. The increase in compensation and employee benefits was due to an increase in the minimum pay rate for employees, annual merit increases and higher employee benefit costs. Occupancy and equipment expenses for 2019 included occupancy, depreciation and equipment expenses for the new campus while still including the costs of properties being vacated. The increase in expenses was primarily due to higher provision for loan losses, and increases in interest and noninterest expenses. Higher interest and noninterest income was partly offset by higher provision for loan losses, higher interest expense and higher noninterest expenses. The increase in net income was the result of higher operating income and lower income tax expense. Return on average equity 1 13.5% 13.5% —% 1 Calculated using the average daily balance For a discussion of 2017 results, please refer to the “Results of operations” section in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—Bank,” in the Company’s 2018 Form 10-K. 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: 2019 Interest income/ expense Average balance Yield/ rate (%) Average balance 2018 Interest income/ expense Yield/ rate (%) Average balance 2017 Interest income/ expense Yield/ rate (%) Interest-earning deposits $ 16,618 $ 9,716 320 350 1,406,564 27,512 31,178 1,360 1.92 3.60 2.22 4.94 $ 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 FHLB stock Investment securities Taxable Non-taxable Total investment securities 1,434,076 32,538 2.27 1,520,521 36,633 2.41 1,280,667 27,946 2.18 Loans Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial Consumer Total loans 1,2 Total interest-earning assets 3 Allowance for loan losses Noninterest-earning assets Total Assets Liabilities and Shareholder’s Equity: Savings Interest-bearing checking Money market Time certificates 2,181,554 863,468 1,043,479 14,065 620,206 270,340 89,956 40,324 38,826 774 27,950 35,864 4,993,112 233,694 6,453,522 266,902 (54,640) 696,270 $7,095,152 $2,340,671 1,044,315 145,939 810,749 1,904 1,298 953 12,675 16,830 843 767 4.12 4.67 3.72 5.50 4.51 13.27 4.68 4.14 0.08 0.12 0.65 1.56 0.39 2.50 0.96 0.41 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 6,343,134 258,387 (53,593) 606,304 $ 6,895,845 $ 2,334,681 1,639 1,006,839 140,225 789,926 4,271,671 41,855 99,162 706 602 11,044 13,991 845 703 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 (55,629) 546,523 $ 6,570,554 $ 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 79,374 2,245 2.83 97,535 251 4,196,850 12,156 0.26 0.29 Total interest-bearing deposits 4,341,674 Advances from Federal Home Loan Bank Securities sold under agreements to repurchase 33,652 79,647 Total interest-bearing liabilities 4,454,973 18,440 Noninterest bearing liabilities: Deposits Other Shareholder’s equity Total Liabilities and Shareholder’s Equity Net interest income Net interest margin (%)4 1,848,336 131,691 660,152 $7,095,152 1,763,331 108,976 610,850 $ 6,895,845 1,672,780 102,789 598,135 $ 6,570,554 $ 248,462 $242,848 $224,151 3.85 3.83 3.69 1 2 3 4 Includes loans held for sale, at lower of cost or fair value, of $6.3 million, $2.3 million and $7.4 million as of December 31, 2019, 2018 and 2017, respectively. Includes recognition of net deferred loan fees of $0.2 million, $0.1 million and $1.7 million for 2019, 2018 and 2017 respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. For 2019, 2018 and 2017, the taxable-equivalent basis adjustments made to the table above were not material. Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets. 55 The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average interest rate multiplied by prior year average balance) and (2) changes in volume (change in average balance multiplied by prior period weighted-average interest rate). Any remaining change is allocated to the above two categories on a 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 (decrease) in interest income Interest expense Savings Interest-bearing checking Money market Time certificates Advances from Federal Home Loan Bank Securities sold under agreements to repurchase Total decrease (increase) in interest expense Increase (decrease) in net interest income $ 2019 vs. 2018 Volume Rate Total Rate 2018 vs. 2017 Volume Total $ $ 31 — (651) $ (1) (620) $ (1) $ 455 165 (413) $ (22) (2,462) 102 (2,360) 454 595 481 (1) (539) 96 1,086 (1,243) (261) (563) (325) (1,325) (181) (219) (2,874) (4,117) $ (2,222) 487 (1,735) 2,566 150 3,711 (48) 1,800 3,966 12,145 9,758 (4) (29) (26) (306) 183 155 (27) 9,731 $ (4,684) 589 (4,095) 3,020 745 4,192 (49) 1,261 4,062 13,231 8,515 (265) (592) (351) (1,631) 2 (64) (2,901) 5,614 $ 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 $ 42 143 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 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. Loan originations and mortgage-backed securities are ASB’s primary earning assets. 56 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: December 31 2019 2018 2017 2016 2015 (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 $ 2,178,135 42.6 $ 2,143,397 44.3 $ 2,118,047 45.3 $ 2,048,051 43.2 $ 2,069,665 44.8 824,830 16.1 748,398 15.4 733,106 15.7 800,395 16.9 690,561 14.9 1,092,125 14,704 21.3 0.3 978,237 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 70,605 1.4 92,264 1.9 108,273 2.3 126,768 2.7 100,796 2.2 11,670 4,192,069 670,674 257,921 0.2 81.9 13.1 5.0 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 5,120,664 100.0 4,843,634 100.0 4,671,577 100.0 4,743,619 100.0 4,622,068 100.0 Less: Deferred fees and discounts Allowance for loan losses 512 (53,355) (613) (52,119) (809) (53,637) (4,926) (55,533) (6,249) (50,038) Total loans, net $ 5,067,821 $ 4,790,902 $ 4,617,131 $ 4,683,160 $ 4,565,781 1 Includes renegotiated loans. The increase in the loans balance in 2019 was primarily due to growth in the HELOC, commercial, commercial real estate and residential 1-4 family loan portfolios, which were the portfolios targeted as ASB continued its loan growth strategy of diversifying the loan portfolio with higher-spread, shorter-maturity loans and/or variable rate 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 2019 In 1 year or less After 1 year through 5 years After 5 years Total $ 73 $ 163 236 — 26 26 12 — 12 85 189 274 $ $ 135 247 382 — 27 27 — — — 135 274 409 $ $ 37 16 53 — 18 18 — — — 37 34 71 $ $ 245 426 671 — 71 71 12 — 12 257 497 754 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 1% 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 ratio Delinquency ratio 2019 2018 $ 1,092,125 $ 978,237 53.7% 0.01% 0.27% 49.2% 0.01% 0.46% December 31, 2019 Outstanding balance (in thousands) % of total Total Interest only 2019-2020 2021-2023 Thereafter amortizing $ 1,092,125 $ 814,174 $ 42,694 $ 118,153 $ 653,327 $ 277,951 100% 75% 4% 11% 60% 25% End of draw period – interest only Current The HELOC portfolio makes up 21% 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, 2019, approximately 23% 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, 2019 and 2018, ASB had nil 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 to service the obligation under the original terms of the agreement (troubled debt restructured loans). ASB loans that were 90 days or 58 more past due on which interest was being accrued as of December 31, 2019, 2018, 2017, 2016 and 2015 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 2019 2018 2017 2016 2015 $ $ $ $ 11,395 195 6,638 448 18,676 5,947 5,113 29,736 9,869 853 10,376 2,644 — — 23,742 2,614 57 26,413 $ 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 In 2019, nonaccrual loans increased $2.4 million primarily due to increases in commercial and consumer nonaccrual loans of $1.7 million and $0.9 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 $0.5 million primarily due to increases of $1.1 million and $1.0 million of commercial and residential land loans, respectively, classified as TDR, partially offset by a $1.2 million decrease in HELOC loans classified as TDR. 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. 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. 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, 2019 $ $ 3 2 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. Using an effective date of January 1, 2020, ASB will adopt ASU 2016-13, Financial Instruments - Measurement of Current Expected Credit Losses on Financial Instruments, which will modify the accounting for the allowance for loan losses from an incurred loss model to an expected loss model (see Note 1, “Summary of Significant Accounting Policies” of the Consolidated Financial Statements). The following table presents the changes in the allowance for loan losses: $ 2019 52,119 23,480 $ 2018 53,637 14,745 $ 2017 55,533 10,901 $ 2016 50,038 16,763 $ 2015 45,618 6,275 (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 $ 128 — 353 18 — — 499 2,722 17,296 20,517 74 — 257 179 — — 510 2,136 1,608 4,254 16,263 52,119 $ 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 1.08% 0.31% 0.34% 1.15% 0.23% 0.27% 1.17% 0.36% 0.24% 1.08% 0.14% 0.04% 26 — 144 4 — — 174 6,811 21,677 28,662 854 — 17 229 — — 1,100 2,351 2,967 6,418 22,244 53,355 1.04% 0.47% 0.45% 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 Allow- ance balance $ 2,380 15,053 6,922 449 2,097 3 26,904 10,245 16,206 $ 53,355 (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 (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 2019 Allowance to loan receivable % Loan receivable % of total Allow- ance balance 2018 Allowance to loan receivable % Loan receivable % of total Allow- ance balance 2017 Allowance to loan receivable % Loan receivable % of total 0.11 1.82 0.63 3.05 2.97 0.03 0.64 1.53 6.28 1.04 42.6 16.1 21.3 0.3 1.4 0.2 81.9 13.1 5.0 $ 1,976 14,505 6,371 479 2,790 4 26,125 9,225 16,769 100.0 $ 52,119 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 4.8 100.0 2016 Allowance to loan receivable % Allowance balance Loan receivable % of total Allowance balance 2015 Allowance to loan receivable % Loan receivable % of total $ $ 2,873 16,004 5,039 1,738 6,449 12 32,115 16,618 6,800 55,533 0.14 2.00 0.58 9.20 5.09 0.07 0.83 2.40 3.82 1.17 43.2 16.9 18.2 0.4 2.7 0.3 81.7 14.6 3.7 100.0 $ $ 4,186 11,342 7,260 1,671 4,461 13 28,933 17,208 3,897 50,038 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 In 2019, ASB’s allowance for loan losses increased by $1.2 million primarily due to an increase in loan loss reserves for the commercial, commercial real estate and HELOC loan portfolios as a result of loan growth in those loan portfolios. Total delinquencies of $19.8 million at December 31, 2019 was a decrease of $6.2 million compared to total delinquencies of $26.0 million at December 31, 2018 primarily due to decreases in delinquent residential 1-4 family and HELOC loans. The ratio of delinquent loans to total loans decreased from 0.54% of total outstanding loans at December 31, 2018 to 0.39% of total outstanding loans at December 31, 2019. Net charge-offs for 2019 were $22.2 million, an increase of $5.9 million compared to $16.3 million at December 31, 2018 primarily due to an increase in consumer loan portfolio charge-offs as result of ASB’s unsecured consumer loan portfolio product offering with risk-based pricing and net charge-offs for an impaired commercial credit. ASB’s provision for loan losses was $23.5 million, an increase of $8.7 million compared to the provision for loan losses of $14.7 million for 2018. The increase was due to additional reserves for the consumer and credit scored loan portfolios, and an impaired commercial credit. 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 61 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 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 2019 2018 2017 (dollars in thousands) U.S. Treasury and federal agency obligations Balance % of total Balance % of total Balance % of total $ 117,787 9% $ 154,349 10% $ 184,298 13% Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies Corporate bonds Mortgage revenue bonds Total investment securities 1,165,836 60,057 28,597 85 4 2 1,303,291 49,132 23,636 85 3 2 1,245,988 — 15,427 86 — 1 $ 1,372,277 100% $ 1,530,408 100% $ 1,445,713 100% 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 2019, 2018 and 2017 was 2.27%, 2.41% and 2.18%, respectively. ASB did not maintain a portfolio of securities held for trading during 2019, 2018 and 2017. 62 As of December 31, 2019, 2018 and 2017, ASB had $139.5 million, $141.9 million and $44.5 million, respectively, of investment securities that were purchased and classified as held-to-maturity. The investment securities were classified as held-to- maturity to enhance ASB’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, 2019, 2018, and 2017 there was no indicated impairment as ASB expects to collect the contractual cash flows 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, 2019, 2018, and 2017, 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, 2019. 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 $ 41 $ 29 In 1 year or less 47 $ After 10 years Mortgage- backed securities 35 24 $ 13 60 2.26% $ $ 76 2.75% $ 53 2.44% 16 16 3.17% Total1 117 $ 1,164 59 29 $ 1,369 1,164 $ 1,164 2.44% 2.54% 1 As of December 31, 2019, 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, 2019, 2018 and 2017, ASB’s stock in FHLB of Des Moines ($8 million, $10 million and $10 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 2019, 2018 and 2017, ASB received cash dividends of $349,000, $350,000 and $208,000, respectively, on its FHLB Stock. Deposits and other borrowings. As of December 31, 2019 and 2018, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings. 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 $113 million in 2019, compared to an inflow of $268 million in 2018 and $342 million in 2017. 63 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 2019 % of total interest- bearing deposits Weighted average rate % Average balance 2018 % of total interest- bearing deposits Weighted average rate % Average balance 2017 % of total interest- bearing deposits Weighted average rate % Savings Checking Money market Certificate Total interest-bearing deposit liabilities $ 2,340,671 53.9% 0.08% $ 2,334,681 54.6% 0.07% $ 2,278,396 56.7% 0.07% 1,044,315 145,939 810,749 24.0 3.4 18.7 0.12 0.65 1.56 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 $ 4,341,674 100.0% 0.39% $ 4,271,671 100.0% 0.33% $ 4,019,941 100.0% 0.24% Total noninterest-bearing demand deposit liabilities 1,848,336 Total deposit liabilities $ 6,190,010 1,763,331 $ 6,035,002 1,672,780 $ 5,692,721 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 204,100 72,436 64,370 115,604 456,510 $ $ 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 increase in other borrowings in 2019 was due to an increase in business repurchase agreements, partly offset by the payoff of FHLB advances. 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. As of December 31, 2019, the unused borrowing capacity with the FHLB of Des Moines was $2.3 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB. See “Liquidity and capital resources” below for changes in the unused borrowing capacity with the FHLB of Des Moines. 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. 64 As of December 31, 2019, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $2.5 million compared to an unrealized loss, net of taxes, of $24.4 million as of December 31, 2018. 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 2019, ASB was a qualified thrift lender. 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: 65 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, 2019, ASB met the new capital requirements with a Common equity Tier-1 ratio of 13.2%, a Tier-1 capital ratio of 13.2%, a Total capital ratio of 14.3% and a Tier-1 leverage ratio of 9.1%. 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. Covered Savings Associations. On May 24, 2019, the OCC issued a final rule to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the OCC on its call report as of December 31, 2017, to elect to operate as covered savings associations. A covered savings association generally has the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, with some exceptions. It is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with some exceptions, and must comply with certain rules and regulations applicable to the powers and investments of a national bank. A covered savings association is not required to comply with the lending and investment limits in HOLA and is not required to be a qualified thrift lender under HOLA. Finally, a covered savings association is not permitted to retain or engage in any subsidiaries, assets, or activities that are not permissible for a national bank. ASB has initiated a preliminary examination of the benefits and disadvantages of such an election with the preservation of being held by a unitary thrift holding company in mind. ASB is awaiting official FRB commentary, and has not reached a decision on the election. Liquidity and capital resources. December 31 (dollars in millions) Total assets Investment securities Loans held for investment, net Deposit liabilities Other bank borrowings 2019 % change 2018 % change $ 7,233 1,372 5,068 6,272 115 3 $ (10) 6 2 5 7,028 1,530 4,791 6,159 110 3 6 4 5 (42) As of December 31, 2019, ASB was one of Hawaii’s largest financial institutions based on assets of $7.2 billion and deposits of $6.3 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, 2019 were $113 million higher than December 31, 2018. ASB’s sources of borrowings include advances from the FHLB and securities sold under agreements to repurchase from broker/dealers and commercial account holders. As of December 31, 2019, ASB had no FHLB borrowings outstanding. 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, 2019, ASB’s unused FHLB borrowing capacity was approximately $2.3 billion with no FHLB borrowings outstanding. In February 2020, the FHLB of Des Moines notified ASB that certain assets would no longer qualify as collateral for FHLB advances, reducing ASB's total FHLB borrowing capacity to approximately $1.5 billion. The notice included high-quality home equity lines of credit and was technical in nature and unrelated to the credit quality of the home equity loans, of which approximately 54% are in first lien position. ASB is working with the FHLB to understand the nature of the disqualification of those assets as collateral and re-establishing eligibility. Although the reduction in borrowing capacity will not impact ASB’s operations, ASB is evaluating other assets to pledge as collateral to increase its reserve borrowing capacity with the FHLB. Over the past 10 years, the maximum amount outstanding as of any quarter end was $110 million. As of December 31, 2019, securities sold under agreements to repurchase totaled $115 million, representing 1.6% of assets. ASB utilizes deposits, advances from the 66 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, 2019, 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, 2019 and 2018, ASB had $29.7 million and $27.3 million of loans on nonaccrual status, respectively, or 0.6% of net loans outstanding. As of December 31, 2019 and 2018, ASB had nil and $0.4 million, respectively, of real estate acquired in settlement of loans. In 2019, operating activities provided cash of $110 million. Net cash of $120 million was used by investing activities primarily due to a net increase in loans receivable of $300 million, purchases of available-for-sale investment securities of $108 million, capital expenditures of $24 million, purchases of held-to-maturity investment securities of $13 million, contributions to low-income housing investments of $7 million and purchases of bank owned life insurance of $4 million, partly offset by receipt of repayments from available-for-sale investment securities of $273 million, proceeds from the sale of real estate of $21 million, proceeds from the sale of available-for-sale investment securities of $20 million, repayments from held-to-maturity investment securities of $16 million and proceeds from the redemption of bank owned life insurance of $6 million. Financing activities provided net cash of $62 million primarily due to a net increase in deposits of $113 million and a net increase in retail repurchase agreements of $50 million, partly offset by a net decrease in FHLB advances of $45 million and common stock dividends to HEI (through ASB Hawaii) of $56 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, 2019, 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 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 67 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 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 16 of the Consolidated Financial Statements for additional information regarding ASB’s fair value measurements. 68 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, 2019. 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” in Item 7 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 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 and minimum contributions, the market value of retirement benefit plans’ assets and the Utilities’ allowed rates of return. Interest rate risk can be defined as the exposure of the Company’s earnings to adverse movements in interest rates. Bank interest rate risk The Company’s success is dependent, in part, upon ASB’s ability to manage interest rate risk (IRR). ASB’s interest-rate risk profile is strongly influenced by its primary business of making fixed-rate residential mortgage loans and taking in retail deposits. Large mismatches in the amounts or timing between the maturity or repricing of interest sensitive assets or liabilities could adversely affect ASB’s earnings and the market value of its interest-sensitive assets and liabilities in the event of significant changes in the level of interest rates. Many other factors also affect ASB’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences and competition for loans or deposits. ASB’s Asset/Liability Management Committee (ALCO), whose voting members are officers and employees of ASB, is responsible for managing interest rate risk and carrying out the overall asset/liability management objectives and activities of ASB as approved by the ASB Board of Directors. ALCO establishes policies under which management monitors and coordinates ASB’s assets and liabilities. See Note 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 69 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, 2019 and 2018 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, 2019 December 31, 2018 December 31, 2019 December 31, 2018 2.8% 2.1 1.3 (2.0) 2.5% 1.9 1.1 (2.3) 15.3% 12.2 7.5 (12.7) 10.0% 8.1 5.1 (11.0) ASB’s NII sensitivity profile was more asset sensitive as of December 31, 2019 compared to December 31, 2018. The decrease in long term market rates increased prepayment expectations, resulting in higher reinvestment into lower yielding fixed-rate mortgage and mortgage-backed investment portfolios. The increased prepayment expectations also drove higher premium amortization on existing mortgage-backed securities. In addition, the bank had more cash on the balance sheet as of December 31, 2019, which contributed to higher NII asset sensitivity. EVE sensitivity increased as of December 31, 2019 compared to December 31, 2018 as the duration of assets shortened while the duration of liabilities lengthened. The downward shift in the yield curve led to faster prepayment expectations and shortened the durations of the fixed-rate mortgage and mortgage-backed investment portfolios, while lengthening core deposit duration. 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 indications 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. 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. 70 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, 2019, 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 10 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 predominately at fixed rates (see Note 16 of the Consolidated Financial Statements for the fair value of long-term debt, net-other than bank). 71 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, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 Consolidated Balance Sheets at December 31, 2019 and 2018 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 Hawaiian Electric Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 Consolidated Balance Sheets at December 31, 2019 and 2018 Consolidated Statements of Capitalization at December 31, 2019 and 2018 Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements Page 73 77 78 78 79 80 81 82 84 84 85 86 88 89 90 72 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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. 73 Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Electric utility segment - regulatory assets and liabilities - Refer to Note 3 to the financial statements Critical Audit Matter Description Hawaiian Electric Company, Inc. (“Hawaiian Electric,” or the “Utility”) is subject to rate regulation by the Hawaii Public Utility Commission (the “PUC”) and accounts for the effects of regulation under FASB Accounting Standards Codification (“ASC”) Topic 980, “Regulated Operations” as management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; and depreciation expense. As of December 31, 2019, regulatory assets and liabilities amounted to approximately $715,080,000 and $972,310,000, respectively. The Company’s 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. Hawaiian Electric’s rates are subject to regulatory rate-setting processes and earnings oversight. Rates are determined and approved in regulatory proceedings based on an analysis of the Company’s costs to provide utility service and a return on, and recovery of, Hawaiian Electric’s investment in the utility business. Any decision by the PUC could (1) impact the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) necessitate a refund or future reductions in rates that should be reported as regulatory liabilities. We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, and (2) a refund to customers. Given that management’s accounting judgements are based on assumptions about the outcome of future decisions by the PUC, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by the rate regulators included the following, among others: • We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. Such controls include the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or incurring future reductions in rates. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. • We read relevant regulatory orders issued by the PUC for the Company, regulatory statutes, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedence of the PUC’s treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness. • For regulatory matters in process, we inspected the Company’s filings with the PUC and the filings with the PUC by intervenors that may impact the Company’s future rates, for any evidence that might contradict management’s assertions. • We obtained analyses from management, which includes input from regulatory and legal counsel, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery, or a future reduction in rates. 74 Allowance for Loan Losses - Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company maintains an allowance for loan losses (the “Allowance”) to absorb losses inherent in its loan portfolio. As of December 31, 2019, the total Allowance balance is $53.4 million. The level of Allowance is based on 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 the interest rate environment). The Allowance 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. These qualitative factors 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 selection of relevant and appropriate qualitative factors in calculating the Allowance requires significant management judgment. Given the magnitude of the loan portfolio and the subjective nature of determining the Allowance, including the judgments applied by management in determining the qualitative factors, auditing the Allowance attributable to these qualitative factors involves a high degree of auditor judgment, and increased level of effort, and the need to involve more experienced audit professionals. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Allowance, included the following procedures, among others: • We tested the effectiveness of controls over the Allowance, including management’s controls over the respective qualitative factors. • We evaluated the reasonableness and conceptual soundness of the Allowance modeling framework, including the use of qualitative factors. • We tested the mathematical accuracy of the calculation of the qualitative Allowance as well as the accuracy and completeness of data used as inputs to the determination of qualitative factors. • We evaluated the qualitative factors applied to the historical loss rates under the incurred loss model, including assessing the basis for the factors and the reasonableness of the qualitative factors used in the Allowance. • In order to identify potential bias in the determination of the Allowance, we performed analytical analysis, including retrospective review, where we compared the estimate of losses to actual losses, analyzed ratios of the Allowance to loans and other relevant metric, such as losses and nonperforming loans, and performed peer analysis where we compared relevant metrics to comparable financial institutions. • We evaluated the directional consistency and magnitude of the qualitative adjustments as well as the absolute value of the Allowance attributable to the qualitative adjustments. Summary of significant accounting policies - Recent accounting pronouncements - Credit losses - Refer to Note 1 to the financial statements Critical Audit Matter Description On January 1, 2020, the Company will adopt ASU No. 2016-13, “Financial Instruments - Credit Losses”, which 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. The Company and Utilities will adopt ASU No. 2016-13 using an effective date of January 1, 2020 and will apply the guidance using a modified retrospective basis with the cumulative effect of initially applying the amendments to be recognized in retained earnings as of January 1, 2020. The allowance for credit losses (ACL) is a material estimate of the Company. As a result of the change from an incurred loss model to a methodology that considers the credit loss over the expected life of the loan, the Company expects to record, upon completing its final analysis, an adjustment between $18 million and $22 million to increase the ACL, with a corresponding adjustment to reduce retained earnings as of January 1, 2020. The ACL requires management to make estimates of the expected credit losses over the expected life of the loans, including using estimates of future economic conditions that will impact the amount of such future losses. In order to estimate the expected credit losses, existing credit loss estimation models were updated and, in certain cases, new models implemented to align with the expected loss framework. 75 The estimation of credit losses significantly changes under the expected loss framework, includes the application of new accounting policies, the use of new subjective judgments, and changes to loss estimation models. Accordingly, the procedures performed to audit the disclosure of the expected impact of the adoption of ASU No. 2016-13 involved a high degree of auditor judgment and required significant effort, including the need to involve our credit specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the disclosure of the expected impact of adopting ASU No. 2016-13 included the following, among others: • We tested the effectiveness of management’s internal controls over key assumptions and judgments, expected loss estimation models, selection and application of new accounting policies, and disclosure of the impact of adoption discussed in the financial statements. • We evaluated the adequacy of the Company’s disclosure related to the Adoption of ASU No. 2016-13. • We evaluated the appropriateness of the Company’s policies, methodologies, and elections involved in the adoption of the expected loss model. • We tested the mathematical accuracy of the expected loss estimation models, including the completeness and accuracy of inputs to the models. • We involved credit specialist to assist us in evaluating the reasonableness and conceptual soundness of the methodology as applied in the expected loss estimation models. • We evaluated the reasonableness of management’s key assumptions and judgments in estimating future credit losses. /s/ Deloitte & Touche LLP Honolulu, Hawaii February 28, 2020 We have served as the Company’s auditor since 2017. 76 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in common stock equity, and cash flows, for each of the three years in the period ended December 31, 2019, 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 referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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 audits 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 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. We believe that our audits provide a reasonable basis for our opinions. /s/ Deloitte & Touche LLP Honolulu, Hawaii February 28, 2020 We have served as the Company’s auditor since 2017. 77 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 (includes $10.8 million gain on sales of properties in 2019) Other Total expenses Operating income (loss) Electric utility Bank Other Total operating income 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 2019 2018 2017 $ 2,545,942 328,570 $ 2,546,525 314,275 $ 2,257,566 297,640 89 49 419 2,874,601 2,860,849 2,555,625 2,291,564 2,304,864 1,994,042 217,008 17,355 206,040 16,589 198,104 17,246 2,525,927 2,527,493 2,209,392 254,378 111,562 (17,266) 348,674 (2,806) (90,899) 4,453 11,987 271,409 51,637 219,772 1,890 217,882 2.00 1.99 108,949 458 109,407 $ $ $ 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 $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 78 Consolidated Statements of Comprehensive Income Hawaiian Electric Industries, Inc. and Subsidiaries Years ended December 31 (in thousands) Net income for common stock Other comprehensive income (loss), net of taxes: Net unrealized gains (losses) on available-for sale investment securities: Net unrealized gains (losses) on available-for sale investment securities arising during the period, net of (taxes) benefits of $(10,024), $3,468 and $2,886 for 2019, 2018 and 2017, respectively 2019 2018 2017 $ 217,882 $ 201,774 $ 165,297 27,382 (9,472) (4,370) Reclassification adjustment for net realized gains included in net income, net of taxes of $175, nil and nil for 2019, 2018 and 2017, respectively (478) — Derivatives qualified as cash flow hedges: Unrealized interest rate hedging losses, net of tax benefit of $409, $151 and nil for 2019, 2018 and 2017, respectively Reclassification adjustment to net income, net of tax benefits of nil, nil and $289 for 2019, 2018 and 2017, respectively Retirement benefit plans: Net gains (losses) arising during the period, net of (taxes) benefits of $(3,892), $9,810 and $(41,129) for 2019, 2018 and 2017, 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 $3,512, $7,317 and $10,041 for 2019, 2018 and 2017, respectively Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of (taxes) benefits of $(5,610), $2,887 and $(49,523) for 2019, 2018 and 2017, respectively Other comprehensive income (loss), net of taxes (1,177) (436) — — — — 454 10,914 (28,101) 65,531 10,107 21,015 15,737 (16,177) 30,571 8,325 (8,669) (78,724) (1,372) Comprehensive income attributable to Hawaiian Electric Industries, Inc. $ 248,453 $ 193,105 $ 163,925 The accompanying notes are an integral part of these consolidated financial statements. 79 Consolidated Balance Sheets Hawaiian Electric Industries, Inc. and Subsidiaries December 31 (dollars in thousands) ASSETS Cash and cash equivalents Restricted cash 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 Operating lease right-of-use assets 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 Operating lease liabilities 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: 108,973,328 shares and 108,879,245 shares at December 31, 2019 and 2018, respectively Retained earnings Accumulated other comprehensive loss, net of tax benefits 2019 2018 $ 100,161 7,545,083 229,953 7,875,197 (2,765,569) $ $ $ 196,813 30,872 300,794 1,232,826 139,451 8,434 5,067,821 12,286 5,109,628 199,171 715,080 649,885 82,190 13,745,251 220,633 24,941 6,271,902 185,710 115,110 1,964,365 379,324 199,571 972,310 513,287 583,545 11,430,698 34,293 — 1,678,257 622,042 $ 102,925 7,118,709 267,714 7,489,348 (2,659,230) $ $ $ 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 Net unrealized gains (losses) on securities Unrealized losses on derivatives Retirement benefit plans Total shareholders’ equity Total liabilities and shareholders’ equity $ 2,481 (1,613) (20,907) $ (24,423) (436) (25,751) (20,039) 2,280,260 13,745,251 $ (50,610) 2,162,280 13,104,051 $ The accompanying notes are an integral part of these consolidated financial statements. 80 Consolidated Statements of Changes in Shareholders’ Equity Hawaiian Electric Industries, Inc. and Subsidiaries (in thousands, except per share amounts) 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: Share-based 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: Share-based plans Share-based expenses and other, net Common stock dividends ($1.24 per share) Balance, December 31, 2018 Net income for common stock Other comprehensive income, net of taxes Issuance of common stock: Share-based plans Share-based expenses and other, net Common stock dividends ($1.28 per share) Balance, December 31, 2019 Common stock Shares Amount Retained earnings Accumulated other comprehensive income (loss) Total 108,583 $ 1,660,910 $ 438,972 $ (33,129) $ 2,066,753 — — — 205 — — — — — 165,297 — 7,440 4,664 (3,083) — — — (134,873) 108,788 1,662,491 — — 91 — — — — 2,650 4,126 — 108,879 1,669,267 — — 94 — — — — 3,092 5,898 — 476,836 201,774 — — — (134,987) 543,623 217,882 — — — (139,463) — (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) (50,610) 2,162,280 — 30,571 217,882 30,571 — — — 3,092 5,898 (139,463) 108,973 $ 1,678,257 $ 622,042 $ (20,039) $ 2,280,260 The accompanying notes are an integral part of these consolidated financial statements. 81 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, held for sale Proceeds from sale of loans, held for sale Gain on sale of real estate, held for sale Deferred income taxes Share-based compensation expense Allowance for equity funds used during construction Other Changes in assets and liabilities Decrease (increase) in accounts receivable and unbilled revenues, net Decrease (increase) in fuel oil stock 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 (decrease) 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 held for sale Capital expenditures Contributions to low income housing investments Acquisition of business Other, net Net cash used in investing activities 2019 2018 2017 $ 219,772 $ 203,664 $ 167,187 229,858 48,255 23,480 (285,042) 277,119 (10,762) (15,085) 9,986 (11,987) 10,822 26,083 (11,493) 71,262 (3,054) 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 (27,538) 29,429 20,685 (4,482) (34,724) 512,470 20,871 15,488 499,312 (108,088) 272,949 19,810 (13,057) 15,505 (95,636) 97,160 (300,210) — 21,060 (457,520) (6,974) — 13,292 (541,709) (224,335) 218,930 — (103,184) 5,720 (28,292) 28,040 (189,352) 7,149 — (506,770) (14,499) — 14,534 (792,059) 882 (25,551) 420,441 (528,379) 220,231 — (44,515) — (2,868) 4,380 15,887 36,760 — (430,454) (17,505) (76,323) 7,487 (815,299) (continued) 82 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 in other bank borrowings with original maturities of three months or less Repayment of other bank borrowings Proceeds from issuance of long-term debt Repayment of long-term debt and funds transferred for repayment of long-term debt Withheld shares for employee taxes on vested share-based compensation Common stock dividends Preferred stock dividends of subsidiaries Other Net cash provided by financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, January 1 Cash, cash equivalents and restricted cash, December 31 Less: Restricted cash Cash and cash equivalents, December 31 The accompanying notes are an integral part of these consolidated financial statements. 2019 2018 2017 113,050 165,880 341,668 86,718 75,000 (50,000) 5,070 — 289,349 (287,285) (997) (139,463) (1,890) (1,836) 87,716 58,477 169,208 (18,999) 25,000 (50,000) 71,556 (50,000) 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 (63,534) 532,325 (465,000) (3,828) (134,873) (1,890) (6,349) 378,287 (16,571) 278,452 227,685 (30,872) $ 196,813 169,208 261,881 — $ 169,208 — $ 261,881 83 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 2019 2018 2017 $ 2,545,942 $ 2,546,525 $ 2,257,566 720,709 633,256 481,737 215,731 240,131 2,291,564 254,378 11,987 (2,836) (70,842) 4,453 197,140 38,305 158,835 915 157,920 1,080 156,840 $ 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 $ 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: 2019 2018 2017 $ 156,840 $ 143,653 $ 119,951 Reclassification adjustment to net income, net of tax benefits of nil, nil and $289 for 2019, 2018 and 2017, respectively — — 454 Retirement benefit plans: Net gains (losses) arising during the period, net of (taxes) benefits of $(1,821), $9,024 and $(39,587) for 2019, 2018 and 2017, 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 $3,312, $6,594 and $9,221 for 2019, 2018 and 2017, respectively Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of (taxes) benefits of $(5,610), $2,887 and $(49,523) for 2019, 2018 and 2017, respectively Other comprehensive income (loss), net of taxes Comprehensive income attributable to Hawaiian Electric Company, Inc. 5,249 (26,019) 63,105 9,550 19,012 14,477 (16,177) (1,378) 155,462 $ 8,325 1,318 144,971 $ (78,724) (688) 119,263 $ The accompanying notes are an integral part of these consolidated financial statements. 84 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 $111 and $1,255 as of December 31, 2019 and 2018, respectively Total property, plant and equipment, net Current assets Cash and cash equivalents Restricted cash 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 Operating lease right-of-use-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 operating lease liabilities Current portion of long-term debt, net 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 Operating lease 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. 85 2019 2018 $ $ 51,816 7,240,288 (2,690,157) 193,074 4,795,021 49,667 6,809,671 (2,577,342) 233,145 4,515,141 6,956 4,801,977 6,961 4,522,102 11,022 30,872 152,790 117,227 11,568 91,937 60,702 116,980 30,710 623,808 176,809 684,370 101,718 962,897 6,388,682 2,047,352 34,293 1,401,714 3,483,359 63,707 95,953 88,987 187,770 20,728 207,992 30,724 67,305 763,166 113,400 377,150 941,586 117,868 478,763 113,390 2,142,157 6,388,682 $ $ $ 35,877 — 177,896 121,738 6,215 79,935 55,204 32,118 71,016 579,999 — 762,410 102,992 865,402 5,967,503 1,957,641 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 5,967,503 $ $ $ 2019 2018 $ 113,678 $ 111,696 714,824 681,305 1,220,129 1,164,541 (1,279) 99 2,047,352 1,957,641 Shares outstanding December 31, 2019 and 2018 2019 2018 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: 17,048,783 shares and 16,751,488 shares at December 31, 2019 and 2018, 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) 86 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): 2019 2018 $ 80,000 $ $ $ 150,000 125,000 140,000 47,000 — 542,000 $ $ 50,000 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 40,000 963,000 — 963,000 — — 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 1,505,000 1,426,546 7,333 95,953 7,744 — 1,401,714 1,418,802 $ 3,483,359 $ 3,410,736 3.50%, Series 2019, due 2049 3.20%, Refunding series 2019, due 2039 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 - redeemed in 2019 Total obligations to the State of Hawaii Other long-term debt – unsecured: Taxable senior notes: 4.21%, Series 2019A, due 2033 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 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 - redeemed in 2019 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. 87 Consolidated Statements of Changes in Common Stock Equity Hawaiian Electric Company, Inc. and Subsidiaries (in thousands) 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 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, 2019 Common stock Shares Amount Premium on capital stock Retained earnings Accumulated other comprehensive income (loss) Total 16,020 $ 106,818 $ 601,491 $ 1,091,800 $ (322) $ 1,799,787 — — — 122 — — — — 816 — — — — 13,184 119,951 — 209 — — (87,767) — (688) (209) — — 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 — — 297 — — — 1,982 — — — 33,519 156,840 — — — (101,252) — 1,318 — — 99 — (1,378) — — 143,653 1,318 70,692 (103,305) 1,957,641 156,840 (1,378) 35,501 (101,252) 17,048 $ 113,678 $ 714,824 $ 1,220,129 $ (1,279) $ 2,047,352 The accompanying notes are an integral part of these consolidated financial statements. 88 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 Income tax credits, net State refundable credit Allowance for equity funds used during construction Other Changes in assets and liabilities Decrease (increase) in accounts receivable Decrease (increase) in accrued unbilled revenues Decrease (increase) in fuel oil stock Increase in materials and supplies Decrease (increase) in regulatory assets Increase in regulatory liabilities 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 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 repayment of long-term debt Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less Proceeds from issuance of short-term debt Repayment of short-term debt Other Net cash provided by (used in) financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, January 1 Cash, cash equivalents and restricted cash, December 31 Less: Restricted cash Cash and cash equivalents, December 31 2019 2018 2017 $ 158,835 $ 145,648 $ 121,946 215,731 29,631 (16,284) 27,259 (8,369) (11,987) 200 20,956 4,511 (12,002) (5,498) 71,262 1,953 (2,051) (28,523) (4,448) (17,220) 423,956 203,626 26,602 (7,982) (99) (6,239) (10,877) 4,768 (50,917) (14,684) 6,938 (807) 9,252 37,358 24,358 25,036 18,746 (17,114) 393,613 192,784 8,498 38,037 (52) (2,251) (12,483) 1,237 2,914 (15,361) (20,443) (718) (17,256) 3,602 25,734 29,862 604 (21,468) 335,186 (419,898) (415,264) (376,865) 11,374 10,082 4,578 (408,524) (405,182) (372,287) (101,252) (103,305) (1,995) 35,500 280,000 (283,546) 38,987 75,000 (50,000) (2,109) (9,415) 6,017 35,877 41,894 (30,872) (1,995) 70,700 100,000 (50,000) (4,999) 25,000 — (472) 34,929 23,360 12,517 35,877 — (87,767) (1,995) 14,000 315,000 (265,000) 4,999 — — (3,905) (24,668) (61,769) 74,286 12,517 — $ 11,022 $ 35,877 $ 12,517 The accompanying notes are an integral part of these consolidated financial statements. 89 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). Pacific Current’s significant subsidiaries include 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 as fair value for investment securities (ASB only); pension and other postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities (Utilities only); electric utility unbilled revenues (Utilities only); asset retirement obligations (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. 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. In general, significant 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 with original maturities of three months or less. Additionally, ASB is required by the Federal Reserve System to maintain noninterest-bearing cash reserves equal to a percentage of certain deposits. The reserve requirement for ASB at December 31, 2019 and 2018 was $26.2 million and $28.1 million, respectively. Restricted cash. The Utilities consider funds on deposit with trustees, which represent the undrawn proceeds from the issuance of special purpose revenue bonds to be restricted cash because these funds are available only to finance (or reimburse payment of) approved capital expenditures. At December 31, 2019 and 2018, total restricted cash of Utilities was $30.9 million and nil, respectively (see Note 6). 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 90 completed and the facilities are either placed in service or become useful for public utility purposes. Costs for betterments that make utility plant more useful, more efficient, of greater durability or of greater capacity are also capitalized. Upon the retirement or sale of electric utility plant, generally no gain or loss is recognized. The cost of the plant retired is charged to accumulated depreciation. Amounts collected from customers for cost of removal are included in regulatory liabilities. See discussion regarding “Utility projects” in Note 3. 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 2019, 2018 and 2017. 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 ERISA minimum and Internal Revenue Code limits and targeted funded status. 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. 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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. 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 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 is added to the denominator. There were no shares of antidilutive securities outstanding during the years ended December 31, 2019, 2018 and 2017. Impairment of long-lived assets and long-lived assets to be disposed of. The Company and the Utilities review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Recent accounting pronouncements. Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 prior comparative periods 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) presented in the financial statements under Accounting Standards Codification (ASC) 840, including the required disclosures under ASC 840). 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 Utilities ($215 million related to PPAs), based on the present value of the remaining minimum rental payments, with corresponding ROU assets for existing operating leases, under current leasing standards. In determining the lease liability upon transition, the Company used the incremental borrowing rates as of the adoption date based on the remaining lease term and remaining lease payments. See Note 8 for more information. 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 Company and Utilities will adopt ASU No. 2016-13 using an effective date of January 1, 2020 and will apply the guidance using a modified retrospective basis with the cumulative effect of initially applying the amendments to be recognized in retained earnings as of January 1, 2020. The allowance for credit losses (ACL) is a material estimate of the Company. As a result of the change from an incurred loss model to a methodology that considers the credit loss over the expected life of the loan, the Company expects to record, upon completing its final analysis, an adjustment between $18 million to $22 million to increase the ACL, with a corresponding adjustment to reduce retained earnings as of January 1, 2020. The ACL is based on the composition, characteristics and quality of the loans and off balance sheet credit exposures as well as the prevailing economic conditions as of the adoption date. The increase to the ACL for the loan portfolio will result in a decrease to retained earnings and regulatory capital amounts and ratios. However, ASB expects to remain well capitalized under the regulatory framework after the adoption of ASU No. 2016-13. Based on the credit quality of the Company’s existing held-to-maturity and AFS investment securities portfolio, the Company will not recognize an ACL at adoption for those investments. The adoption of the new standard did not have a material impact to the Utilities’ customer and other accounts receivables and accrued unbilled revenue. Compensation-retirement benefits-defined benefit plans. In August 2018, the FASB issued ASU No. 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 early adopted ASU No. 2018-14, effective for the year ended December 31, 2019, and applied the amended disclosure requirements to all periods presented. See Note 10 for additional information regarding the Company’s employee benefit plans. Codification Improvements. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which is intended to clarify certain issues related to the accounting for financial instruments. • With respect to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04 allows entities to measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets, or to make an accounting policy election not to measure an allowance for credit losses on accrued interest receivable amounts if an entity writes off the uncollectible accrued interest receivable balance in a timely manner and makes certain disclosures. ASU No. 2019-04 also allows an entity to make an accounting policy election regarding the presentation and disclosure of accrued interest receivables and the related allowance for credit losses for those accrued interest receivables. ASU No. 2019-04 also clarifies certain issues related 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) to transfers between classifications or categories for loans and debt securities, recoveries, variable interest rates and prepayments, vintage disclosures, and contractual extensions and renewal options. • With respect to Topic 815, Derivatives and Hedging, ASU No. 2019-04 provides amendments, among others, that address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements. • With respect to Topic 825, Financial Instruments, ASU No. 2019-04 clarifies the scope of the guidance and disclosure requirements with respect to recognizing and measuring financial instruments. The amended guidance in ASU No. 2019-04 is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU No. 2019-04 in the first quarter of 2020 and the impact of the ASU on the Company’s consolidated financial statements was not material. Reclassifications. Certain reclassifications have been made to prior years’ financial statements to conform to the 2019 presentation, which did not affect previously reported results of operations. Electric utility Regulation by the Public Utilities Commission of the State of Hawaii (PUC). The Utilities are regulated by the PUC and account for the effects of regulation under FASB ASC Topic 980, “Regulated Operations.” As a result, the 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 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 recovered through surcharge mechanisms. The amounts collected through the 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, 2019 and 2018, the allowance for customer accounts receivable, accrued unbilled revenues and other accounts receivable was $1.4 million and $1.5 million, respectively. 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 7.4% in 2019, 7.3% in 2018 and 7.7% in 2017, 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. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 recognized in AOCI. Based on ASB’s evaluation as of December 31, 2019, 2018 and 2017, there was no indicated impairment as ASB 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 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 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. 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, 2019 and 2018, 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 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, 2019, 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 its 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 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 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, 2019, 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, 2019 and 2018, the carrying amount of LIHTC investments was $66.3 million and $67.6 million, respectively, and included in other assets in the consolidated balance sheets. ASB’s unfunded commitments to fund its LIHTC investment partnerships were $23.4 million and $18.1 million as of December 31, 2019 and 2018, respectively. These unfunded commitments are unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of December 31, 2019, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships. The table below summarizes the amounts in income tax expense related to ASB’s LIHTC investments: Years ended December 31 (in millions) 2019 2018 2017 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 $ $ (7.9) $ (7.7) $ 11.9 10.9 4.0 $ 3.2 $ (7.4) 10.7 3.3 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 achieve the state’s sustainability goals. Significant investments of Pacific Current made through its subsidiaries, Hamakua Energy, LLC and Mauo, LLC, include: 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 currently 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 is funding 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, non-recourse project debt, and equity). There are five separate project sites, which are expected to be placed into service during 2020. 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment financial information was as follows: (in thousands) 2019 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, 2019) 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 expenditures1 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 expenditures1 Assets (at December 31, 2017) Electric utility Bank Other Total $ 2,545,865 $ 328,570 $ 166 $ 2,874,601 77 2,545,942 245,362 70,842 197,140 38,305 158,835 1,995 156,840 419,898 — 328,570 28,675 18,440 112,034 23,061 88,973 — 88,973 24,175 6,388,682 7,233,017 (77) 89 4,076 20,057 (37,765) (9,729) (28,036) (105) (27,931) 13,447 123,552 — 2,874,601 278,113 109,339 271,409 51,637 219,772 1,890 217,882 457,520 13,745,251 $ 2,546,472 $ 314,275 $ 102 $ 2,860,849 53 2,546,525 230,228 73,348 180,426 34,778 145,648 1,995 143,653 415,264 — 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 1,995 119,951 376,865 5,630,613 — 297,640 19,416 12,156 98,716 31,719 66,997 — 66,997 53,272 6,798,659 (111) 419 1,300 9,335 (27,281) (5,525) (21,756) (105) (21,651) 317 104,888 — 2,555,625 221,998 91,128 276,580 109,393 167,187 1,890 165,297 495,187 12,534,160 1 Contributions in aid of construction balances are included in capital expenditures. Intercompany electricity sales of the Utilities to ASB 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. 100 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, 2019 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 (1-2 years) Unamortized expense and premiums on retired debt and equity issuances (1-20 years; 1-19 years remaining) Vacation earned, but not yet taken (1 year) Other (1-39 years remaining) Total regulatory assets Included in: Current assets Long-term assets Total regulatory 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) Decoupling revenue balancing account and RAM (1-2 years) Retirement benefit plans (balance primarily varies with plans’ funded statuses) Other (1-19 years remaining) Total regulatory liabilities Included in: Current liabilities Long-term liabilities Total regulatory liabilities 2019 2018 $ 554,485 $ 624,126 102,612 114,076 — 10,228 12,535 35,220 715,080 30,710 684,370 715,080 $ $ $ 49,560 10,065 10,820 24,779 833,426 71,016 762,410 833,426 $ $ $ 2019 2018 $ 521,977 $ 491,006 386,990 413,339 16,370 21,707 25,266 972,310 30,724 941,586 972,310 $ $ $ — 19,129 26,762 950,236 17,977 932,259 950,236 $ $ $ The regulatory asset and liability relating to retirement benefit plans was recorded as a result of pension and OPEB tracking mechanisms adopted by the PUC in rate case decisions for the Utilities in 2007 (see Note 10). Major customers.  The Utilities received 11% ($281 million), 11% ($273 million) and 11% ($239 million) of their operating revenues from the sale of electricity to various federal government agencies in 2019, 2018 and 2017, respectively. 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Cumulative preferred stock. The following series of cumulative preferred stock are redeemable only at the option of the respective company at the following prices in the event of voluntary liquidation or redemption: December 31, 2019 Series C, D, E, H, J and K (Hawaiian Electric) $ I (Hawaiian Electric) G (Hawaii Electric Light) H (Maui Electric) Voluntary liquidation price Redemption price $ 20 20 100 100 21 20 100 100 Hawaiian Electric is obligated to make dividend, redemption and liquidation payments on the preferred stock of each of its subsidiaries if the respective subsidiary is unable to make such payments, but this obligation is subordinated to Hawaiian Electric’s obligation to make payments on its own preferred stock. Related-party transactions. HEI charged the Utilities $6.0 million, $5.9 million and $6.2 million for general management and administrative services in 2019, 2018 and 2017, 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 years ended December 31, 2019 and December 31, 2018, 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 $68 million and $56 million, respectively. Hawaiian Electric’s short-term borrowings from HEI totaled nil at December 31, 2019 and 2018. Borrowings among the Utilities are eliminated in consolidation. Interest charged by HEI to Hawaiian Electric was not material for the years ended December 31, 2019 and 2018. 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. On May 15, 2019, Trust III redeemed $50 million of its outstanding 2004 Trust Preferred Securities and $1.5 million of trust common securities. Subsequently a Certificate of Cancellation of Statutory Trust was filed with the Delaware Secretary of State in order to cancel the Trust III, which became effective on June 10, 2019. For the year-to-date period ending on the Trust’s cancellation date on June 10, 2019, Trust III’s income statement consisted of $1.2 million of interest income received from the 2004 Debentures; $1.2 million of distributions to holders of the Trust Preferred Securities; and $37,000 of common dividends on the trust common securities to Hawaiian Electric. Unconsolidated variable interest entities. Power purchase agreements. As of December 31, 2019, the Utilities had four PPAs for firm capacity (excluding the PGV PPA as Puna Geothermal Venture (PGV) has been offline since May 2018 due to lava flow on Hawaii Island) and other PPAs with independent power producers (IPPs) and Schedule Q providers (i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs. Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and Hamakua Energy in its consolidated financial statements. Hamakua Energy is an indirect subsidiary of Pacific Current, and is consolidated in HEI’s consolidated financial statements. 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 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 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. 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 Wind IPPs Solar IPPs Other IPPs1 Total IPPs 2019 2018 2017 214 139 76 — 68 95 36 5 633 $ $ 216 140 69 15 56 107 29 7 639 $ $ 180 140 67 38 35 97 27 3 587 $ $ 1 Includes hydro power and other PPAs As of December 31, 2019, 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 $51 million in 2020, $38 million each in 2021, 2022, 2023 and 2024, and $241 million from 2025 through 2033. 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 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 ECRC. Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. 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. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA (which has been subject to automatic extension on a month-to-month basis) prior to July 31, 2020, to allow for a negotiated resolution and PUC approval. 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. Hawaiian Electric and AES Hawaii have been in dispute over an additional 9 MW of capacity. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on an amendment to the PPA. However, in June 2018, the PUC issued an order suspending review of the amendment pending a DOH decision on AES Hawaii’s request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric. If approved by the PUC, the amendment will resolve AES Hawaii’s claims related to the additional capacity. 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 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 and litigation delays, which resulted in 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. In August 2017, the PUC’s approval was appealed by a third party. On May 10, 2019, the Hawaii Supreme Court issued a decision remanding the matter to the PUC for further proceedings consistent with the court’s decision which must include express consideration of Green House Gas emissions that would result from approving the PPA, whether the cost of energy under the PPA is reasonable in light of the potential for GHG emissions, and whether the terms of the PPA are prudent and in the public interest, in light of its potential hidden and long-term consequences. On June 20, 2019, the PUC issued an order reopening the docket for further proceedings. On September 29, 2019, the PUC issued an order setting the procedural schedule for the matter and on December 20, 2019, issued an order modifying the procedural schedule. Pre-hearing matters will be conducted through March 6, 2020. Thereafter, the PUC will set the date for an evidentiary hearing and post-hearing briefing. Hu Honua expected to complete construction of the plant in the fourth quarter of 2019, but has been delayed. 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 $246 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. 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, 2019, the total deferred project costs and accrued carrying costs after the project went into service amounted to $59.3 million. In February 2019, the PUC approved a methodology for passing the future cost saving benefits of the new ERP/EAM system to customers developed by the Utilities in collaboration with the Consumer Advocate. The Utilities filed a benefits clarification document on June 10, 2019, reflecting $150 million in future net O&M expense reductions and cost avoidance, and $96 million in capital cost reductions and tax savings over the 12-year service life. To the extent the reduction in O&M expense relates to amounts reflected in electric rates, the Utilities would reduce future rates for such amounts. As of December 31, 2019, the Utilities recorded a total of $2.4 million as a regulatory liability for amounts to be returned to customers for reduction in O&M expense included in rates. On September 13, 2019, the Utilities filed their Semi-Annual Enterprise System Benefits Report for the period January 1 through June 30, 2019. In October 2019, the PUC approved the Utilities and the Consumer Advocate’s Stipulated Performance Metrics and Tracking Mechanism. West Loch PV Project. In November 2019, Hawaiian Electric placed into service a 20-MW (ac) utility-owned and operated renewable and dispatchable solar facility on property owned by the Department of the Navy. PUC orders resulted in a project cost cap of $67 million and a performance guarantee to provide energy at 9.56 cents/kWh or less to the system. Capital cost recovery under MPIR was approved by the PUC in December 2019 (See “Decoupling” section below for MPIR guidelines and cost recovery discussion.) Project costs incurred as of December 31, 2019 amounted to $51.4 million and generated 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) $13.4 million and $14.0 million in federal and state nonrefundable tax credits, respectively. The tax credits are being deferred and amortized, starting in 2020, over PUC-approved amortization periods. 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.In cooperation with the Hawaii Department of Health and EPA, Maui Electric further investigated the Site and the Adjacent Parcel to determine the extent of impacts of polychlorinated biphenyls (PCBs), residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of December 31, 2019, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on cleanup approach implemented. 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 PCBs contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant. As of December 31, 2019, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.2 million. The reserve balance represents the probable and reasonably estimable undiscounted cost for the onshore investigation and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the potential onshore source control requirements 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 1) the removal of retired generating units, certain types of transformers and underground storage tanks; 2) the abandonment of fuel pipelines, underground injection and supply wells; and 3) the removal of equipment and restoration of leased land used in connection with Utility-owned renewable and dispatchable generation facilities. 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 2019 $ 8,426 $ 312 1,594 (8) — $ 10,324 $ 2018 6,035 282 1,058 (74) 1,125 8,426 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. 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Regulatory proceedings. Decoupling. Decoupling is a regulatory model that is intended to provide the Utilities with 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 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) RAM revenues for escalation in certain O&M expenses and rate base changes, (3) MPIR component, (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 return on average common equity (ROACE) allowed in its most recent rate case. 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. Each of the Utilities’ RAM revenues was below its respective RAM Cap in 2019. The 2019 RAM also incorporated additional amortization of the regulatory liability associated with certain excess deferred taxes resulting from the Tax Act decrease in tax rates. The reduction in the RAM revenues will be counterbalanced by the lower income tax expense and, therefore, will have no net income impact. 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 2018 by $3.6 million and are being collected in customer bills since June 2019. In February 2019, Hawaiian Electric submitted an MPIR filing of $19.8 million 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. The PUC approved the Utilities’ requests for MPIR of the cost of the Grid Modernization Strategy Phase 1 project and West Loch PV project in March and December 2019, respectively. On February 7, 2020, the Utilities submitted an MPIR filing totaling $24.2 million for the Schofield Generation Station ($19.2 million), West Loch PV project ($4.5 million) and Grid Modernization Strategy Phase 1 project ($0.5 million for all three utilities) for the accrual of revenues effective January 1, 2020, that included the 2020 return on project amount (up to the capped amount) in rate base, depreciation and incremental O&M expenses, for collection from June 2021 through May 2022. Performance incentive mechanisms. The PUC has established the following PIMs. • Service Quality performance incentives are measured on a calendar-year basis. 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 reward is 8 basis points applied to the common equity share of 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) each respective utility’s approved rate base (or maximum penalties or rewards of approximately $1.3 million - in total for the three utilities). • • In December 2018, the Utilities accrued $2.1 million in estimated penalties for service reliability, net of call center performance rewards, for 2018. As a result of a PUC order denying the exclusion of the impact of a specific project on the service reliability performance, in May 2019, Hawaiian Electric accrued an additional $1.3 million in service reliability penalties related to 2018. The net service quality performance penalties related to 2018 were reflected in the 2019 annual decoupling filing and will reduce customer rates in the period June 1, 2019 through May 31, 2020. In December 2019, the Utilities accrued $0.3 million in estimated rewards for call center performance, net of service reliability penalties, for 2019. The net service quality performance rewards related to 2019 will be reflected in the 2020 annual decoupling filing and will increase customer rates in the period June 1, 2020 through May 31, 2021. • 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 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. For PPAs filed by December 31, 2018 and subsequently approved by the PUC, the incentive is 20% of the savings, with a cap of $3.5 million for the three utilities in total. For PPAs filed in January, February, and March 2019 and subsequently approved by the PUC, scaled incentives are 15%, 10% and 5%, respectively, of the savings for PPAs, with a cap of $3 million for the three utilities in total. There are no penalties. On March 25, 2019, the PUC approved six contracts, which were filed by December 31, 2018 and qualified for incentives. A seventh contract, which was filed in February 2019 and approved in August 2019, also qualified for incentives. Half of the incentive is earned upon PUC approval of the contract and the other half is eligible to be earned in the year following the in-service date of the projects. The Utilities accrued $1.7 million in incentives in March 2019, which were reflected in the 2019 annual decoupling filing and will be recovered in rates in the period June 1, 2019 through May 31, 2020. On October 9, 2019, the PUC issued an order establishing PIMs for the Utilities with regards to the Variable Renewable Dispatchable Generation and Energy Storage requests for proposals (RFPs) as well as the Delivery of Grid Services via Customer-sited Distributed Energy Resources RFPs, that were issued on August 22, 2019 for Oahu, Maui and Hawaii island. The order establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. The earliest the Utilities would be eligible for a PIM pursuant to this order is upon PUC approval of executed contracts resulting from the Phase 2 RFPs. The order requires contracts under the Grid Service RFP be filed for approval by May 2020, and by September 2020 under the Renewable RFPs. There is no set time period for approval. The Utilities filed a motion for reconsideration and/or clarification regarding the order on October 21, 2019, relating to certain design aspects and eligibility criteria for the PIMs. Annual decoupling filings. The net annual incremental amounts approved to be collected (refunded) from June 1, 2019 through May 31, 2020 are as follows: (in millions) 2019 Annual incremental RAM adjusted revenues,net of changes in Tax Act adjustment* Annual change in accrued RBA balance as of December 31, 2018 (and associated revenue taxes) which incorporates MPIR recovery Performance Incentive Mechanisms (net) Hawaiian Electric Hawaii Electric Light Maui Electric Total $ 6.5 $ 1.1 $ 5.4 $ 13.0 (12.2) (1.3) (2.0) — 0.8 (0.4) (13.4) (1.7) (2.1) Net annual incremental amount to be collected (refunded) under the tariffs $ (7.0) $ (0.9) $ 5.8 $ * The 2017 Tax Cuts and Jobs Act (the Tax Act) had two incremental impacts in 2019. First, the 2019 RAM calculation for all of the Utilities incorporated additional amortization of the regulatory liability associated with certain deferred taxes. Secondly, Maui Electric incorporated a $2.8 million adjustment in its 2018 annual decoupling filing related to the Tax Act which is not recurring in 2019. Performance-based regulation proceeding. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). 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. 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The proceeding has two phases. Phase 1 examined the current regulatory framework and identified those areas of utility performance that are deserving of further focus in Phase 2. In May 2019, the PUC issued an order concluding Phase 1, which established guiding principles, regulatory goals, and priority outcomes to guide the development of the PBR mechanisms in Phase 2. The PUC identified the following guiding principles, which will inform the development of the PBR framework: 1) a customer-centric approach, 2) administrative efficiency to reduce regulatory burdens; and 3) utility financial integrity to maintain the utility’s financial health. Priority goals (and priority outcomes) identified by the PUC were: enhance customer experience (affordability, reliability, interconnection experience, and customer engagement), improve utility performance (cost control, distributed energy resources (DER) asset effectiveness, and grid investment efficiency), and advance societal outcomes (capital formation, customer equity, GHG reduction, electrification of transportation, and resilience). The order also outlined the PUC’s vision of a comprehensive PBR framework that would be further developed in Phase 2. The framework envisioned would include 1) a five-year multi-year rate plan with an index-driven annual revenue adjustment based on an inflation factor, an X-factor which would encompass productivity, a Z-factor to account for exceptional circumstances not in the utility’s control and a customer dividend, 2) a symmetric earnings sharing mechanism that would help ensure that utility earnings do not excessively benefit or suffer from external factors outside of utility control or unforeseen results of regulatory mechanisms, 3) off-ramp provisions, 4) continuation of the RBA, MPIR adjustment mechanism, the pension and OPEB tracking mechanism, and other recovery mechanisms, and 5) a portfolio of performance incentive mechanisms for customer engagement and DER asset effectiveness (rewards only), and interconnection experience (both rewards and penalties), in addition to scorecards to track progress against targeted performance levels, shared savings mechanisms to apportion savings to the utility and customers, and reported metrics. The Phase 2 schedule includes working group meetings through the first half of 2020, followed by statements of positions, evidentiary hearing in October 2020 and anticipated decision in December 2020. Most recent rate proceedings. Hawaiian Electric 2020 test year rate case. On August 21, 2019, Hawaiian Electric filed an application for a general rate increase for its 2020 test year rate case, requesting an increase of $77.6 million over revenues at current effective rates (for a 4.1% increase in revenues), based on an 8.0% rate of return (which incorporates a ROACE of 10.5%). In September 2019, the PUC issued an order ruling that Hawaiian Electric’s application was complete as of the date of filing. It also ordered that an outside consultant, selected by the PUC, would independently conduct a management audit of Hawaiian Electric. The PUC expects the audit to conclude in May 2020. 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, that included the effects of the 2017 Tax Act, between Maui Electric and the Consumer Advocate. On March 18, 2019, the PUC issued its D&O that approved, with certain modifications, the stipulated settlement, which addressed all issues in the rate case. Revised tariffs reflecting a final increase of $12.2 million over revenues at current effective rates based on the approved 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 $454 million rate base became effective on June 1, 2019. Maui Electric’s ECRC tariff, resulting in the recovery of all fuel and purchased energy through the ECRC and the removal of the recovery of these costs from base rates, became effective on September 1, 2019. The ECRC reflects a 98%/2% fossil fuel generation cost risk-sharing split between ratepayers and Maui Electric, with an annual maximum increase or decrease to revenues to $0.6 million for the utility. Hawaii Electric Light 2019 test year rate case. 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%). On September 24, 2019, Hawaii Electric Light and the Consumer Advocate (Parties) filed a Stipulated Partial Settlement Letter (Partial Settlement) which documented agreements reached with the Consumer Advocate on all of the issues in the proceeding except for the ROACE, capital structure, amortization period for the state investment tax credit (ITC), and symmetric or asymmetric automatic annual target heat rate adjustment (collectively, remaining issues). On November 13, 2019, the PUC issued an interim decision maintaining Hawaii Electric Light’s revenues at current effective rates based on an interim revenue requirement of $387 million, average rate base of $534 million, and a 7.52% ROR on average rate base that incorporates a ROACE of 9.5% and 58.0% total equity ratio. On November 25, 2019, the Parties filed separate responses to the interim order, agreeing that: (1) they do not intend to withdraw from the Partial Settlement; (2) they waive their respective rights to an evidentiary hearing on the remaining contested issues; and (3) the remaining issues in the proceeding can be decided based on the evidence in the record and should be the subject of the filing of opening and reply briefs in February 2020. On December 13, 2019, the PUC issued an order approving the interim tariffs (effective January 1, 2020), removing the evidentiary hearing from 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) the procedural schedule, and scheduling the filing of supplemental evidence on January 17, 2020 and simultaneous opening and reply briefs on February 3, 2020 and February 24, 2020. There is no statutory deadline for the PUC to issue a final decision. Consolidating financial information. Consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the years ended December 31, 2019, 2018 and 2017, and as of December 31, 2019 and 2018. Hawaiian Electric 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 and (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). 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. 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Maui Electric 378,202 Other subsidiaries — Consolidating adjustments (548) [1] Hawaiian Electric Consolidated 2,545,942 $ Consolidating statement of income Year ended December 31, 2019 (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 $ 1,803,698 494,728 494,215 319,771 143,470 170,979 1,623,163 180,535 9,955 43,167 Hawaii Electric Light 364,590 84,565 90,989 76,091 41,812 33,787 327,244 37,346 816 — 141,416 48,052 85,875 30,449 35,365 341,157 37,045 1,216 — (2,287) (51,199) (422) (10,741) (127) (9,450) 3,666 183,837 25,917 157,920 — 342 27,341 5,990 21,351 534 445 29,129 6,398 22,731 381 157,920 20,817 22,350 1,080 — — Net income for common stock $ 156,840 20,817 22,350 Consolidating statement of comprehensive income Year ended December 31, 2019 — — — — — — — — — — — — — — — — — — — — — — — — — (548) — (43,167) [2] — 548 [1] — (43,167) — (43,167) — (43,167) — 720,709 633,256 481,737 215,731 240,131 2,291,564 254,378 11,987 — (2,836) (70,842) 4,453 197,140 38,305 158,835 915 157,920 1,080 (43,167) $ 156,840 (in thousands) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income for common stock $ 156,840 20,817 22,350 — (43,167) $ 156,840 Other comprehensive income (loss), net of taxes: Retirement benefit plans: Net gains (losses) arising during the period, net of taxes Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes Other comprehensive loss, net of tax benefits Comprehensive income attributable to common shareholder 5,249 373 (204) 9,550 1,455 1,182 (16,177) (1,378) (1,840) (1,152) (12) (174) $ 155,462 20,805 22,176 — — — — — (169) [1] 5,249 (2,637) [1] 9,550 2,992 [1] 186 (16,177) (1,378) (42,981) $ 155,462 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 Net income for common stock $ Hawaiian Electric $ 1,802,550 Hawaii Electric Light 375,493 Maui Electric 368,700 Other subsidiaries — Consolidating adjustments (218) [1] Hawaiian Electric Consolidated 2,546,525 $ 523,706 494,450 313,346 137,410 170,363 1,639,275 163,275 9,208 45,393 90,792 95,838 70,396 40,235 34,850 332,111 43,382 478 — (2,649) (52,180) (417) (11,836) 4,019 167,066 22,333 144,733 — 144,733 1,080 143,653 276 31,883 6,868 25,015 534 24,481 — 24,481 146,030 49,019 77,749 25,981 34,699 333,478 35,222 1,191 — (565) (9,550) 572 26,870 5,577 21,293 381 20,912 — 20,912 — — — — — — — — — — — — — — — — — — — — — — — — — (218) — (45,393) [2] — 218 [1] — (45,393) — (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 1,080 143,653 Consolidating statement of comprehensive income Year ended December 31, 2018 (in thousands) Net income for common stock 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 Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated $ 143,653 24,481 20,912 — (45,393) $ 143,653 (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) $ 144,971 111 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) Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income for common stock $ 119,951 20,146 17,911 — (38,057) $ 119,951 Other comprehensive income (loss), net of taxes: Derivatives qualified as cash flow hedges: Reclassification adjustment to net income, net of tax benefits Retirement benefit plans: Net gains arising during the period, net of taxes Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes Other comprehensive income (loss), net of taxes Comprehensive income attributable to common 454 — — — — 454 63,105 3,093 7,329 — (10,422) [1] 63,105 14,477 1,903 1,619 (78,724) (4,994) (9,003) (688) 2 (55) — — — — (3,522) [1] 14,477 13,997 [1] (78,724) 53 (688) (38,004) $ 119,263 shareholder $ 119,263 20,148 17,856 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating balance sheet December 31, 2019 (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 Restricted cash 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 Operating lease right-of-use 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 operating lease liabilities Current portion of long-term debt, net 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 Operating lease 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 Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated $ 42,598 4,765,362 (1,591,241) 165,137 3,381,856 5,310 3,387,166 591,969 5,606 1,313,727 (574,615) 9,993 754,711 114 754,825 — 3,612 1,161,199 (524,301) 17,944 658,454 1,532 659,986 — 2,239 30,749 27,700 105,454 83,148 18,396 69,003 34,876 88,334 27,689 6,885 123 8,000 24,520 17,071 1,907 8,901 8,313 3,725 1,641 1,797 — — 22,816 17,008 1,960 14,033 17,513 24,921 1,380 487,588 81,086 101,428 174,886 476,390 69,010 720,286 $ 5,187,009 1,537 109,163 15,493 126,193 962,104 386 98,817 17,215 116,418 877,832 $ 2,047,352 298,998 292,870 22,293 1,006,737 3,076,382 7,000 206,416 512,414 63,582 61,958 88,987 8,000 139,056 14,759 143,522 13,363 51,295 584,522 111,598 265,864 664,894 86,852 339,471 57,426 1,526,105 $ 5,187,009 94 13,995 — — 25,629 3,115 32,541 9,454 11,362 96,190 1,442 53,534 178,474 16,196 69,928 33,926 353,500 962,104 113 5,000 188,561 486,431 31 20,000 — 27,700 23,085 2,900 31,929 7,907 15,297 128,849 360 57,752 98,218 14,820 69,364 22,038 262,552 877,832 — — — — — — — — 101 — — — — — — — — — 101 — — — — 101 101 — — 101 — — — — — — — — — — — — — — — — — 101 — — — — — — — (591,969) [2] — — (35,700) [1] — — (10,695) [1] — — — — (46,395) — — — — (638,364) $ 51,816 7,240,288 (2,690,157) 193,074 4,795,021 6,956 4,801,977 — 11,022 30,872 — 152,790 117,227 11,568 91,937 60,702 116,980 30,710 623,808 176,809 684,370 101,718 962,897 6,388,682 $ (591,969) [2] $ 2,047,352 — — (591,969) 34,293 1,401,714 3,483,359 — — — (35,700) [1] — (46) [1] — — (10,649) [1] (46,395) — — — — — — — (638,364) $ 63,707 95,953 88,987 — 187,770 20,728 207,992 30,724 67,305 763,166 113,400 377,150 941,586 117,868 478,763 113,390 2,142,157 6,388,682 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 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 Total deferred credits and other liabilities Total capitalization and liabilities 1,410,043 $ 4,776,538 $ 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 8,781 726,092 5,314 115 3,171,669 726,207 576,838 — 16,732 125,960 88,060 21,962 54,262 30,291 23,214 60,093 15,623 26,483 17,051 3,131 11,027 7,155 5,212 3,177 420,574 88,859 537,708 69,749 607,457 $ 4,776,538 120,658 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 22,293 1,000,137 2,980,071 7,000 217,749 520,623 5,000 200,916 486,779 25,000 126,384 16,203 164,747 7,699 46,391 386,424 271,438 657,210 60,271 359,174 61,950 — 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 — 20,045 4,203 34,128 4,872 15,077 78,325 54,936 176,101 16,217 73,147 32,319 352,720 951,668 114 — — — — — — — — 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) Consolidating statements of changes in common stock equity Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated (in thousands) 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 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, 2019 Hawaiian Electric $ 1,799,787 119,951 (688) 14,000 Hawaii Electric Light 291,291 20,146 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) 1,957,641 156,840 295,874 20,817 (1,378) 35,501 (12) (1) 280,863 22,350 (174) 4,899 (101,252) (17,680) (15,068) 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) 101 (576,838) 1,957,641 — — — — (43,167) 156,840 186 (4,898) 32,748 (1,378) 35,501 (101,252) $ 2,047,352 298,998 292,870 101 (591,969) $ 2,047,352 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Consolidating statement of cash flows Year ended December 31, 2019 (in thousands) Cash flows from operating activities Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income $ 157,920 21,351 22,731 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 Income tax credits, net State refundable credit Allowance for equity funds used during construction Other Changes in assets and liabilities: Decrease in accounts receivable Decrease (increase) in accrued unbilled revenues Decrease (increase) in fuel oil stock Decrease (increase) in materials and supplies Decrease in regulatory assets Increase (decrease) in regulatory liabilities Increase (decrease) in accounts payable Change in prepaid and accrued income taxes, tax credits and revenue taxes Decrease in defined benefit pension and other postretirement benefit plans liability Change in other assets and liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Advances to affiliates Other Net cash used in investing activities Cash flows from financing activities Common stock dividends (43,204) 32,783 143,470 23,351 (13,547) 27,277 (6,245) (9,955) 298 25,376 4,912 (14,741) (4,585) 55,494 102 4,687 — — 41,812 4,810 (2,383) (13) (559) (816) (48) 3,326 (20) 2,126 (1,158) 9,218 (1,558) (3,160) — — 30,449 1,470 (354) (5) (1,565) (1,216) (50) 3,469 (381) 613 245 6,550 3,409 (3,578) (24,900) (893) (3,097) (3,033) (15,341) 340,119 (311,538) (27,700) 5,241 (762) (6,152) 65,121 (49,811) (8,000) 297 (653) (6,940) 51,097 (58,549) — 1,303 (333,997) (57,514) (57,246) (101,252) (17,680) (15,068) Preferred stock dividends of Hawaiian Electric and subsidiaries Proceeds from issuance of common stock (1,080) 35,500 (534) — Proceeds from issuance of long-term debt 190,000 72,500 (381) 4,900 17,500 (183,546) (70,000) (30,000) Repayment of long-term debt and funds transferred for repayment of long-term dent Net increase in short-term borrowings from non- affiliates and affiliate with original maturities of three months or less Proceeds from issuance of short-term debt Repayment of short-term debt Other Net cash provided by (used in) financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, January 1 Cash, cash equivalents and restricted cash, December 31 Less: Restricted cash 46,987 75,000 (50,000) (1,475) 10,134 16,256 16,732 32,988 (30,749) Cash and cash equivalents, December 31 $ 2,239 27,700 — — (126) 4,525 (1,624) 3,421 1,797 — 1,797 — — — (508) (16,222) (8,615) 15,623 7,008 (123) 6,885 116 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 101 101 — 101 (43,167) [2] $ 158,835 43,167 [2] (32,748) [2] — — — — — — — (11,215) [1] — — — — — 367 [1] — 11,215 [1] (32,381) — 35,700 [1] 4,533 [1],[2] 40,233 (37) 35 215,731 29,631 (16,284) 27,259 (8,369) (11,987) 200 20,956 4,511 (12,002) (5,498) 71,262 1,953 (2,051) (28,523) (4,448) (17,218) 423,956 (419,898) — 11,374 (408,524) 32,748 [2] (101,252) — (4,900) [2] — — (35,700) [1] — — — (7,852) — — — — — (1,995) 35,500 280,000 (283,546) 38,987 75,000 (50,000) (2,109) (9,415) 6,017 35,877 41,894 (30,872) 11,022 $ 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, 2018 (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 Income tax credits, net State refundable credit 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 regulatory liabilities 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 Advances from 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 the issuance of common stock Proceeds from the issuance of long-term debt Repayment of long-term debt Net decrease in short-term borrowings from non- affiliates and affiliate with original maturities of three months or less Proceeds from issuance of short-term debt Other Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, January 1 $ 144,733 25,015 21,293 (45,493) 27,408 137,410 20,956 (9,806) (83) (4,941) (9,208) 3,991 (51,656) (10,884) 10,710 (1,966) 12,192 26,540 14,748 — — 40,235 5,069 (341) (14) (547) (478) 348 (4,867) (1,111) (2,329) 886 71 5,380 6,104 — — 25,981 577 2,165 (2) (751) (1,191) 429 (8,614) (2,689) (1,443) 273 (3,011) 5,438 3,506 24,438 (2,118) 3,047 17,178 (8,056) 298,211 (760) 2,806 73,349 2,328 2,356 49,692 (305,703) (51,054) (58,507) — 3,226 — 1,182 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 — — (39) (9,939) (2,911) 6,332 3,421 — — (56) (11,879) 11,598 4,025 15,623 117 Cash and cash equivalents, December 31 $ 16,732 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 101 101 (45,393) [2] $ 145,648 45,393 [2] (100) (27,308) [2] — — — — — — — 14,220 [1] — — — — — — (331) [1] — (14,220) [1] (27,639) — (12,000) [1] 1,831 [1],[2] (10,169) 100 203,626 26,602 (7,982) (99) (6,239) (10,877) 4,768 (50,917) (14,684) 6,938 (807) 9,252 37,358 24,358 25,036 18,746 (17,114) 393,613 (415,264) — 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) Consolidating statement of cash flows Year ended December 31, 2017 (in thousands) Cash flows from operating activities Hawaiian Electric Hawaii Electric Light Maui Electric Other subsidiaries Consolidating adjustments Hawaiian Electric Consolidated Net income $ 121,031 20,680 18,292 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Adjustments to reconcile net income to net cash provided by operating activities Equity in earnings of subsidiaries Common stock dividends received from subsidiaries Depreciation of property, plant and equipment Other amortization Deferred income taxes Income tax credits, net State refundable credit 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 in regulatory liabilities 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 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 the issuance of common stock Proceeds from the issuance of long-term debt Repayment of long-term debt 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 Cash and cash equivalents, December 31 $ (38,157) 36,867 130,889 2,398 26,342 (35) (1,382) (10,896) 263 1,817 (11,355) (17,733) 1,603 (8,395) 2,552 23,519 — — 38,741 3,225 3,954 (16) (528) (554) 974 (359) (2,376) (469) (661) (4,007) 315 (3,547) — — 23,154 2,875 8,004 (1) (341) (1,033) — 45 (1,630) (2,241) (1,660) (4,854) 735 5,762 16,716 7,961 5,362 709 (18,765) 257,988 52 (748) (157) (569) 62,637 51,743 (281,752) (47,784) — (1,711) (283,463) 3,500 649 (47,329) (2,000) 400 (43,635) (48,929) (87,767) (24,796) (11,946) (1,080) 14,000 202,000 (534) — 28,000 (381) 4,800 85,000 (162,000) (28,000) (75,000) 3,499 (2,506) — (396) — (1,003) (33,854) (25,726) 1,470 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. 118 (38,057) [2] $ 121,946 38,057 [2] (36,742) [2] — — (263) [1] — — — — 1,411 [1] — — — — — — (177) [1] — (1,411) [1] (37,182) — (1,500) [1] 5,240 [1],[2] 3,740 (100) 125 192,784 8,498 38,037 (52) (2,251) (12,483) 1,237 2,914 (15,361) (20,443) (718) (17,256) 3,602 25,734 29,862 604 (21,493) 335,186 (376,865) — 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 (59,329) 61,388 2,059 (6,724) 10,749 4,025 4,284 2,048 6,332 — 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 and Comprehensive Income Data 2019 2018 2017 $ 233,632 $ 220,463 $ 207,255 32,922 266,554 16,830 1,610 18,440 248,114 23,480 224,634 19,275 20,877 6,507 7,687 4,943 10,762 653 2,074 72,778 103,009 21,272 15,306 10,239 8,760 5,512 4,490 1,204 15,586 185,378 112,034 23,061 88,973 29,406 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 82,509 (7,119) $ 118,379 $ 75,390 $ 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 66,997 (3,139) 63,858 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 Gain on sale of real estate 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 Other comprehensive income (loss), net of taxes Comprehensive income 119 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 Less: Gain on sale of real estate *Revenues-Bank Total interest expense Provision for loan losses Noninterest expense Less: Retirement defined benefits credit (expense)—other than service costs Add: Gain on sale of real estate *Expenses-Bank *Operating income-Bank Add back: Retirement defined benefits expense (credit)—other than service costs 2019 2018 2017 $ 266,554 $ 258,225 $ 236,078 72,778 (10,762) 328,570 18,440 23,480 185,378 472 (10,762) 217,008 111,562 (472) 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 (820) — 198,104 99,536 820 Income before income taxes $ 112,034 $ 106,578 $ 98,716 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 $143,467 and $142,057 at December 31, 2019 and 2018, 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 gains (losses) on securities Retirement benefit plans Total shareholder’s equity Total liabilities and shareholder’s equity $ 2,481 (11,143) 120 2019 2018 $ 129,770 48,628 $ 122,059 4,225 1,232,826 1,388,533 139,451 8,434 5,121,176 (53,355) 5,067,821 12,286 511,611 82,190 $ 7,233,017 $ 1,909,682 4,362,220 115,110 146,954 6,533,966 1 349,453 358,259 (8,662) 699,051 $ 7,233,017 $ (24,423) (13,645) 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2019 2018 $ $ $ $ 157,465 204,449 19,365 9,101 66,302 — 54,929 511,611 45,822 14,996 23,647 10,486 52,003 146,954 $ $ $ $ 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 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 decrease in premises and equipment, net was due to the sale of two building facilities. Investment securities.  The major components of investment securities were as follows: (dollars in thousands) December 31, 2019 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 Amortized cost Gross unrealized gains Gross unrealized losses Less than 12 months 12 months or longer Estimated fair value Number of issues Fair value Amount Number of issues Fair value Amount Gross unrealized losses $ 117,255 $ 652 $ (120) $ 117,787 2 $ 4,110 $ (11) 3 $ 27,637 $ (109) 1,024,892 58,694 28,597 6,000 1,363 — (4,507) 1,026,385 — — 60,057 28,597 $1,229,438 $ 8,015 $ (4,627) $ 1,232,826 19 — — 21 152,071 (819) — — — — $ 156,181 $ (830) 75 — — 78 318,020 (3,688) — — — — $ 345,657 $ (3,797) $ 139,451 $ 139,451 $ $ 4,087 4,087 $ $ (71) $ 143,467 (71) $ 143,467 1 1 $ 12,986 $ 12,986 $ $ (71) — (71) — $ $ — $ — $ — — 121 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Amortized cost Gross unrealized gains Gross unrealized losses Less than 12 months 12 months or longer Estimated 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 (1,330) 145 947,890 (30,212) 23,175 (369) — — — $ 178,068 $ (1,907) — 164 — — — — $1,066,295 $(32,411) $ 141,875 $ 141,875 $ $ 1,446 $ (1,264) $ 142,057 1,446 $ (1,264) $ 142,057 3 3 $ 29,814 $ 29,814 $ $ (400) (400) 2 2 $ $ 31,505 31,505 $ $ (864) (864) (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 bond Held-to-maturity Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2019, 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 2019, 2018 and 2017. 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. The contractual maturities of investment securities were as follows: December 31, 2019 (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 Amortized Cost Fair value $ 60,200 $ 75,694 53,225 15,427 60,249 77,225 53,540 15,427 204,546 206,441 1,024,892 1,026,385 $ 1,229,438 $ 1,232,826 $ $ 139,451 139,451 $ $ 143,467 143,467 122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The proceeds, gross gains and losses from sales of available-for-sale securities were as follows: Years ended December 31 2019 2018 2017 (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 $ 19.8 $ — $ 0.7 — — — — — — 2019 2018 2017 $ 31,847 $ 37,153 $ 28,398 1,074 609 425 $ 32,921 $ 37,762 $ 28,823 ASB pledged securities with a market value of approximately $546 million as of December 31, 2019 and 2018, 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, 2019 and 2018, securities with a carrying value of $130 million and $92 million, respectively, were pledged as collateral for securities sold under agreements to repurchase. Stock in FHLB. As of December 31, 2019 and 2018, ASB’s stock in FHLB was carried at cost ($8.4 million and $10.0 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, 2019, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2019, 2018 and 2017 based on its evaluation of the underlying investment. Future deterioration in the FHLB’s financial position and/or negative developments in any of the factors considered in ASB’s impairment evaluation may result in future impairment losses. Loans. 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 2019 2018 $ 2,178,135 $ 2,143,397 824,830 1,092,125 14,704 70,605 11,670 748,398 978,237 13,138 92,264 14,307 4,192,069 3,989,741 670,674 257,921 587,891 266,002 5,120,664 4,843,634 512 (53,355) (613) (52,119) $ 5,067,821 $ 4,790,902 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 property purchases, the loan-to-value ratio may not exceed 75% of the lower of the appraised value or purchase price at origination. 123 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ASB services real estate loans for investors (principal balance of $1.3 billion, $1.2 billion and $1.2 billion as of December 31, 2019, 2018 and 2017, respectively), which are not included in the accompanying balance sheets data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan servicing cost to expense as incurred. As of December 31, 2019 and 2018, ASB had pledged loans with an amortized cost of approximately $2.9 billion and $2.7 billion, respectively, as collateral to secure advances from the FHLB. As of December 31, 2019 and 2018, 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 $24.1 million and $24.0 million, respectively. As of December 31, 2019 and 2018, $18.0 million and $18.3 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. 124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The allowance for loan losses (balances and changes) and financing receivables were as follows: (in thousands) December 31, 2019 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 $ 1,976 $ 14,505 $ 6,371 $ 479 $ 2,790 $ (26) 854 (424) — — 548 (144) 17 678 (4) 229 (255) — — (693) 4 — — (1) $ 9,225 $ 16,769 $ 52,119 (6,811) (21,677) (28,662) 2,351 5,480 2,967 18,147 6,418 23,480 2,380 $ 15,053 $ 6,922 $ 449 $ 2,097 $ 3 $ 10,245 $ 16,206 $ 53,355 898 $ 2 $ 322 $ — $ — $ — $ 1,015 $ 454 $ 2,691 Charge-offs Recoveries Provision Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment $ $ $ Financing Receivables: Ending balance $ 2,178,135 1,482 $ $ 15,051 $ 6,600 824,830 $ 1,092,125 $ $ 449 14,704 $ $ 2,097 70,605 $ $ 3 $ 9,230 $ 15,752 $ 50,664 11,670 $ 670,674 $ 257,921 $ 5,120,664 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2018 Allowance for loan losses: $ 15,600 $ 1,048 $ 12,073 $ 3,091 $ — $ — $ 8,418 $ 507 $ 40,737 $ 2,162,535 $ 823,782 $ 1,080,052 $ 11,613 $ 70,605 $ 11,670 $ 662,256 $ 257,414 $ 5,079,927 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 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 $ 2,143,397 $ 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 $ $ $ 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, 2017 Allowance for loan losses: Beginning balance $ 2,873 $ 16,004 $ 5,039 $ 1,738 $ 6,449 $ Charge-offs Recoveries Provision Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Financing Receivables: (826) 157 698 2,902 1,248 1,654 $ $ $ Ending balance $ 2,118,047 — — (208) 15,796 65 15,731 733,106 $ $ $ $ (14) 308 2,189 7,522 647 6,875 913,052 $ $ $ $ (210) 482 — — (1,114) (1,778) $ $ $ $ 896 47 849 15,797 $ $ $ $ 4,671 $ 4,671 108,273 $ $ 12 — — — 12 $ 16,618 $ 6,800 $ 55,533 (4,006) (11,757) (16,813) 1,852 1,217 (3,613) 14,727 $ 10,851 $ 10,987 4,016 10,901 53,637 2,730 50,907 $ $ $ — $ — $ 694 $ 29 12 $ 10,157 $ 10,958 14,910 $ 544,828 $ 223,564 $ 4,671,577 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment $ 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 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 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 ASB 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: 2019 2018 Commercial real estate Commercial construction Commercial Total Commercial real estate Commercial construction Commercial Total Pass $ 756,747 $ 68,316 $ 621,657 $ 1,446,720 $ 658,288 $ 89,974 $ 547,640 $ 1,295,902 Special mention Substandard Doubtful Loss Total 4,451 63,632 — — — 2,289 — — 29,921 19,096 — — 34,372 85,017 — — 32,871 57,239 — — — 2,290 — — 11,598 28,653 — — 44,469 88,182 — — $ 824,830 $ 70,605 $ 670,674 $ 1,566,109 $ 748,398 $ 92,264 $ 587,891 $ 1,428,553 126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The credit risk profile based on payment activity for loans was as follows: (in thousands) December 31, 2019 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, 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 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 $ 2,588 $ 290 $ 1,808 $ 4,686 $ 2,173,449 $ 2,178,135 $ $ $ — 813 — — — 1,077 4,386 — — — — — 311 3,257 — 2,117 25 — — 172 2,907 — 824,830 824,830 2,930 1,089,195 1,092,125 25 — — 1,560 10,550 14,679 70,605 11,670 669,114 247,371 14,704 70,605 11,670 670,674 257,921 8,864 $ 3,858 $ 7,029 $ 19,751 $ 5,100,913 $ 5,120,664 $ 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 $ — — — — — — — — — — — — — — — — — — 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 Accruing loans 90 days or more past due Troubled debt restructured loans not included in nonaccrual loans 2019 2018 2019 2018 2019 2018 $ 11,395 $ 12,037 $ — $ — $ 9,869 $ 195 6,638 448 — — 5,947 5,113 — 6,348 436 — — 4,278 4,196 — — — — — — — — — — — — — — 853 10,376 2,644 — — 2,614 57 $ 29,736 $ 27,295 $ — $ — $ 26,413 $ 10,194 915 11,597 1,622 — — 1,527 62 25,917 127 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 2019 Unpaid principal balance Recorded investment Related allowance Recorded investment 2018 Unpaid principal balance Related allowance $ 6,817 $ 7,207 $ — $ 7,822 $ 8,333 $ 195 1,984 3,091 — — 1,948 2 14,037 8,783 853 10,089 — — — 6,470 505 26,700 15,600 1,048 12,073 3,091 — — 8,418 507 200 2,135 3,294 — — 2,285 2 15,123 8,835 853 10,099 — — — 6,470 505 26,762 16,042 1,053 12,234 3,294 — — 8,755 507 — — — — — — — — 898 2 322 — — — 1,015 454 2,691 898 2 322 — — — 1,015 454 — 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 $ 40,737 $ 41,885 $ 2,691 $ 39,697 $ 41,952 $ 2,222 128 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 2019 2018 2017 Average recorded investment Interest income recognized* Average recorded investment Interest income recognized* Average recorded investment Interest income recognized* $ 8,169 $ 907 $ 8,595 $ 445 $ 9,440 $ 16 2,020 2,662 — — 4,534 21 17,422 8,390 886 11,319 27 — — 6,990 360 27,972 16,559 902 13,339 2,689 — — 11,524 381 — 84 129 — — 276 4 1,400 359 37 567 — — — 132 24 1,119 1,266 37 651 129 — — 408 28 — 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 58 316 11 101 117 — — 54 — 599 493 54 251 97 — — 723 3 1,621 809 65 352 214 — — 777 3 $ 45,394 $ 2,519 $ 37,990 $ 1,562 $ 36,538 $ 2,220 * 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 five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral 129 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2019, 2018, and 2017 were as follows: Years ended December 31, 2019 December 31, 2018 (dollars in thousands) Real estate: Residential 1-4 family Commercial real estate Home equity line of credit Residential land Commercial construction Residential construction Commercial Consumer Year ended (dollars in thousands) 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 (as of period end)1 Related allowance (as of period end) Outstanding recorded investment (as of period end)1 Related allowance (as of period end) Number of contracts Number of contracts 11 — 3 3 — — 8 — 25 $ 1,770 $ 190 — 442 1,086 — — 5,523 — $ 8,821 $ — 73 — — — 417 — 680 3 — 53 2 — — 12 — 70 $ 566 $ — 6,659 1,338 — — 2,165 — $ 10,728 $ 26 — 578 — — — 211 — 815 December 31, 2017 Outstanding recorded investment (as of period end)1 Related allowance (as of period end) Number of contracts 3 — 44 1 — — 8 1 $ 469 $ — 2,791 92 — — 525 58 57 $ 3,935 $ 65 — 545 — — — 250 29 889 1 The period end balances reflect all paydowns and charge-offs since the modification period. TDRs fully paid off, charged- off, or foreclosed upon by period end are not included. 130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Loans modified in TDRs that experienced a payment default of 90 days or more in 2019, 2018, and 2017 and for which the payment default occurred within one year of the modification, were as follows: Years ended December 31 (dollars in thousands) 2019 2018 2017 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 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, 2019 and 2018. The Company had $3.5 million and $4.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2019 and 2018, 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 $277.1 million, $112.2 million and $128.0 million of proceeds from the sale of residential mortgages in 2019, 2018, and 2017, respectively, and recognized gains on such sales of $4.9 million, $1.5 million, and $2.2 million in 2019, 2018, and 2017, respectively. Repurchased mortgage loans were nil for 2019, 2018 and 2017. The repurchase reserve was $0.1 million as of December 31, 2019, 2018 and 2017. Mortgage servicing fees, a component of other income, net, were $3.0 million for the years ended December 31, 2019, 2018, and 2017. Changes in the carrying value of MSRs were as follows: (in thousands) December 31, 2019 December 31, 2018 Gross carrying amount1 Accumulated amortization1 Valuation allowance Net carrying amount $ $ 21,543 18,556 $ $ (12,442) (10,494) $ $ — $ — $ 9,101 8,062 1 Reflects impact of loans paid in full. 131 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 2019 2018 2017 $ 8,062 $ 8,639 $ 2,987 (1,948) — — 1,045 (1,622) — — 9,373 1,239 (1,973) — — 9,101 8,062 8,639 — — — — — — — — — — — — Net carrying value of mortgage servicing rights $ 9,101 $ 8,062 $ 8,639 The estimated aggregate amortization expenses of MSRs for 2020, 2021, 2022, 2023 and 2024 are $1.5 million, $1.2 million, $1.1 million, $0.9 million and $0.8 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 uses a present value cash flow model 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 2019 2018 $ 1,276,437 $ 1,188,514 3.96% 9.3% 11.4% 3.98% 10.0% 6.5% 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 2019 2018 $ (950) $ (1,947) (102) (202) (250) (566) (139) (275) 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. 132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2019 Weighted- average stated rate Amount 2018 Weighted- average stated rate Amount 0.09% $ 2,379,522 0.07% $ 2,322,552 0.09 — — 0.69 1.42 1,062,122 977,459 932,223 150,751 769,825 0.09 — — 0.63 1.61 1,055,019 932,608 868,119 152,713 827,841 0.24% $ 6,271,902 0.27% $ 6,158,852 As of December 31, 2019 and 2018, time certificates of $100,000 or more totaled $456.5 million and $500.2 million, respectively. The approximate scheduled maturities of time certificates outstanding at December 31, 2019 were as follows: (in thousands) Thereafter 2020 $ 2021 2022 2023 2024 $ 503,214 112,632 87,132 29,134 35,253 2,460 769,825 Overdrawn deposit accounts are classified as loans and totaled $2.4 million and $2.1 million at December 31, 2019 and 2018, respectively. 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. 2019 2018 2017 $ 12,675 $ 11,044 $ 1,904 953 1,298 1,639 602 706 7,687 1,567 168 238 $ 16,830 $ 13,991 $ 9,660 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, 2019 December 31, 2018 Gross amount of recognized liabilities Gross amount offset in the Balance Sheets Net amount of liabilities presented in the Balance Sheets $ 115 65 — $ — 115 65 $ 133 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in millions) Commercial account holders December 31, 2019 December 31, 2018 Gross amount not offset in the Balance Sheets Net amount of  liabilities presented in the Balance Sheets Financial instruments Cash collateral pledged $ 115 $ 65 130 $ 92 — — 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. 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: December 31 2019 2018 2017 65 99 152 0.75% 0.71% 1 $ $ $ 141 98 141 0.65% 0.26% 1 $ $ $ $ $ $ 2019 115 80 115 0.98% 0.96% 1 2018 Maturity (dollars in thousands) Overnight 1 to 29 days 30 to 90 days Over 90 days Repurchase liability Weighted- average interest rate Collateralized by  mortgage-backed securities and federal agency obligations at fair value plus  accrued interest Repurchase liability Weighted- average interest rate Collateralized by  mortgage-backed securities and federal agency obligations at fair value plus  accrued interest $ 115,110 0.98% $ 129,527 $ 65,040 0.75% $ 92,290 — — — — — — — — — — — — — — — — — — $ 115,110 0.98% $ 129,527 $ 65,040 0.75% $ 92,290 Advances from Federal Home Loan Bank. FHLB advances were nil and $45 million as of December 31, 2019 and 2018. 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, 2019 and 2018, ASB’s available FHLB borrowing capacity was $2.3 billion, and $2.0 billion, respectively. In February 2020, the FHLB of Des Moines notified ASB that certain assets would no longer qualify as collateral for FHLB advances, reducing ASB's total FHLB borrowing capacity to approximately $1.5 billion. The notice included high-quality home equity lines of credit and was technical in nature and unrelated to the credit quality of the home equity loans, of which approximately 54% are in first lien position. ASB is working with the FHLB to understand the nature of the disqualification of those assets as collateral and re-establishing eligibility. 134   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, 2019 and 2018. Common stock equity. ASB is regulated and supervised by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ASB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt 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, 2019, 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, 2019, and 2018 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, 2019 Tier 1 leverage Common equity tier 1 Tier 1 capital Total capital December 31, 2018 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 641,547 641,547 641,547 696,643 606,291 606,291 606,291 660,151 9.06% 13.18% 13.18% 14.31% 8.70% 12.80% 12.80% 13.93% 283,122 219,071 292,094 389,459 278,811 213,190 284,253 379,004 4.00% 4.50% 6.00% 8.00% 4.00% 4.50% 6.00% 8.00% 353,903 316,435 389,459 486,823 348,514 307,941 379,004 473,755 5.00% 6.50% 8.00% 10.00% 5.00% 6.50% 8.00% 10.00% In 2019, ASB paid cash dividends of $56.0 million to HEI, compared to cash dividends of $50.0 million in 2018. The FRB and OCC approved the dividends. Related-party transactions. HEI charged ASB $2.3 million, $2.2 million and $2.1 million for general management and administrative services in 2019, 2018 and 2017, 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. 135 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income. Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. The notional amount and fair value of ASB’s derivative financial instruments were as follows: December 31 (in thousands) Interest rate lock commitments Forward commitments 2019 2018 Notional amount Fair value Notional amount Fair value $ 23,171 $ 29,383 297 $ (42) 10,180 $ 10,132 91 (43) 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 2019 2018 Asset derivatives Liability derivatives Asset derivatives Liability derivatives $ $ 297 3 300 $ $ — $ 45 45 $ 91 — 91 $ $ — 43 43 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 2019 2018 2017 $ $ 206 1 207 $ $ (40) $ (19) (59) $ (290) 153 (137) 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. 136 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 2019 2018 $ 1,290,854 $ 1,242,804 484,806 70,088 21,131 11,912 515,058 70,292 17,552 13,340 $ 1,878,791 $ 1,859,046 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, 2019, 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.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) raised the minimum reserve ratio for the Deposit Insurance Fund to 1.35 percent but required the Federal Deposit Insurance Corporation (FDIC) to offset the effect of the increase in the minimum reserve ratio on small institutions (generally insured depository institutions with total consolidated assets of $10 billion or less) when setting assessments. In September 2018, the reserve ratio reached 1.36 percent and the FDIC awarded the small institutions an assessment credit, which was applied to the 2019 second and third quarter assessments for these banks. For the years ended December 31, 2019, 2018 and 2017 ASB’s FDIC insurance expenses were $1.2 million, $2.5 million and $2.6 million, respectively. Note 5 · Short-term borrowings Commercial paper and bank term loan.  As of December 31, 2019 and 2018, HEI had $97 million and $49 million of commercial paper outstanding, with a weighted-average interest rate of 2.3% and 2.9%, respectively. As of December 31, 2019 and 2018, Hawaiian Electric had $39 million of and no commercial paper outstanding, respectively. Additionally, on December 23, 2019, Hawaiian Electric entered into a 364-day, $100 million term loan credit agreement that matures on December 21, 2020. 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, amended revolving unsecured credit agreement. Hawaiian Electric drew the first $50 million on December 23, 2019 and has until March 23, 2020, to draw the remaining $50 million, if needed. The weighted-average interest rate of Hawaiian Electric’s outstanding commercial paper and bank term loan as of December 31, 2019 was 2.3%. As of December 31, 2019 and 2018, HEI had three letters of credit outstanding in the aggregate amount of $6 million and $7 million, respectively, on behalf of Hamakua Energy. 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 Credit 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. As of December 31, 2019 and December 31, 2018, no amounts were outstanding under the Credit Facilities. None of the facilities are collateralized. Under the Credit 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 Credit Facilities contain provisions for pricing adjustments in the event of a long-term ratings change based on the respective Credit 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 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and conditions customary for facilities of this type. The Credit 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 Credit 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 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 Hamakua Energy 4.02% notes, due 2030, secured by real and personal property of Hamakua Energy, LLC Mauo LIBOR + 1.375% loan, due 2022 Less unamortized debt issuance costs 2019 2018 $ $ 1,497,667 150,000 50,000 50,000 50,000 100,000 59,699 9,349 (2,350) 1,964,365 $ $ 1,418,802 150,000 50,000 50,000 50,000 100,000 63,438 — (2,599) 1,879,641 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, 2019, the aggregate principal payments required on the Company’s long-term debt for 2020 through 2024 are $102 million in 2020, $54 million in 2021, $213 million in 2022, $154 million in 2023 and $5 million in 2024. As of December 31, 2019, the aggregate payments of principal required on the Utilities’ long-term debt for 2020 through 2024 are $96 million in 2020, nil in 2021, $52 million in 2022, $100 million in 2023 and nil in 2024. 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. 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 Electric Light and Maui Electric, of certain financial ratios generally consistent with those in Hawaiian Electric’s existing, amended revolving unsecured credit agreement. Changes in long-term debt. 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. In October 2019, the loan was amended to extend the maturity date to March 31, 2022 and to revise certain other defined terms. The loan bears interest at LIBOR plus 1.375%. As of December 31, 2019, $9 million was outstanding under the facility. The loan is guaranteed by HEI 138 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 13, 2019, 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 Unsecured Notes): Aggregate principal amount Fixed coupon interest rate Maturity date Principal amount by company: Hawaiian Electric Hawaii Electric Light Maui Electric Series 2019A $50 million 4.21% May 15, 2034 $30 million $10 million $10 million The Unsecured 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. The Unsecured 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. On May 15, 2019, proceeds from the sale were applied to redeem the Utilities’ 2004 junior subordinated deferrable interest debentures at par value: 2004 Junior subordinated deferrable interest debentures redeemed Aggregate principal amount Fixed coupon interest rate Maturity date Principal amount by company: Hawaiian Electric Hawaii Electric Light Maui Electric $51.5 million 6.50% May 15, 2034 $31.5 million $10 million $10 million On July 18, 2019, the Department of Budget and Finance of the State of Hawaii (DBF) for the benefit of Hawaiian Electric and Hawaii Electric Light, issued, at par: Refunding Series 2019 Special Purpose Revenue Bonds Aggregate principal amount Fixed coupon interest rate Maturity date DBF loaned the proceeds to: Hawaiian Electric Hawaii Electric Light $150 million 3.20% July 1, 2039 $90 million $60 million On July 26, 2019, proceeds from the sale were applied to redeem at par, bonds previously issued by the DBF for the benefit of Hawaiian Electric and Hawaii Electric Light: Series 2009 Special Purpose Revenue Bonds Redeemed Aggregate principal amount Fixed coupon interest rate Maturity date Principal amount by company: Hawaiian Electric Hawaii Electric Light $150 million 6.50% July 1, 2039 $90 million $60 million 139 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) On October 10, 2019, the DBF for the benefit of Hawaiian Electric, Hawaii Electric Light and Maui Electric, issued, at par: Series 2019 Special Purpose Revenue Bonds Aggregate principal amount Fixed coupon interest rate Maturity date DBF loaned the proceeds to: Hawaiian Electric Hawaii Electric Light Maui Electric $80 million 3.50% October 1, 2049 $70 million $2.5 million $7.5 million Proceeds from the Series 2019 Special Purpose Revenue Bonds will be used only to finance capital expenditures, including reimbursements to the Companies for previously incurred approved capital expenditures. The undrawn funds are deposited with a trustee and earn interest at market rates. As of December 31, 2019, Hawaiian Electric and Hawaii Electric Light had $30.8 million and $0.1 million of undrawn funds remaining with the trustee, respectively. Maui Electric received all bond proceeds at closing and had no undrawn funds as of December 31, 2019. Undrawn funds are included in restricted cash in the consolidated balance sheets. (See Note 1). On December 31, 2019, Hawaiian Electric and Maui Electric wired approximately $84 million to pay off the Series 2012B senior note ($62 million for Hawaiian Electric, $20 million for Maui Electric, and approximately $2 million of accrued interest), which matured on January 1, 2020. Note 7 · Shareholders’ equity Reserved shares. As of December 31, 2019, HEI had reserved a total of 18.5 million 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: (in thousands) HEI Consolidated Hawaiian Electric Consolidated Net unrealized gains (losses) on securities Unrealized gains (losses) on derivatives Retirement benefit plans Unrealized gains (losses) on derivatives Retirement benefit plans AOCI AOCI Balance, December 31, 2016 $ (7,931) $ (454) $ (24,744) $ (33,129) $ (454) $ 132 $ (322) Current period other comprehensive income (loss) and reclassifications, net of taxes Reclass of AOCI for tax rate reduction impact1 Balance, December 31, 2017 Current period other comprehensive income (loss) and reclassifications, net of taxes Balance, December 31, 2018 Current period other comprehensive income (loss) and reclassifications, net of taxes (4,370) 454 2,544 (1,372) 454 (1,142) (688) (2,650) (14,951) (9,472) (24,423) — — (4,790) (7,440) (26,990) (41,941) (436) (436) 1,239 (8,669) (25,751) (50,610) 26,904 (1,177) 4,844 30,571 — — — — — (209) (209) (1,219) (1,219) 1,318 1,318 99 99 (1,378) (1,378) Balance, December 31, 2019 $ 2,481 $ (1,613) $ (20,907) $ (20,039) $ — $ (1,279) $ (1,279) 1 The Company and the Utilities adopted ASU No. 2018-02 as of the beginning of the fourth quarter of 2017 and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. Other than this reclassification to retained earnings, the Company and the Utilities release the income tax effects in AOCI from AOCI when the specific AOCI items (e.g., on a security-by-security basis for ASB’s gains/losses on investment securities) are included in net income. 140 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Reclassifications out of AOCI were as follows: Years ended December 31 (in thousands) HEI consolidated Net realized gains on securities included in net income 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 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 Amount reclassified from AOCI 2019 2018 2017 Affected line item in the Statement of  Income/Balance Sheet $ (478) $ — $ — Revenues-bank (gains on sale of investment securities, net) — — 454 Property, plant and equipment-electric utilities (2017) 10,107 21,015 15,737 See Note 10 for additional details (16,177) 8,325 (78,724) See Note 10 for additional details $ (6,548) $ 29,340 $ (62,533) $ — $ — $ 454 Property, plant and equipment (2017) 9,550 19,012 14,477 See Note 10 for additional details (16,177) 8,325 (78,724) See Note 10 for additional details Total reclassifications $ (6,627) $ 27,337 $ (63,793) Note 8 · Leases The Company adopted ASU No. 2016-02 and related amendments on January 1, 2019, and used the effective date as the date of initial application. The Company elected the practical expedient package under which the Company did not 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 Company elected the short-term lease recognition exemption for all of its leases that qualify, and accordingly, does not recognize lease liabilities and ROU assets for all leases that have lease terms that are 12 months or less. The amounts related to short-term leases are not material. The Company elected the practical expedient to not separate lease and non-lease components for its real estate and equipment and fossil fuel and renewable energy PPAs. The Company elected the practical expedient to not assess all existing land easements that were not previously accounted for in accordance with ASC 840. The Company leases certain real estate and equipment for various terms under long-term operating lease agreements. The agreements expire at various dates through 2054 and provide for renewal options up to 10 years. The periods associated with the renewal options are excluded for the purpose of determining the lease term unless the exercise of the renewable option is reasonably certain. In the normal course of business, it is expected that many of these agreements will be replaced by similar agreements. Certain real estate leases require the Company to pay for operating expenses such as common area maintenance, real estate taxes and insurance, which are recognized as variable lease expense when incurred and are not included in the measurement of the lease liability. Additionally, the Utilities contract with independent power producers to supply energy under long-term power purchase agreements. Certain PPAs are treated as operating leases under the new standard because the Company elected the practical expedient package under which prior conclusions about lease identification were not reassessed. The fixed capacity payments under the PPAs are included in the lease liability, while the variable lease payments (e.g., payments based on kWh) are excluded from the lease liability. Several as-available PPAs have variable-only payment terms based on production. For PPAs with no minimum lease payments, the Utilities do not recognize any lease liabilities or ROU assets, and the related costs are reported as variable lease costs. 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In August 2019, Hawaiian Electric entered into a lease agreement for a total office space of approximately 195,000 square feet in downtown Honolulu to lower costs and bring together office workers currently in separate leased buildings. The lease consists of two different phases with commencement dates of January 2020 and January 2021, respectively, and is an operating lease for a term of 12 years with various options to extend up to 10 years. Annual base rent expense for each phase is approximately $1.9 million and $1.7 million, respectively, and the operating lease liability recorded upon commencement of the first phase of the lease was $21 million and the operating lease liability to be recorded upon commencement of the second phase is approximately $19 million. In addition to the annual base rent payments that are included in the lease liability, there are additional payments for operating expenses, which are recognized as variable lease cost when incurred. These payments are related to operating expenses, such as common area maintenance, various taxes and insurance. Under the terms of the lease, Hawaiian Electric is entitled to receive up to $5.0 million and $4.6 million in reimbursements for various office improvements for each phase, respectively. The amounts are to be included as a reduction to the initial measurement of the ROU asset on each respective commencement date, and will be subsequently adjusted if the actual reimbursements are different from the initial amounts previously recognized. The Utilities’ lease payments for each operating lease agreement were discounted using its estimated unsecured borrowing rates for the appropriate term, reduced for the estimated impact of collateral, which is a reduction of approximately 15 basis points. ASB’s lease payments for each operating lease agreement were discounted using Federal Home Loan Bank of Des Moines (FHLB) fixed rate advance rates, which are collateralized, for the appropriate term. The FHLB is ASB’s primary wholesale funding source and can provide collateralized borrowing rates for various terms starting at overnight borrowings to 30-year borrowing terms. Amounts related to the Company’s total lease cost and cash flows arising from lease transaction are as follows: Year ended December 31, 2019 (dollars in thousands) Operating lease cost Variable lease cost Total lease cost Other information HEI consolidated Hawaiian Electric consolidated Other leases PPAs classified as leases Total Other leases PPAs classified as leases Total $ 10,265 $ 63,319 $ 73,584 $ 4,955 $ 63,319 $ 68,274 13,034 192,138 205,172 10,272 192,138 202,410 $ 23,299 $ 255,457 $278,756 $ 15,227 $ 255,457 $270,684 Cash paid for amounts included in the measurement of lease liabilities—Operating cash flows from operating leases Weighted-average remaining lease term—operating leases (in years) Weighted-average discount rate—operating leases $ 10,447 $ 62,594 $ 73,041 $ 5,768 $ 62,594 $ 68,362 6.5 3.50% 2.8 3.5 4.08% 3.96% 4.5 4.11% 2.8 2.9 4.08% 4.08% The following table summarizes the maturity of our operating lease liabilities as of December 31, 2019: (in millions) HEI consolidated Hawaiian Electric consolidated PPAs classified as leases Other leases Total Other leases PPAs classified as leases Total 2020 $ 2021 2022 2023 2024 12 $ 10 6 5 4 9 46 (5) 63 $ 63 42 — — — 168 (9) $ 41 $ 159 $ Thereafter Total lease payments Less: Imputed interest Total present value of lease payments1 75 73 48 5 4 9 214 (14) 200 $ $ 7 $ 63 $ 5 3 2 1 2 20 (2) 18 $ 63 42 — — — 168 (9) 159 $ 70 68 45 2 1 2 188 (11) 177 1 The fixed capacity payment related to the existing PPA with PGV, which will expire on December 31, 2027, is not included as a lease liability as of December 31, 2019 as the facility has been offline since May 2018 due to lava flow on Hawaii Island. The annual capacity payment is approximately $7 million. The lease liability will be remeasured when PGV is back in service. 142 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The future minimum lease obligations under operating leases in effect as of December 31, 2018, having a term in excess of one year as determined prior to the adoption of ASC 842 are as follows: (in millions) HEI consolidated Hawaiian Electric consolidated Other leases PPAs classified as leases Total Other leases PPAs classified as leases Total 2019 $ 11 $ 63 $ 2020 2021 2022 2023 Thereafter Total lease payments $ 9 8 5 4 12 49 $ 63 63 42 — — 74 72 71 47 4 12 $ 6 $ 63 $ 6 5 2 2 3 63 63 42 — — 69 69 68 44 2 3 231 $ 280 $ 24 $ 231 $ 255 HEI’s consolidated operating lease expense prior to the adoption of ASC 842 was $21 million and $20 million in 2018 and 2017, respectively. The Utilities’ operating lease expense prior to the adoption of ASC 842 was $11 million each year for 2018 and 2017. Note 9· Revenues 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 2019, 2018 and 2017, the Utilities’ revenues include recovery of revenue taxes of approximately $226 million, $226 million and $202 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, 2019 and 2018, the Utilities had recorded $132 million and $130 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 and Comprehensive Income 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 and Comprehensive 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 obligated to 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. Under the decoupling tariff approved in 2011, the prior year accrued RBA revenues 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. 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., 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 12 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. 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 the 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. 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. 144 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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: (in thousands) Revenues from contracts with customers Year ended December 31, 2019 Year ended December 31, 2018 Electric utility Bank Other Total Electric utility Bank Other Total Electric energy sales - residential $ 807,652 $ — $ — $ 807,652 $ 801,846 $ — $ — $ 801,846 Electric energy sales - commercial 846,110 — 905,308 16,296 — — — 46,659 — — — — 846,110 853,672 — 905,308 16,296 46,659 894,770 17,243 — — — 47,300 — — — — 853,672 894,770 17,243 47,300 2,575,366 46,659 — 2,622,025 2,567,531 47,300 — 2,614,831 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 (54,101) — Bank interest and dividend income — 266,554 Other bank noninterest income Other Total revenues from other sources — 24,677 15,357 — (29,424) 281,911 Total revenues $ 2,545,942 $ 328,570 $ — — — 89 89 89 (54,101) 266,554 15,357 24,766 (37,687) — — 258,225 — 16,681 8,750 — 252,576 (21,006) 266,975 $ 2,874,601 $ 2,546,525 $ 314,275 $ — — — 49 49 49 (37,687) 258,225 8,750 16,730 246,018 $ 2,860,849 Timing of revenue recognition Services/goods transferred at a point in time Services/goods transferred over time Total revenues from contracts with customers $ — $ 46,659 $ — $ 46,659 $ — $ 47,300 $ — $ 47,300 2,575,366 — — 2,575,366 2,567,531 — — 2,567,531 $ 2,575,366 $ 46,659 $ — $ 2,622,025 $ 2,567,531 $ 47,300 $ — $ 2,614,831 There are no material contract assets or liabilities associated with revenues from contracts with customers existing at December 31, 2018 or December 31, 2019. 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, 2019, 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. 145 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 10 · Retirement benefits Defined benefit plans. Substantially all of the employees of HEI and the Utilities participate in the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI Pension Plan). Substantially all of the employees of ASB 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 until the various credit bases are fully recognized. Each participating employer reserves the right to terminate its participation in the Hawaiian Electric Benefits Plan at any time. Balance sheet recognition of the funded status of retirement plans. Employers must recognize on their balance sheets the funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity (using the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO), to calculate the funded status). The PUC allowed the Utilities to adopt pension and OPEB tracking mechanisms in previous rate cases. The amount of the net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in each rate case. Under the Utilities’ tracking mechanisms, any actual costs determined in accordance with GAAP that are over/ under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit expenses (except for executive life and nonqualified pension plan expenses, which amounted to $1.1 million and $1.0 million in 2019 and 2018, 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 $(21.8) million pretax and $11.2 million pretax for 2019 and 2018, respectively). 146 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 contribution 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. Future decisions in rate cases could further impact funding amounts. 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 2019 and 2018 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, 2019 and 2018 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) gains 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 $ $ $ $ $ $ $ 2019 2018 Pension benefits Other benefits Pension benefits Other benefits $ 1,991,384 $ 188,666 $ 2,094,356 $ 212,601 62,135 84,267 224,421 — (83,924) 2,278,283 1,479,067 354,072 48,629 — (82,568) 1,799,200 2,209 8,004 25,998 2,351 (11,589) 215,639 173,693 35,525 — 2,351 (10,738) 200,831 68,987 77,374 (171,226) — (78,107) 1,991,384 1,618,703 (101,406) 38,496 — (76,726) 1,479,067 2,721 7,933 (25,977) 2,505 (11,117) 188,666 193,995 (11,846) — 2,505 (10,961) 173,693 (479,083) $ (14,808) $ (512,317) $ (14,973) 19,396 $ — $ 10,930 $ — (498,479) (14,808) (523,247) (479,083) $ (14,808) $ (512,317) $ 536,920 $ 1,962 $ 527,830 $ 42 (15,479) (17,662) 503,821 (474,628) 29,193 503,813 8 503,821 (474,628) 29,193 (7,677) 21,516 $ $ $ 1,806 13 2,829 6,610 (7,458) (848) $ $ 11,707 (5,097) 6,610 (7,458) (848) 219 (629) $ 42 (30,084) 39,132 536,920 (498,944) 37,976 536,954 (34) 536,920 (498,944) 37,976 (10,023) 27,953 $ $ $ (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) As of December 31, 2019 and 2018, the other postretirement benefit plans shown in the table above had ABOs in excess of plan assets. 147 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) 2019 2018 Pension benefits Other benefits Pension benefits Other benefits $ 1,837,653 $ 181,162 $ 1,928,648 $ 204,644 60,461 77,851 212,310 — (77,060) (311) 2,110,904 1,343,113 326,204 47,808 — (76,581) (127) 2,191 7,673 25,123 2,311 (11,382) (5) 207,073 170,862 34,928 — 2,311 (10,532) (5) 67,359 71,294 (158,258) — (71,535) 145 1,837,653 1,468,403 (91,836) 37,550 — 2,704 7,628 (25,330) 2,472 (10,958) 2 181,162 190,814 (11,625) — 2,472 (71,060) (10,801) 56 2 1,640,417 197,564 1,343,113 170,862 $ (470,487) $ (9,509) $ (494,540) $ (10,300) (518) (715) (512) (669) $ $ $ $ (469,969) (8,794) (494,028) (9,631) (470,487) $ (9,509) $ (494,540) $ (10,300) 502,189 $ 1,551 $ 493,464 $ (7) (14,658) (9,446) 478,078 (474,628) 3,450 478,069 $ $ 9 478,078 (474,628) 3,450 (888) 1,803 — 2,376 5,730 (7,458) (1,728) $ 10,815 $ (5,085) 5,730 (7,458) (1,728) 445 (8) (27,302) 36,035 502,189 (498,944) 3,245 502,173 $ $ 16 502,189 (498,944) 3,245 (836) 839 1,803 (98) (993) 1,551 (4,929) (3,378) 8,439 (6,888) 1,551 (4,929) (3,378) 870 AOCI debit/(credit), net of taxes (benefits), December 31 $ 2,562 $ (1,283) $ 2,409 $ (2,508) As of December 31, 2019 and 2018, the other postretirement benefit plan shown in the table above had ABOs in excess of plan assets. Pension benefits. In 2019, investment returns were higher than assumed rates and together with updates to mortality assumptions projected generationally, improved the funded position. Actuarial losses due to demographic experience, including assumption changes, the most significant of which was the decrease in the discount rate used to measure PBO compared to the prior year, partially offset the improvement in funded position. In 2018, actuarial gains due to demographic experience, including assumption changes, the most significant of which was the increase in the discount rate used to measure PBO and updates to mortality assumptions projected generationally improved funded position but investment losses more than offset any improvement resulting in a deterioration in the funded position. 148 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Other benefits. In 2019, investment returns were higher than assumed rates, which improved funded position and predominately offset the actuarial losses due to demographic experience, including assumption changes, the most significant of which was the decrease in the discount rate used to measure APBO. Updates to the per capita claims costs also contributed to a deterioration in the funded position. In 2018, actuarial gains due to demographic experience, including assumption changes, the most significant of which was the increase in the discount rate used to measure APBO along with updates to mortality assumptions projected generationally and per capita claims costs improved funded position beyond the deterioration caused by investment losses. The dates used to determine retirement benefit measurements for the defined benefit plans and OPEB were December 31 of 2019, 2018 and 2017. 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 and pension liability volatility by an appropriate allocation to fixed income securities. In order to reduce the level of portfolio risk and volatility in returns, efforts have been made to diversify the plans’ investments by asset class, geographic region, market capitalization and investment style. The asset allocation of defined benefit retirement plans to equity and fixed income securities (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 2019 2018 Target Range 2019 2018 Target Range 71% 29 100% 69% 31 100% 70% 30 100% 65-75 25-35 71% 29 100% 70% 30 100% 70% 30 100% 65-75 25-35 1 Asset allocation (excluding cash) is applicable to only HEI and the Utilities. As of December 31, 2019 and 2018, nearly all of ASB’s pension assets were invested in fixed income securities. 2 Asset allocation (excluding cash) is applicable to only HEI and the Utilities. ASB does not fund its other benefits. 149 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Assets held in various trusts for the retirement benefit plans are measured at fair value on a recurring basis and were as follows: (in millions) December 31 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 Level 1 Level 2 Level 3 $ 470 610 $ — $ — $ $ — $ — Equity securities 2019 $ 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 Equity securities Equity index and exchange-traded funds 2018 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 $ $ $ 470 610 — 1,080 123 — 123 — $ 507 348 — 855 123 — 123 — 78 1,158 353 245 598 39 1,795 4 1,799 507 348 65 920 310 208 518 36 1,474 5 1,479 — — — 230 — 230 — — — — 187 — 187 — — — — — — — — — $ — — — — — — — — $ 61 69 11 141 52 4 56 4 201 — 201 65 42 10 $ 61 69 — 130 49 — 49 — $ 65 42 — 117 107 45 — 45 — $ 152 $ 47 4 51 5 173 1 174 — — — 2 — 2 — 2 — — — — — — — $ — — — — 2 — 2 — 2 — — — — — — — $ — $ 1,203 $ 230 $ $ 179 $ $ — $ — $ $ — $ — $ 978 $ 187 $ 150 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) 2019 Non U.S. equity funds (a) Fixed income investments (b) Cash equivalents (c) 2018 Non U.S. equity funds (a) Fixed income investments (b) Cash equivalents (c) $ $ $ $ 78 245 39 362 65 208 36 309 Daily-Monthly Monthly Daily 5-30 days 15 days 0-1 day Daily-Monthly Monthly Daily 5-30 days 15 days 0-1 day $ $ $ $ 11 4 4 19 10 4 5 19 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, 2019 were: daily, 60% and monthly, 40%, and as of December 31, 2018 were daily, 32% and monthly, 68%. Redemption frequency for other benefits assets as of December 31, 2019 were: daily, 59% and monthly, 41% and as of December 31, 2018 were: daily, 27% and monthly, 73%. (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, 2019 and 2018. 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 2018 2019 2017 2019 Other benefits 2018 2017 3.61% 3.5 4.31% 3.5 3.74% 3.5 4.31 7.25 3.5 3.74 7.50 3.5 4.26 7.50 3.5 3.52% NA 4.34 7.25 NA 4.34% NA 3.72 7.50 NA 3.72% NA 4.22 7.50 NA 1 HEI’s and Utilities’ plan assets only. For 2019, 2018 and 2017, ASB’s expected return on plan assets was 4.51%, 3.94% and 4.46%, 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. 151 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company and the Utilities based their selection of an assumed discount rate for 2020 NPPC and NPBC and December 31, 2019 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, 2019. In selecting the expected rate of return on plan assets for 2020 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 3.69%, which is consistent with the assumed discount rate as of December 31, 2019 with a 20 basis point active manager premium. For 2019, retirement benefit plans’ assets of HEI and the Utilities had a net return of 24.3%. As of December 31, 2019, the assumed health care trend rates for 2020 and future years were as follows: medical, 7%, grading down to 5% for 2028 and thereafter; dental, 5%; and vision, 4%. 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%. The components of NPPC and NPBC were as follows: Expected return on plan assets (111,989) (108,953) (102,745) (in thousands) HEI consolidated Service cost Interest cost Amortization of net prior service gain 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 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) Pension benefits Other benefits 2019 2018 2017 2019 2018 2017 $ 62,135 $ 68,987 $ 64,906 $ 2,209 $ 2,721 $ 84,267 77,374 81,185 (42) 15,479 49,850 48,143 (42) 30,084 67,450 25,828 (55) 26,496 69,787 (18,004) 8,004 (12,356) (1,806) (13) (3,962) 3,258 7,933 (12,908) (1,805) 95 (3,964) 3,842 3,374 9,453 (12,326) (1,793) 1,130 (162) 1,211 $ $ 97,993 $ 93,278 $ 51,783 $ (704) $ (122) $ 1,049 60,461 $ 67,359 $ 63,059 $ 2,191 $ 2,704 $ 77,851 71,294 (104,632) (102,368) 7 14,658 48,345 48,143 8 27,302 63,595 25,828 74,632 (95,892) 8 24,392 66,199 (18,004) 7,673 (12,180) (1,803) — (4,119) 3,258 7,628 (12,713) (1,803) 98 (4,086) 3,842 3,353 9,115 (12,147) (1,804) 1,102 (381) 1,211 $ 96,488 $ 89,423 $ 48,195 $ (861) $ (244) $ 830 The Company recorded pension expense of $59 million, $59 million and $33 million and OPEB expense of $(0.1) million, nil and $1.0 million in 2019, 2018 and 2017, respectively, and charged the remaining amounts primarily to electric utility plant. The Utilities recorded pension expense of $57 million, $55 million and $30 million and OPEB (income) expense of $(0.3) million, $(0.1) million and $0.8 million in 2019, 2018 and 2017, respectively, and charged the remaining amounts primarily to electric utility plant. 152 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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), and pension plans with ABOs and PBOs in excess of plan assets were as follows: December 31 (in billions) Defined benefit plans - ABOs Defined benefit plans with ABO in excess of plan assets ABOs Fair value of plan assets Defined benefit plans with PBOs in excess of plan assets PBOs Fair value of plan assets HEI consolidated Hawaiian Electric consolidated 2019 2018 2019 2018 $ 2.0 $ 1.7 $ 1.8 $ 1.9 1.7 2.2 1.7 1.6 1.4 1.9 1.4 1.8 1.6 2.1 1.6 1.6 1.6 1.3 1.8 1.3 HEI consolidated. The Company estimates that the cash funding for the qualified defined benefit pension plans in 2020 will be $69 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 2020 is nil. As of December 31, 2019, the benefits expected to be paid under all retirement benefit plans in 2020, 2021, 2022, 2023, 2024 and 2025 through 2029 amount to $91 million, $95 million, $99 million, $103 million, $107 million and $593 million, respectively. Hawaiian Electric consolidated. The Utilities estimate that the cash funding for the qualified defined benefit pension plan in 2020 will be $68 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 2020 is nil. As of December 31, 2019, the benefits expected to be paid under all retirement benefit plans in 2020, 2021, 2022, 2023, 2024 and 2025 through 2029 amounted to $84 million, $87 million, $90 million, $93 million, $97 million and $544 million, respectively. Defined contribution plans information. For 2019, 2018 and 2017, the Company’s expenses for its defined contribution plans under the HEIRSP and the ASB 401(k) Plan were $7 million, $7 million and $7 million, respectively, and cash contributions were $7 million, $7 million and $6 million, respectively. The Utilities’ expenses and cash contributions for its defined contribution plan under the HEIRSP for 2019, 2018 and 2017 were $3 million, $2 million and $2 million, respectively. Note 11 · 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, 2019, 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 0.7 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 2019, 2018, 2017 and 2016 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. 153 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Stock performance awards granted under the 2019-2021, 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. On June 26, 2019, an additional 300,000 shares were made available for issuance under the 2011 Director Plan. As of December 31, 2019, there were 310,263 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 2019 2018 2017 $ $ 10.0 1.4 3.2 0.6 $ 7.8 1.1 2.7 0.5 5.4 1.9 1.9 0.7 1 For 2019, 2018 and 2017, the Company has not capitalized any share-based compensation. Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows: (dollars in millions) Shares granted Fair value Income tax benefit 2019 36,344 1.6 0.4 $ 2018 38,821 1.3 0.3 $ 2017 35,770 1.2 0.5 $ 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. 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) 2019 Shares 200,358 96,565 (76,813) (12,469) 207,641 $ $ (1) 33.05 37.82 32.61 34.20 35.36 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 $ 3.7 $ 3.2 $ 3.3 (1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant. For 2019, 2018 and 2017, total restricted stock units and related dividends that vested had a fair value of $3.2 million, $2.7 million and $3.5 million, respectively, and the related tax benefits were $0.5 million, $0.4 million and $1.1 million, respectively. As of December 31, 2019, there was $4.8 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, 2018-2020 and 2019-2021 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 154 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 earnings per share (EPS) growth, return on average common equity (ROACE), Hawaiian Electric’s net income growth, ASB’s efficiency ratio, and Pacific Current’s EBITDA growth and return on average invested capital. 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) 2019 Shares 65,578 35,215 — (4,391) 96,402 $ $ (1) 38.81 41.07 — 39.19 39.62 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 $ 1.4 $ 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) 2019 2.48% 3 15.8% 15.0% to 73.2% 2018 2.29% 3 17.0% 15.1% to 26.2% 2017 1.46% 3 20.1% 15.4% to 26.0% $ 41.07 $ 38.20 $ 39.51 For 2017, total vested LTIP awards linked to TSR and related dividends had a fair value of $1.9 million and the related tax benefits were $0.7 million. There were no share-based LTIP awards linked to TSR with a vesting date in 2018 or 2019. As of December 31, 2019, there was $1.4 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 2019 Shares 276,169 140,855 — 4,314 (17,570) 403,768 $ $ (1) 33.80 37.78 — 33.53 34.66 35.15 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 Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) $ 5.3 $ 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. 155 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For 2017, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $4.2 million and the related tax benefits were $1.6 million. There were no share-based LTIP awards linked to other performance conditions with a vesting date in 2018 or 2019. As of December 31, 2019, there was $5.1 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 12 · Income taxes The components of income taxes attributable to net income for common stock were as follows: Years ended December 31 (in thousands) Federal Current Deferred* Deferred tax credits, net** State Current Deferred Deferred tax credits, net** HEI consolidated 2018 2019 2017 Hawaiian Electric consolidated 2017 2018 2019 $ 28,736 $ 42,903 $ 61,534 $ 21,751 $ 29,649 $ 36,267 (4,353) 13,410 37,793 10,472 (10,732) 14,104 13,844 (6,099) 33,967 (12) (20) 36,792 95,481 17,361 (3,269) (87) 10,076 3,868 (32) 14,005 13,912 (7,793) 13,155 27,113 5,579 (8,491) 14,104 11,192 (5,245) 35,229 (12) (20) 24,392 71,476 13,210 (2,737) (87) 8,947 2,808 (32) 10,386 11,723 Total $ 51,637 $ 50,797 $ 109,393 $ 38,305 $ 34,778 $ 83,199 * 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 “Major tax developments” disclosure below for details of the accounting for the enactment of the Tax Act. ** Represents 2019 federal and state tax credits, primarily related to the West Loch PV project, deferred and amortized starting in 2020. See West Loch PV Project discussion in Note 3. 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 2018 2017 2019 Hawaiian Electric consolidated 2017 2018 2019 $ 56,996 $ 53,437 $ 96,796 $ 41,399 $ 37,889 $ 71,801 State income taxes, net of federal income tax benefit 11,658 11,832 9,789 8,703 8,080 7,584 Net deferred tax asset (liability) adjustment related to the Tax Act Other, net Total Effective income tax rate (9,255) (7,762) $ 51,637 (9,540) (4,932) $ 50,797 13,420 (10,612) $ 109,393 (9,255) (2,542) $ 38,305 (9,285) (1,906) $ 34,778 9,168 (5,354) $ 83,199 19.0% 20.0% 39.6% 19.4% 19.3% 40.6% 156 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows: December 31 (in thousands) Deferred tax assets Regulatory liabilities, excluding amounts attributable to property, plant and equipment Operating lease liabilities Allowance for bad debts Other1 Total deferred tax assets Deferred tax liabilities Property, plant and equipment related Operating lease right-of-use assets 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 2019 2018 2019 2018 $ $ 100,427 51,573 14,858 54,028 220,886 464,312 51,542 33,897 — 9,684 40,776 600,211 379,325 $ $ 104,868 — 14,647 46,036 165,551 437,644 — 37,345 11,278 20,173 31,629 538,069 372,518 $ $ 100,427 45,608 560 41,181 187,776 458,349 45,608 33,897 — 13,072 14,001 564,927 377,151 $ $ 104,868 — 659 26,522 132,049 434,831 — 37,345 11,278 25,430 6,362 515,246 383,197 1 As of December 31, 2019, HEI consolidated and Hawaiian Electric consolidated have deferred tax assets of $8.7 million and $6.7 million respectively, relating to the benefit of state tax credit carryforwards of $11.7 million and $9 million respectively. These state tax credit carryforwards primarily relate to the West Loch PV project and do not expire. The Company concluded that as of December 31, 2019, a valuation allowance is not required. 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, 2019 and 2018, 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 2019, 2018 and 2017. (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 HEI consolidated 2018 2017 2019 Hawaiian Electric consolidated 2018 2017 2019 $ 2.1 0.5 — 0.1 (0.2) (0.3) $ 4.0 0.3 — 0.1 (0.1) (2.2) 3.8 0.9 (0.2) — (0.5) — 4.0 $ $ 1.6 0.5 — 0.1 (0.2) (0.3) 3.5 0.3 — 0.1 (0.1) (2.2) $ 1.7 $ 1.6 $ 3.8 0.4 (0.2) — (0.5) — 3.5 Unrecognized tax benefits, December 31 $ 2.2 $ 2.1 $ At December 31, 2019 and 2018, there were $0.5 million of unrecognized tax benefits, if recognized, would affect the Company’s annual effective tax rate. As of December 31, 2019 and 2018, 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 2019, 2018 and 2017, the Company recognized approximately $0.1 million, $(0.1) million and $0.2 million in interest expense. The Company had $0.6 million and $0.4 million of interest accrued as of December 31, 2019 and 2018, respectively. 157 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 2019, 2018 and 2017, the Utilities recognized approximately $0.1 million in interest expense. The Utilities had $0.4 million and $0.3 million of interest accrued as of December 31, 2019 and 2018, respectively. As of December 31, 2019, 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 2016, 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 changes enacted in the 2017 Tax Cuts and Jobs Act continue to impact corporate taxpayers. 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% lowered 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. 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. 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. Other applicable provisions. There are a number of other provisions in the Tax Act that have an impact on the Company, including 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 that created these deferred taxes reverse. The excess related to the Utilities’ deferred taxes that were identified to be refunded in rates was reclassified to a regulatory liability and is currently being returned to the customers over various periods of time. The remaining excess was written off through deferred tax expense. Consequently, in 2017, the Company recorded a provisional increase in deferred tax expense of $13.4 million ($9.2 million at the Utilities). In December 2018, the end date of the measurement period for purposes of SAB No. 118 passed, and consequently, the Company (and Utilities) completed its 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). 158 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 13 · Cash flows Years ended December 31 (in millions) Supplemental disclosures of cash flow information HEI consolidated 2019 2018 2017 Interest paid to non-affiliates, net of amounts capitalized $ 107 $ 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 Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) Loans transferred from held for investment to held for sale (investing) Common stock issued (gross) for director and executive/management compensation (financing)1 Obligations to fund low income housing investments, net (investing) Transfer of retail repurchase agreements to deposit liabilities (financing) Hawaiian Electric consolidated 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) 56 4 68 55 4 64 — 5 11 — 62 9 — 72 34 73 64 31 59 1 4 12 102 44 14 48 83 55 1 63 26 — 38 41 11 13 — 38 18 — 1 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities. Note 14 · 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, 2019, the consolidated common stock equity of HEI’s electric utility subsidiaries was 56% of their total capitalization (as calculated for purposes of the PUC Agreement). As of December 31, 2019, Hawaiian Electric and its subsidiaries had common stock equity of $2.0 billion of which approximately $825 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 159 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, 2019, in order to maintain its “well-capitalized” position, ASB could not transfer approximately $487 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 15 · Significant group concentrations of credit risk Most of the Company’s business activity is with customers located in the State of Hawaii. The Utilities are regulated operating electric public utilities engaged in the generation, purchase, transmission, distribution and sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of Hawaii. The Utilities provide the only electric public utility service on the islands they serve. The Utilities extend 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. 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. 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 investments are in the State of Hawaii since its strategy is focused on investing in non-regulated renewable energy and sustainable infrastructure in the State of Hawaii. Note 16 · 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 160 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. MSRs are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and its 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. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for FHLB advances 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. 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. 161 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) December 31, 2019 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 liabilities Short-term borrowings—other than bank Other bank borrowings Long-term debt, net—other than bank Derivative liabilities Hawaiian Electric consolidated Short-term borrowings Long-term debt, net December 31, 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 liabilities Short-term borrowings—other than bank Other bank borrowings Long-term debt, net—other than bank Derivative liabilities Hawaiian Electric consolidated Short-term borrowings Long-term debt, net 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 $ 1,232,826 $ — $ 1,204,229 $ 28,597 $ 1,232,826 139,451 8,434 5,080,107 9,101 25,179 769,825 185,710 115,110 1,964,365 51,375 88,987 1,497,667 — — — — — — — — 33 — — 143,467 8,434 12,295 — 300 — — 143,467 8,434 5,145,242 5,157,537 12,379 — 12,379 300 765,976 185,710 115,107 2,156,927 2,185 88,987 1,670,189 — — — — — — 765,976 185,710 115,107 2,156,927 2,218 88,987 1,670,189 $ 1,388,533 $ — $ 1,364,897 $ 23,636 $ 1,388,533 — — — — — — — — — 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 1,443,968 141,875 9,958 4,792,707 8,062 10,180 827,841 73,992 110,040 1,879,641 34,132 25,000 1,418,802 162 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) 2019 2018 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 Derivative liabilities Interest rate lock commitments (bank segment)1 Forward commitments (bank segment)1 Interest rate swap (Other segment)2 — — — $ — $ 1,026,385 $ — $ — $1,161,416 $ — — — 117,787 60,057 — — — 28,597 — — — 154,349 49,132 — 23,636 $ $ $ $ $ — $ 1,204,229 $ 28,597 $ — $1,364,897 $ 23,636 — $ — — $ 297 3 300 $ $ — $ — $ — — — $ — $ 91 — 91 $ $ — $ — $ — $ — $ — $ 33 — 33 12 2,173 — — $ 2,185 $ — $ 34 — 34 $ 9 587 596 $ — — — — — — — 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 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, 2019 and 2018. 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 2019 23,636 $ — 4,961 — 28,597 $ 2018 15,427 — 8,209 — 23,636 $ $ 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, 2019, the weighted average discount rate was 3.41% 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. 163 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, 2019 Loans December 31, 2018 Loans Real estate acquired in settlement of loans Balance Fair value measurements using Level 2 Level 1 Level 3 $ 25 $ — $ — $ 77 186 — — — — 25 77 186 For 2019 and 2018, 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) December 31, 2019 Residential land Total loans December 31, 2018 Home equity lines of credit Total loans Real estate acquired in settlement of loans $ $ $ $ Fair value Valuation technique Significant unobservable input Range Weighted Average Significant unobservable input value (1) 25 Fair value of property or collateral Appraised value less 7% selling cost N/A (2) N/A (2) 25 77 Fair value of property or collateral Appraised value less 7% selling cost N/A (2) N/A (2) 77 186 Fair value of property or collateral Appraised value less 7% selling cost N/A (2) N/A (2) (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. 164 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 2019 Revenues Operating income1 Net income1 Net income for common stock1 Basic earnings per common share 1,2 Diluted earnings per common share 1,3 Dividends per common share 2018 Revenues Operating income 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 2019 Revenues Operating income Net income Net income for common stock 2018 Revenues Operating income Net income Net income for common stock $ 661,615 $ 715,485 $ 771,535 $ 725,966 $ 2,874,601 77,937 46,161 45,688 0.42 0.42 0.32 72,634 42,985 42,512 0.39 0.39 0.32 97,308 63,890 63,419 0.58 0.58 0.32 100,795 66,736 66,263 0.61 0.61 0.32 348,674 219,772 217,882 2.00 1.99 1.28 $ 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 $ 578,495 $ 633,784 $ 688,330 $ 645,333 $ 2,545,942 56,560 32,625 32,126 55,694 33,073 32,574 71,793 47,277 46,779 70,331 45,860 45,361 254,378 158,835 156,840 $ 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 Note: HEI owns all of Hawaiian Electric’s common stock, therefore per share data for Hawaiian Electric is not meaningful. 1 2 3 Operating income for the fourth quarter of 2019 includes gains on property sales totaling $10.8 million, and net income and net income for common stock includes $7.9 million (or $0.07 per share (basic and diluted) at ASB’s 26.8% statutory tax rate). 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. 165 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, 2019. Based on their evaluation, as of December 31, 2019, 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, 2019 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, 2019. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 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 There have been no changes in internal control over financial reporting during the quarter ended December 31, 2019 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 Scott W. H. Seu, 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, 2019. Based on their evaluation, as of December 31, 2019, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective in ensuring that information required to be disclosed by Hawaiian Electric in reports Hawaiian Electric files or submits under the Securities Exchange Act of 1934: (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to Hawaiian Electric management, including Hawaiian Electric’s CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 166 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, 2019 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, 2019. Changes in Internal Control over Financial Reporting There have been no changes in internal control over financial reporting during the quarter ended December 31, 2019 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 “Information about our Executive Officers” 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 2020 Proxy Statement: • • • • • • “Nominees for three Class III directors whose terms expire at the 2023 Annual Meeting” “Nominee for one Class I director whose term expires at the 2021 Annual Meeting” “Continuing Class I directors whose terms expire at the 2021 Annual Meeting” “Continuing Class II directors whose terms expire at the 2022 Annual Meeting” “Committees of the Board” (portions regarding whether HEI has an audit & risk committee and identifying its members; no other portion of the Committees of the Board section is incorporated herein by reference) “Audit & Risk Committee Report” (portion identifying audit & risk committee financial experts who serve on the HEI Audit & Risk Committee only; no other portion of the Audit & Risk 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. Information required to be reported under this caption is incorporated herein by reference to the “Other relationships and related person transactions” section in HEI’s 2020 Proxy Statement. Delinquent Section 16(a) reports Information required to be reported under this caption is incorporated herein by reference to the “Delinquent Section 16 (a) Reports” section in HEI’s 2020 Proxy Statement. 167 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 5 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 2020 Proxy Statement. Hawaiian Electric: The information required by this Item 11 for Hawaiian Electric is incorporated herein by reference to: • • • Pages 6 to 31 of Hawaiian Electric Exhibit 99.1 to this Form 10-K; The discussion of “2018-20 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 2020 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 2020 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. 168 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 2020 Proxy Statement. Equity Compensation Plan Information Information as of December 31, 2019 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) 706,851 — 706,851 $ $ — — — 2,759,090 — 2,759,090 (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, 2019, including: EIP 158,649 Restricted stock units plus estimated compounded dividend equivalents (if applicable) * Shares to be issued in February 2020, 2021 and 2022 under the 2017-2019, 2018-2020 and 2019-2021 LTIPs, 548,202 respectively, plus compounded dividend equivalents 706,851 * Under the amended EIP as of December 31, 2019, 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, 2019 for future awards, including 2,448,827 shares available for future awards under the amended EIP and 310,263 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 31 to 32 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 2020 Proxy Statement. Hawaiian Electric: The information required by this Item 13 for Hawaiian Electric is incorporated herein by reference to pages 32 to 33 of Hawaiian Electric Exhibit 99.1. 169 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 & Risk Committee Report in HEI’s 2020 Proxy Statement (but no other part of the “Audit & Risk 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 34 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, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 Valuation and Qualifying Accounts, Hawaiian Electric Industries, Inc. and subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries for the years ended December 31, 2019, 2018 and 2017 Page/s in Form 10-K HEI Hawaiian Electric 171-173 175 NA 175 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. ITEM 16. FORM 10-K SUMMARY None. 170 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 from subsidiaries Property, plant and equipment, net Deferred income tax assets Other assets and intercompany receivables Investments in subsidiaries, at equity Total assets Liabilities and shareholders’ equity Liabilities Accounts payable Interest payable Notes payable to subsidiaries Commercial paper 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: 108,973,328 shares and 108,879,245 shares at December 31, 2019 and 2018, respectively Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity $ $ $ 2019 2018 $ 953 779 22,598 2,931 10,754 21,770 3,742 2,604 20,789 3,456 10,147 11,963 2,761,802 2,605,038 2,821,587 $ 2,657,739 1,509 $ 3,041 — 96,723 399,064 29,367 11,623 541,327 2,001 3,476 34 48,992 398,874 29,565 12,517 495,459 — — 1,678,257 1,669,267 622,042 (20,039) 543,623 (50,610) 2,280,260 2,162,280 $ 2,821,587 $ 2,657,739 171 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 interest expense and income (taxes) benefits Retirement defined benefits expense—other than service costs Interest expense Income before income benefits Income benefits Net income 2019 2018 2017 $ 777 $ 429 $ 798 246,005 226,972 187,097 19,195 19,515 16,578 570 570 20,335 226,447 442 17,930 208,075 9,807 597 509 20,621 206,780 674 12,664 193,442 8,332 548 496 17,622 170,273 1,119 9,389 159,765 5,532 $ 217,882 $ 201,774 $ 165,297 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. 172 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 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 2019 2018 2017 $ 131,120 $ 135,470 $ 99,600 (1,187) — (47) (38,935) (1,001) (41,170) (20,596) — (143) (71,970) 140 (92,569) (70,000) 66,391 (317) (22,353) (177) (26,456) — (30) 98 47,731 — — — — (997) (139,463) (10) (92,739) (2,789) 3,742 953 $ (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 $ 173 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.” 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 2019 2018 $ 150,000 $ 150,000 50,000 50,000 50,000 100,000 (936) 50,000 50,000 50,000 100,000 (1,126) $ 399,064 $ 398,874 The aggregate payments of principal required within five years after December 31, 2019 on long-term debt are nil in 2020, $50 million in 2021, $150 million in 2022, $50 million in 2023, nil for 2024, and $150 million thereafter. Indemnities As of December 31, 2019, 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 2019, 2018 and 2017, cash dividends received from subsidiaries were $157 million, $154 million and $125 million, respectively. Supplemental disclosures of noncash activities In 2019, 2018 and 2017, $2.3 million, $2.3 million and $2.8 million, respectively, of HEI accounts receivable from ASB Hawaii were reduced with a corresponding reduction in HEI notes payable to ASB Hawaii in noncash transactions. In 2019, 2018 and 2017, $2.3 million, $2.3 million and $2.8 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 was immaterial for 2019, 2018 and 2017 as HEI satisfied the share purchase requirements of the DRIP in 2019, 2018 and 2017 through open market purchases of its common stock rather than new issuances. 174 Hawaiian Electric Industries, Inc. and subsidiaries and Hawaiian Electric Company, Inc. and subsidiaries SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2019, 2018 and 2017 (in thousands) Description Col. A 2019 Col. B Balance at begin- ning of period Col. C Additions Col. D Col. E Charged to costs and expenses Charged to other accounts Deductions Balance at end of period Allowance for uncollectible accounts – electric utility Allowance for uncollectible interest – bank Allowance for losses for loans – bank 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 $ $ $ $ $ $ $ $ $ $ 1,480 373 52,119 1,178 367 53,637 1,121 1,834 55,533 38 $ $ $ $ $ $ $ $ $ $ 2,106 — $ $ 795 (a) (99) 23,480 (c) $ 6,418 (a) 2,474 — $ $ (4,099) (a), (d) 6 14,745 (c) $ 4,254 (a) 1,810 — $ $ 785 (a) — 10,901 (c) $ 4,016 (a) — $ — $ $ $ $ $ $ $ $ $ $ 3,004 (b) — 28,662 (b) (1,927) (b), (d) — 20,517 (b) (b), (d) 2,538 1,467 16,813 (b) 38 $ $ $ $ $ $ $ $ $ $ 1,377 274 53,355 1,480 373 52,119 1,178 367 53,637 — (a) Primarily recoveries. (b) Bad debts charged off. (c) Represents provision for loan losses. (d) Reclass (reversal) of allowance for one customer account into other long term assets in 2018 and 2017 were $(4,934), and $841, respectively. 175 (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. HEI: 3(i) 3(ii) Description File Form Number Exhibit # Filing date HEI’s Amended and Restated Articles of Incorporation. Amended and Restated Bylaws of HEI effective February 14, 2019. 8-K 8-K 1-8503 1-8503 3(i) 3.1 5/6/09 2/19/19 * 4 Description of HEI Common Stock 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. 10-K 1-8503 4.1 3/31/93 8-K 1-8503 4(a) 3/28/11 First Supplement to Note Purchase Agreement among HEI and the Purchasers thereto, dated March 6, 2013. 8-K 1-8503 4(a) 3/6/13 Hawaiian Electric Industries Retirement Savings Plan, restatement effective January 1, 2013. 10-K 1-8503 Amendment 2014-1 to Hawaiian Electric Industries Retirement Savings Plan, effective as of January 1, 2015 Amendment 2015-1 to Hawaiian Electric Industries Retirement Savings Plan, effective as of February 1, 2015 Amendment 2015-2 to Hawaiian Electric Industries Retirement Savings Plan, effective as of February 1, 2015 Amendment 2019-1 to Hawaiian Electric Industries Retirement Savings Plan, effective as of May 6, 2019 Amendment 2019-1 to the Hawaiian Electric Industries Retirement Savings Plan, effective as of May 6, 2019 Amendment 2019-2 to the Hawaiian Electric Industries Retirement Savings Plan, effective as of August 1, 2019 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. 176 4.5 4.4 4.5 4.6 4.7 2/19/13 6/26/19 6/26/19 6/26/19 6/26/19 S-8 S-8 S-8 S-8 333- 232360 333- 232360 333- 232360 333- 232360 10-Q 1-8503 4.2 11/1/19 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 4.1 4.2 4.2(a) 4.3 4.3(a) 4.3(b) 4.3(c) 4.3(d) * 4.3(e) 4.3(f) 4.4 4.4(a) 4.4(b) 4.4(c) 4.4(d) 4.4(e) 4.4(f) 4.4(g) Exhibit no. 4.4(h) 4.4(i) * 4.4(j) 4.5 4.5(a) 4.6 4.6(a) 4.6(b) Description Third Amendment effective July 1, 2018 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Fourth Amendment effective June 26, 2019 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company. Letter Amendment effective November 1, 2019 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. Hawaiian Electric Industries, Inc. Dividend Reinvestment and Stock Purchase Plan, as amended and restated. 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. Amendment 2019-1 to the American Savings Bank 401(k) Plan, effective as of May 6, 2019. * 4.6(c) Amendment 2020-1 to the American Savings Bank 401(k) Plan, effective as of January 1, 2020. 10.1 10.2 10.3 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. HEI Exhibits 10.4 through 10.21 are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of this report. HEI Exhibits 10.4 through 10.19 are also management contracts or compensatory plans or arrangements with Hawaiian Electric participants. File Form 10-Q Number Exhibit # 1-8503 4 Filing date 8/3/18 S-8 333- 232360 4.15 6/26/19 S-3 S-3 10-K 10-K S-8 333- 220842 333- 234591 1-8503 1-8503 333- 232361 4.3 4.3 4.8 4.7(a) 10/5/17 11/8/19 2/19/13 2/23/16 4.5 6/26/19 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 10.4 10.5 10.6 10.7 10.7(a) 10.7(b) 10.7(c) 10.7(d) 10.7(e) 10.8 10.9 10.9(a) HEI Executive Incentive Compensation Plan amended as of February 4, 2013. HEI Executives’ Deferred Compensation Plan 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 10-K 1-8503 1-8503 10.4 10.5 2/19/13 2/28/19 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) 2/27/09 177 Exhibit no. 10.10(b) Description Amendment No. 1 dated December 13, 2010 to January 1, 2009 Restatement of HEI Excess Pay Plan. 10.11 10.12 * 10.13 10.14 10.15 10.16 10.16(a) 10.17 10.18 10.19 10.20 10.20(a) 10.20(b) 10.20(c) 10.20(d) Form of Change in Control Agreement. Nonemployee Director Retirement Plan, effective as of October 1, 1989. HEI 2011 Nonemployee Director Stock Plan, as amended effective October 31, 2019. 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, Inc. Executives’ Deferred Compensation Plan effective on January 1, 2009. 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). 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. Amendment No. 3 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 3, 2014. Amendment No. 4 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 4, 2017. * 10.20(e) Amendment No. 5 to January 1, 2009 Restatement of American Savings Bank Select Deferred Compensation Plan dated December 5, 2018. File Form 10-K Number Exhibit # 10.10(c) 1-8503 Filing date 2/19/13 10-K 10-K 1-8503 1-8503 10.11 10.15 2/27/09 3/27/90** 10-K 10-Q 10-Q 1-8503 1-8503 1-8503 10.5 10.5 10.6 2/28/19 11/5/08 11/5/08 10-Q 1-8503 10.1 11/5/09 10-Q 1-8503 10 8/3/18 10-Q 1-8503 10.2 11/5/08 10-Q 1-8503 10.1 11/8/12 10-Q 1-8503 10.7 11/5/08 10-K 1-8503 10.20(a) 2/23/16 10-K 1-8503 10.20(b) 2/23/16 10-K 1-8503 10.20(c) 2/23/16 10-K 1-8503 10.20(d) 3/1/18 10.21 10.21(a) 10.22 * 11 * 21.1 * 23.1 * 31.1 * 31.2 American Savings Bank Supplemental Executive Retirement, Disability, and Death Benefit Plan, effective January 1, 2009. 10-Q 1-8503 10.8 11/5/08 10-K 1-8503 10.19(b) 2/27/09 10-Q 1-8503 10.1 8/3/17 Amendments to the American Savings Bank Supplemental Executive Retirement, Disability, and Death Benefit Plan Freezing Benefit Accruals Effective December 31, 2008. Second Amended and Restated Credit Agreement, dated as of June 30, 2017, among HEI, as Borrower, the Lenders Party Thereto and Wells Fargo Bank, National Association, as Syndication Agent, and Bank of America, N.A., MUFG Union Bank, N.A., Barclays Bank PLC, U.S. Bank National Association and Bank of Hawaii as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, and JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners. HEI - Computation of Earnings per Share of Common Stock. HEI - Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm (Deloitte & Touche 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. 178 Exhibit no. * 101.LAB XBRL Taxonomy Extension Label Linkbase Document. Description * 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) File Form Number Exhibit # Filing date Hawaiian Electric: 3(i).1 3(i).2 3(i).3 3(i).4 3(ii) 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 * 4 Description of Hawaiian Electric’s Preferred Stock 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 10.1(a) 10.1(b) 10.1(c) 10.1(d) 10.1(e) 10.1(f) 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 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. 10-K 1-4955 4.1 3/19/03 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. 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 11/8/00 179 Exhibit no. 10.1(g) 10.1(h) 10.1(i) 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) Description 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). 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. File Form 10-Q Number Exhibit # 1-4955 10.3 Filing date 11/5/04 10-Q 1-4955 10.4 11/5/04 10-Q 1-4955 10 11/4/16 10-Q 1-4955 10(a) 5/16/88 10-K 1-4955 10.4 3/31/89 10-Q 1-4955 10 11/13/89 10-K 1-4955 13(c) 3/27/90** 10-K 1-4955 10.2(e) 3/9/04 10-Q 1-4955 10 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 10.3(g) Power Purchase Agreement between Puna Geothermal Venture and Hawaii Electric Light dated February 7, 2011. 10-K 1-4955 10.4(g) 2/17/12 * 10.3(h) 10.4(a) 10.4(b) 10.4(c) 10.4(d) Amended and Restated Power Purchase Agreement between Puna Geothermal Venture and Hawaii Electric Light dated December 31, 2019 (subject to PUC approval). 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. 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) 3/1/18 180 File Form 10-Q Number Exhibit # 1-4955 10 Filing date 5/7/19 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-K 1-4955 10.11(a) 3/1/18 10-Q 1-4955 10.2 8/3/17 Exhibit no. 10.5 Description Supply Contract for Low Sulfur Fuel Oil, High Sulfur Fuel Oil, No. 2 Diesel, and Ultra-Low Sulfur Diesel by and between Hawaiian Electric, Hawaii Electric Light, and Maui Electric and PAR Hawaii Refining, LLC dated January 21, 2019 (certain confidential information has been omitted) 10.6(a) 10.6(b) 10.7(a) 10.7(b) 10.8 10.9 11 * 21.2 * 31.3 * 31.4 * 32.2 * 99.1 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. Amended and Restated Power Purchase Agreement between Hawaiian Electric and Hu Honua Bioenergy, LLC dated May 9, 2017. 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. 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 Scott W. H. Seu (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. 181 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The execution of this report by registrant Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to such registrant and its subsidiaries. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Gregory C. Hazelton Gregory C. Hazelton By /s/ Tayne S. Y. Sekimura Tayne S. Y. Sekimura Executive Vice President and Chief Financial Officer Senior Vice President and Chief Financial Officer (Principal Financial Officer of HEI) (Principal Financial Officer of Hawaiian Electric) Date: February 28, 2020 Date: February 28, 2020 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, 2020. 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/ Scott W. H. Seu Scott W. H. Seu /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 & Chief Executive Officer of HEI and Director of HEI (Principal Executive Officer of HEI) President & Chief Executive Officer of Hawaiian Electric and Director of Hawaiian Electric (Principal Executive Officer of Hawaiian Electric) Executive Vice President and Chief Financial Officer of HEI (Principal Financial Officer of HEI) Senior Vice President and Chief Financial Officer of Hawaiian Electric (Principal Financial Officer of Hawaiian Electric) Vice President, Tax, Controller and Treasurer of HEI (Principal Accounting Officer of HEI) Controller of Hawaiian Electric (Principal Accounting Officer of Hawaiian Electric) 182 Signature /s/ Kevin M. Burke Kevin M. Burke /s/ Celeste A. Connors Celeste A. Connors /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/ Mary G. Powell Mary G. Powell /s/ Keith P. Russell Keith P. Russell /s/ William James Scilacci, Jr. William James Scilacci, Jr. /s/ Kelvin H. Taketa Kelvin H. Taketa /s/ Jeffrey N. Watanabe Jeffrey N. Watanabe /s/ Eva T. Zlotnicka Eva T. Zlotnicka Title Director of Hawaiian Electric Director of HEI Director of HEI Director of HEI Director of HEI Chairman of the Board of Directors of Hawaiian Electric Director of HEI Director of Hawaiian Electric Director of HEI Director of HEI Director of HEI Director of Hawaiian Electric Chairman of the Board of Directors of HEI Director of HEI 183 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 (40 companies were included as of December 31, 2019). 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, 2014, 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. 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) 2019 2018 2017 HEI CONSOLIDATED NET INCOME GAAP (as reported) Excluding special items (after-tax): Bonus related to enactment of federal tax reform2 Federal tax reform impacts3 $ 217.9 $ 201.8 $ 165.3 - - - - 201.8 0.7 13.4 $ 179.5 Non-GAAP (core) net income $ 217.9 $ HEI CONSOLIDATED DILUTED EARNINGS PER COMMON SHARE GAAP (as reported) Excluding special items (after-tax): Bonus related to enactment of federal tax reform2 Federal tax reform impacts3 $ 1.99 $ 1.85 - - - - 1.52 0.01 0.12 Non-GAAP (core) diluted earnings per common share $ 1.99 $ 1.85 $ 1.65 HEI CONSOLIDATED RETURN ON AVERAGE COMMON EQUITY (ROACE) (simple average) Based on GAAP Based on non-GAAP (core)4 9.8% 9.8% 9.5% 9.5% 7.9% 8.6% Note: Columns may not foot due to rounding 1 Accounting principles generally accepted in the United States of America 2 Bonus paid by American Savings Bank related to enactment of federal tax reform 3 Reflects the lower rates enacted by federal tax reform, primarily the adjustments to reduce the unregulated net deferred tax asset balances 4 Calculated as non-GAAP (core) net income divided by average GAAP common equity Executive Management (as of March 1, 2020) Hawaiian Electric Industries (HEI) Constance H. Lau President and Chief Executive Officer Chair, American Savings Bank, F.S.B. Greg C. Hazelton Executive Vice President and Chief Financial Officer Kurt K. Murao Executive Vice President, General Counsel, Chief Administrative Officer and Corporate Secretary Jimmy D. Alberts Senior Vice President, Business Development and Strategic Planning Shelee M. T. Kimura Senior Vice President, Customer Service Colton K. Ching Senior Vice President, Planning and Technology Tayne S. Y. Sekimura Senior Vice President and Chief Financial Officer Danielle K. N. Aiu Executive Vice President, Consumer Banking Natalie M. H. Taniguchi Executive Vice President, Enterprise Risk and Regulatory Relations John S. Ward Executive Vice President and Chief Experience Officer Gabriel S. H. Lee Executive Vice President, Commercial Markets Ann C. Teranishi Executive Vice President, Operations K. Elizabeth Whitehead Executive Vice President, Chief Administrative Officer and Assistant Secretary Hawaiian Electric Scott W. H. Seu President and Chief Executive Officer Ronald R. Cox Senior Vice President, Operations Sharon M. Suzuki President, Maui County and Hawai‘i Island Utilities* * 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 Steven R. Nakahara Executive Vice President and Chief Credit Officer Dane A. Teruya Executive Vice President and Chief Financial Officer Brian M. Yoshii Executive Vice President and Chief Information Officer Pacific Current Scott A. Valentino President Board of Directors Jeffrey N. Watanabe Chair, HEI Chair, HEI Executive Committee Retired Founder, Watanabe Ing LLP Constance H. Lau President and CEO, HEI Director, HEI Chair, ASB Admiral Thomas B. Fargo, USN (Retired) Vice Chair, HEI Chair, HEI Compensation Committee Chairman, Huntington Ingalls Industries, Inc. Former Commander of the U.S. Pacific Command Peggy Y. Fowler Chair, HEI Nominating & Corporate Governance Committee Director, HEI Chairman, Umpqua Holdings Corp. Former President and CEO, Portland General Electric Company William James Scilacci, Jr. Chair, Audit & Risk Committee Director, HEI Former Executive Vice President and Chief Financial Officer, Edison International Celeste A. Connors Director, HEI Executive Director, Hawai‘i Green Growth Local2030 Hub Richard J. Dahl Director, HEI Non-Executive Chairman, Dine Brands Global, Inc. Chairman, IDACORP, Inc. Former President and CEO, James Campbell Company, LLC Micah A. Kane Micah A. Kane Director, HEI President and CEO, Hawai‘i Community Foundation Mary G. Powell Director, HEI Director, ASB Former President and CEO, Green Mountain Power Keith P. Russell Director, HEI Chair, ASB Risk Committee Director, ASB President, Russell Financial, Inc. Eva T. Zlotnicka Director, HEI Managing Director, ValueAct Spring Fund Head of Stewardship, ValueAct Capital James A. Ajello Director, ASB Former Executive Vice President and Chief Financial Officer, HEI Kevin M. Burke Director, Hawaiian Electric Former Chief Marketing Officer, Square, Inc. Shirley J. Daniel, Ph.D. Director, ASB Professor of Accountancy, Shidler College of Business, University of Hawai‘i-Manoa University of Hawai‘i-Manoa Elisia K. Flores Chair, ASB Audit Committee Director, ASB CEO and Vice Chair, L&L Franchise, Inc. Former Senior Finance Manager, General Electric Company Timothy E. Johns Chair, Hawaiian Electric Chair, Hawaiian Electric Audit & Risk Committee President and CEO, Zephyr Insurance Company, Inc. Michael J. Kennedy Director, ASB CEO, Interstellar Bert A. Kobayashi, Jr. Director, Hawaiian Electric Chairman, CEO and Managing Partner, BlackSand Capital, LLC Bert A. Kobayashi, Sr. Director, ASB Chairman and CEO, Kobayashi Development Group LLC James K. Scott, Ed.D. Director, ASB Former President, Punahou School Scott W. H. Seu President and CEO, Hawaiian Electric Director, Hawaiian Electric Kelvin H. Taketa Director, Hawaiian Electric Former President and CEO, Hawai‘i Community Foundation Richard F. Wacker President and CEO, ASB Director, ASB HEI Hawaiian Electric ASB Jeffrey N. Watanabe, Chair (1) Celeste A. Connors (2) Richard J. Dahl (2, 3) Admiral Thomas B. Fargo, USN (Retired) (1, 3, 4) Peggy Y. Fowler (1, 3, 4) Micah Kane (4) Micah Kane (4) Constance H. Lau (1) Mary G. Powell (3) Keith P. Russell (1, 2) William James Scilacci, Jr. (1, 2) Eva T. Zlotnicka (3) Timothy E. Johns, Chair (5) Kevin M. Burke (5) Bert A. Kobayashi, Jr. Scott W. H. Seu Kelvin H. Taketa Constance H. Lau, Chair (7) James A. Ajello (7) Shirley J. Daniel, Ph.D. (6) Elisia K. Flores (6) Michael J. Kennedy (7) Bert A. Kobayashi, Sr. Keith P. Russell (6, 7) James K. Scott, Ed.D. Richard F. Wacker HEI Board Committees: Hawaiian Electric Board Committees: ASB Board Committees: (1) Executive Jeffrey N. Watanabe, Chair (2) Audit & Risk (3) Compensation Admiral Thomas B. Fargo, USN (Retired), Chair (4) Nominating & Corporate William James Scilacci, Jr., Chair Governance Peggy Y. Fowler, Chair (5) Audit & Risk Timothy E. Johns, Chair (6) Audit (7) Risk Elisia K. Flores, Chair Keith P. Russell, Chair F Shareholder Information Corporate Headquarters Hawaiian Electric Industries, Inc. 1001 Bishop Street, Suite 2900 Honolulu, Hawai‘i 96813 Telephone: 808-543-5662 Mailing address: Investor Relations P.O. Box 730 Honolulu, Hawai‘i 96808-0730 New York Stock Exchange Common stock symbol: HE Shareholder Services c/o Broadridge Corporate Issuer Solutions P.O. Box 1342 Brentwood, NY 11717 Telephone: 808-206-7529 Toll Free: 866-672-5841 M-F 9 a.m. to 9:30 p.m. EST E-mail: shareholder@broadridge.com 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 2019 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. 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 5, 2020 at 10:00 a.m. Please direct inquiries to: American Savings Bank Tower 1001 Bishop Street 8th Floor, Room 805 Honolulu, Hawai‘i 96813 Kurt K. Murao Executive Vice President, General Counsel, Chief Administrative Officer and Corporate Secretary Telephone: 808-543-5884 Facsimile: 808-203-1992 To protect the health and safety of our shareholders, the 2020 annual meeting will be held virtually rather than in person. Please refer to our proxy statement for details on how to participate. 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 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. 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. 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 Agent Common stock and utility company preferred stock: Shareholder Services c/o Broadridge Corporate Issuer Solutions To minimize our environmental impact, this report was printed on paper containing fibers from socially and environmentally responsible forestry products. To learn more, please visit us at www.hei.com 

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