~~FINANCIAL CONDITION~~

~~Liquidity and capital resources.~~ The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements for the foreseeable future.

~~The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:~~

(dollars in millions) September 30, 2019 December 31, 2018
Short-term borrowings—other than bank $ 164
4 % $ 74
2 %
Long-term debt, net—other than bank 1,885
43
1,880
45
Preferred stock of subsidiaries 34
1
34
1
Common stock equity 2,243
52
2,162
52
$ 4,326
100 % $ 4,150
100 %

~~HEI’s commercial paper borrowings and line of credit facility were as follows:~~

Average balance Balance
(in millions) Nine months ended September 30, 2019 September 30, 2019 December 31, 2018
Commercial paper $ 40
$ 52
$ 49
Line of credit draws —
—
—
Undrawn capacity under HEI’s line of credit facility 150
150

~~Note:~~ This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s external short-term borrowings during the first nine months of 2019 was $102 million.

~~HEI has a $150 million line of credit facility with no amounts outstanding at September 30, 2019. See Note 5 of the Condensed Consolidated Financial Statements.~~

In October 2019, Moody’s revised HEI’s rating outlook to “positive” from “stable,” and affirmed HEI’s P-3 commercial paper rating. The revision to the rating outlook was based on the considerable progress made with respect to the Utilities’ transition to renewable energy and the improvement in its customer service.

The Company has the ability to satisfy the share purchase requirements for the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP and ASB 401(k) Plan either through the issuance of new shares, which provides new equity capital, or through open market purchases of its common stock. From December 7, 2016 to date, HEI satisfied the share purchase requirements for these plans through open market purchases of its common stock rather than through new issuances.

For the first nine months of 2019, net cash provided by operating activities of HEI consolidated was $341 million. Net cash used by investing activities for the same period was $373 million, primarily due to capital expenditures and ASB’s net increase in loans, partly offset by ASB’sreceipt of repayments from and proceeds from the sale of available-for-sale investment securities. Net cash provided by financing activities during this period was $40 million as a result of several factors, including net increases in short-term borrowings and ASB’s deposit liabilities, the issuance of short-term and long-term debt, partly offset by payment of common stock dividends and repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds. During the first nine months of 2019, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $76 million and $47 million, respectively.

~~Dividends.~~ The payout ratios for the first nine months of 2019 and full year 2018 were 69% and 67%, respectively. HEI currently expects to maintain its 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 current and expected future economic conditions.

~~MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES~~

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.

In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments.

~~For information about these material estimates and critical accounting policies, see pages 37 to 39, 50 to 51, and 66 to 68 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2018 Form 10-K.~~

~~Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.~~

~~Electric utility~~

~~RESULTS OF OPERATIONS~~

Three months ended September 30, Increase
2019 2018 (decrease) (dollars in millions, except per barrel amounts)
$ 688
$ 687
$ 1

Revenues. Net increase largely due to:
$ 4
higher rates
3
MPIR for Schofield Generating Station
2
pole attachment revenues
(2 ) net of lower purchase power energy price and higher kWh purchased
(7 )
net of lower fuel oil pricesand higher kWh generated
199
207
(8 )
Fuel oil expense¹. Net decrease largely due to lower fuel oil prices, partially offset by higher kWh generated
175
178
(3 )
Purchased power expense^{1, 2}. Net decrease largely due to lower purchased power energy price, partially offset by higher kWh purchased
124
114
10

Operation and maintenance expenses. Net increase largely due to:
4
higher generation overhaul costs
2
higher preventive/corrective maintenance expense for generating facilities
1
reset of pension costs included in rates as part of rate case decisions
1
higher vegetation management costs
1
higher medical premium costs
1
higher outside consulting services for grid modernization projects
118
116
2

Other expenses. Increase primarily due to higher depreciation expense for plant investments in 2018
72
74
(2 )
Operating income. Decrease due to higher operation and maintenance and depreciation expenses, offset in part by higher revenue
47
50
(3 )
Net income for common stock. Decrease due to higher operating expenses and higher income taxes, offset in part by higher rates and lower interest expense. See below for discussion on effective tax rate.

2,414
2,329
85

Kilowatthour sales (millions)³
$ 82.30
$ 90.93
$ (8.63 ) Average fuel oil cost per barrel

Nine months ended September 30 Increase
2019 2018 (decrease) (dollars in millions, except per barrel amounts)
$ 1,901
$ 1,866
$ 35

Revenues. Net increase largely due to:
$ 26
higher rates
13
MPIR for Schofield Generating Station
5
pole attachment revenues
2
billing to a third party for mutual assistance work reimbursement
(5 )
net of lower fuel oil pricesand lower kWh generated
(6 ) lower kWh purchased and lower capacity charges
541
545
(4 )
Fuel oil expense¹. Net decrease largely due to lower kWh generated, coupled with higher fuel efficiency
472
478
(6 )
Purchased power expense^{1 ,2}. Net decrease largely due to lower kWh purchased and lower capacity charges
362
334
28

Operation and maintenance expenses. Net increase largely due to:
6
higher outside consulting services for system support (Asset management, Energy Management, Enterprise and Grid Modernization systems)
6
higher preventive/corrective maintenance expense for generating facilities
5
reset of pension costs included in rates as part of rate case decisions
5
higher generation overhaul costs
2
higher medical premium costs
2
cost incurred related to reimbursed third-party mutual assistance work
1
voluntary retirement bonus payout
1
higher engineering costs due to transmission planning and interconnection requirements study related to integration of more renewables
341
328
13

Other expenses. Increase due to higher depreciation expense for plant investments in 2018
184
181
3

Operating income. Increase due to higher revenue, offset in part by higher operation and maintenance and depreciation expenses
111
108
3

Net income for common stock. Increase due to higher rates and MPIR revenues, offset in part by higher operating expenses

6,449
6,469
(20 )
Kilowatthour sales (millions)⁴
$ 83.64
$ 84.67
$ (1.03 ) Average fuel oil cost per barrel
464,892
462,516
2,376
Customer accounts (end of period)


1	~~The rate schedules of the electric utilities currently contain ECACs and ECRCs 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 when compared to the same quarter in the prior year due largely to warmer and more humid weather in the third quarter of 2019 than 2018.~~

4 kWh sales were lower when compared to prior year due largely to continued energy efficiency and conservation efforts by customers and increasing levels of private customer-sited renewable generation, coupled with cooler and less humid weather in the first quarter of 2019.

The Utilities’ effective tax rates for the third quarters of 2019 and 2018 were 19% and 12%, respectively. The Utilities’ effective tax rate for the first nine months of 2019 and 2018 were similar at 20% and 19%, respectively. The effective tax rate was higher for the three months ended September 30, 2019 compared to the same period in 2018 due primarily to certain 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 2017 Tax Act offset, in part, by higher amortization in 2019 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in federal income tax rate.

~~Hawaiian Electric’s consolidated ROACE was 7.6% and 7.2% for the twelve months ended September 30, 2019 and September 30, 2018, respectively.~~

The Utilities’ consolidated kWh sales have declined each year since 2007. Year-over-year sales in 2019 are anticipated to be about the same as in 2018 on a consolidated basis due to the continued adoption of energy efficiency and distributed energy resources, partially offset by the warmer, more humid weather in the second and third quarter of the year. Cooler, less humid than average weather in the first quarter was offset by warmer, more humid weather in the second and third quarter, resulting in sales being slightly lower in the first three quarters of the year. However, following the adoption of the decoupling model in 2011, revenues are not tied to kWh sales and include annual rate adjustments to revenues. See “Decoupling” in the “Regulatory proceedings” section of Note 3 of the condensed consolidated financial statements for additional information.

The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of September 30, 2019 amounted to $4 billion, of which approximately 28% related to generation PPE, 63% 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.

~~See “Economic conditions” in the “HEI Consolidated” section above.~~

~~Executive overview and strategy.~~ The Utilities provide electricity on all the principal islands in the state, other than Kauai, 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 regulatory framework includes a number of mechanisms designed to provide utility financial stability during the transition toward the state’s 100% renewable energy future. Under the sales decoupling mechanism, the utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have declined as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the 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 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 Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. The Utilities are currently working through the next software update with the vendor, and will submit the final cost report in the fourth quarter of 2019. The Utilities are on track to remain below the $3.9 million budget cap.

multi-year Grid Services Purchase Agreements with third party aggregators. These contracts pay service providers to aggregate grid-supporting capabilities from customer-sited Distributed Energy Resources. The first of these five-year contracts in a not-to-exceed amount of $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. 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 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.

~~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 phase one. 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 25, 2019 to review progress and status of 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 Condensed Consolidated Financial Statements for a discussion of decoupling.~~

As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2018, 2017 and 2016 did not trigger the earnings sharing mechanism for the Utilities.

~~Regulated returns.~~ ~~Actual and PUC-allowed returns, as of September 30, 2019, were as follows:~~

% Rate-making Return on rate base (RORB)* ROACE** Rate-making ROACE***
Twelve months ended
September 30, 2019
Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric
Utility returns 6.73
6.39
6.16
7.78
6.88
7.39
8.39
7.36
7.54
PUC-allowed returns 7.57
7.80
7.43
9.50
9.50
9.50
9.50
9.50
9.50
Difference (0.84 ) (1.41 ) (1.27 ) (1.72 ) (2.62 ) (2.11 ) (1.11 ) (2.14 ) (1.96 )

* Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.

** Recorded net income divided by average common equity.

*** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.

The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, and O&M increases and return on capital additions since the last rate case in excess of indexed escalations.

~~Most recent rate proceedings.~~ 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. Final rates for Maui Electric’s 2018 rate case were effective on June 1, 2019 based on rulings 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)

Date
(filed/
implemented)
Amount
% over
rates in
effect

ROACE
(%)

RORB
(%)

Rate
base

Common
equity
%

Stipulated agreement
reached with
Consumer Advocate
Hawaiian Electric

2017 ¹

Request 12/16/16 $ 106.4
6.9
10.60
8.28
$ 2,002
57.36
Yes
Interim increase 2/16/18 36.0
2.3
9.50
7.57
1,980
57.10

Interim increase with Tax Act 4/13/18 (0.6 ) —
9.50
7.57
1,993
57.10

Final increase 9/1/18 (0.6 ) —
9.50
7.57
1,993
57.10

2020
Request 8/21/19 $ 77.6
4.1
10.50
7.97
$ 2,477
57.15

Hawaii Electric Light

2016²

Request 9/19/16 $ 19.3
6.5
10.60
8.44
$ 479
57.12
Yes
Interim increase 8/31/17 9.9
3.4
9.50
7.80
482
56.69

Interim increase with Tax Act 5/1/18 1.5
0.5
9.50
7.80
481
56.69

Final increase 10/1/18 —
—
9.50
7.80
481
56.69

2019
Request 12/14/18 $ 13.4
3.4
10.50
8.30
$ 537
56.91

Maui Electric

2018 ³

Request 10/12/17 $ 30.1
9.3
10.60
8.05
$ 473
56.94
Yes
Interim increase with Tax Act 8/23/18 12.5
3.82
9.50
7.43
462
57.02

Final increase 6/1/19 12.2
3.7
9.50
7.43
454
57.02

Note: The “Request” date reflects the application filing date for the rate proceeding. The “Interim increase” and “Final increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.


1	~~Final D&O was issued on June 22, 2018.~~

~~2 Final D&O was issued on June 29, 2018.~~

~~3 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.~~

~~See “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.~~

~~Performance-based regulation~~. ~~See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Condensed Consolidated Financial Statements.~~

~~Developments in renewable energy efforts~~. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:

~~New renewable PPAs~~.

In 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 working to construct the project.

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. Kawailoa Solar, LLC is expected to be in service by the end of 2019.

In July 2018, the PUC approved Maui Electric’s PPA with Molokai New Energy Partners to purchase solar energy from a PV plus battery storage project. The 4.88 MW project will deliver no more than 2.64 MW at any time to the Molokai system. 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.

~~Tariffed renewable resources~~.

As of September 30, 2019, there were approximately 486 MW, 102 MW and 116 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 September 30, 2019, an estimated 29% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 17% of the Utilities' total customers have solar systems.

The Utilities began accepting energy from feed-in tariff projects in 2011. As of September 30, 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 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 262 MW, 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 Number of contracts Total photovoltaic size (MW) Battery Energy Storage System (BESS) Size (MW/MWh) Guaranteed commercial operation dates Contract term (years) Total projected annual payment (in millions)
Hawaiian Electric 4 139.5 139.5 / 558 9/30/2021 & 12/31/2021 20 & 25 $ 30.9
Hawaii Electric Light 2 60 60 / 240 7/20/2021 & 6/30/2022 25 14.1
Maui Electric 2 75 75 / 300 7/20/2021 & 6/30/2022 25 17.6
Total 8 274.5 274.5 / 1,098 $ 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 October 2017, the Utilities filed a draft request for proposal with the PUC for 40 MW of firm renewable generation on Maui (Maui Firm RFP) to be in service by the end of 2022. The Utilities have since decided to move forward with an RFP for variable renewable energy and energy storage.

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 seeks 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, is 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 from the retiring Kahului Power Plant on Maui and the expiring AES Hawaii facility on Oahu. For the Grid Services RFP, the targets have been expanded in alignment with the Renewable RFPs. Utility proposals to address reliability will be submitted on November 4, 2019. Proposals from third parties for these RFPs are due by November 5, 2019.

On August 6, 2019, the Utilities filed draft RFPs with the PUC 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.

~~Legislation and regulation.~~ Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.

~~Impact of lava flows on PGV.~~ 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. Hawaii Electric Light and PGV are in negotiations of an amended and restated PPA, which would, among others, delink the original PPA from the cost of fossil-fuel.

In June 2019, Hawaii Electric Light filed an application requesting approval to reconstruct the necessary transmission lines. In August 2019, the PUC issued an order suspending the application with the expectation that Hawaii Electric Light provide information on an expected timeline for various permit approvals and substantive details on a renegotiated PPA. In response to the PUC’s order, Hawaii Electric Light submitted its quarterly report, which provided details on the status of permits and PGV’s assertion that every permit required to operate its facilities is in full force and effect. In addition, the report indicated that the work described in the Rebuild Agreement is necessary to restore facilities under the existing original PPA with PGV, which is valid through 2027, and that the parties continue to negotiate an amended and restated PPA that would be delinked from the cost of fossil fuel. In October 2019, the PUC opened a docket to review an amended and restated PPA between Hawaii Electric Light and PGV.

~~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 by 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 replacements.

~~FINANCIAL CONDITION~~

~~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.

~~Hawaiian Electric’s consolidated capital structure was as follows:~~

(dollars in millions) September 30, 2019 December 31, 2018
Short-term borrowings $ 113
3 % $ 25
1 %
Long-term debt, net 1,418
40
1,419
41
Preferred stock 34
1
34
1
Common stock equity 1,993
56
1,958
57
$ 3,558
100 % $ 3,436
100 %

~~Information about Hawaiian Electric’s commercial paper borrowings, borrowings from HEI and line of credit facility were as follows:~~

Average balance Balance
(in millions) Nine months ended September 30, 2019 September 30, 2019 December 31, 2018
Short-term borrowings ¹

Commercial paper $ 50
$ 63
$ —
Line of credit draws —
—
—
Borrowings from HEI —
—
—
Undrawn capacity under line of credit facility —
200
200

¹ The maximum amount of external short-term borrowings by Hawaiian Electric during the first nine months of 2019 was approximately $158 million. As of September 30, 2019, Hawaiian Electric had short-term borrowings from Hawaii Electric Light of $15 million and Maui Electric had short-term borrowings from Hawaiian Electric of approximately $22 million.

~~Hawaiian Electric has a $200 million line of credit facility with no amounts outstanding at September 30, 2019. See Note 5 of the Condensed Consolidated Financial Statements.~~

In October 2019, Moody’s revised Hawaiian Electric’s rating outlook to “positive” from “stable” and affirmed Hawaiian Electric’s Baa2 senior unsecured rating and Hawaiian Electric’s P-2 commercial paper rating. The revision to the rating outlook was based on the considerable progress made with respect to the Utilities’ transition to renewable energy and the improvement in its customer service. Moody’s also indicated that future upgrades or downgrades in ratings action are dependent on a variety of factors, including continuing progress toward renewable energy generation, 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 Condensed Consolidated Financial Statements.

On February 26, 2019, the PUC approved Hawaiian Electric and Hawaii Electric Light’s request to issue refunding special purpose revenue bonds (SPRBs) prior to December 31, 2020 to refinance their outstanding Series 2009 SPRBs in the amount of up to $90 million and $60 million, respectively. 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 5 of the Condensed 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. See Note 5 of the Condensed 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.

On November 29, 2018, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures on November 28, 2019. Hawaiian Electric drew the first $25 million on November 29, 2018 and the second $25 million on January 31, 2019.

On January 31, 2019, the Utilities received PUC approval to issue the remaining authorized amounts under the April 2018 Approval in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the Utilities received approval to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.

Pursuant to this 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 junior subordinated deferrable interest debentures. See Note 5 of the Condensed Consolidated Financial Statements. See summary table below.

(in millions) Hawaiian Electric Hawaii Electric Light Maui Electric
Total “up to” amounts of taxable debt authorized through 2022 $ 410
$ 150
$ 130
Less:
Taxable debt authorized and issued in 2018 under April 2018 Approval $ 75
$ 15
$ 10
Taxable debt issuance to refinance the 2004 QUIDS 30
10
10
Remaining authorized amounts $ 305
$ 125
$ 110

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. See summary table below.

(in millions) Hawaiian Electric Hawaii Electric Light Maui Electric
Total “up to” amounts of common stock authorized to issue and sell through 2021 $ 150.0
$ 10.0
$ 10.0
Supplemental increase authorized 280.0
100.0
100.0
Total “up to” amounts of common stock authorized to issue and sell through 2022 430.0
110.0
110.0
Common stock authorized and issued in 2017 and 2018 84.7
—
6.3
Remaining authorized amounts $ 345.3
$ 110.0
$ 103.7

~~Cash flows. The following table reflects the changes in cash flows for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018:~~

Nine months ended September 30,
(in thousands) 2019 2018 Change
Net cash provided by operating activities $ 282,618
$ 193,722
$ 88,896
Net cash used in investing activities (295,145 ) (300,558 ) 5,413
Net cash provided by financing activities 9,157
101,543
(92,386 )

~~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 rates.~~

~~Net cash used in investing activities.~~ ~~The decrease in net cash used in investing activities was primarily driven by a decrease 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 higher net cash from long-term borrowings in 2018.~~

~~Forecast capital expenditures~~. For the five-year period 2019 through 2023, the Utilities forecast up to $2.1 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting, and the timing and results of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2019 to 2023 forecast (such as increases in the costs or acceleration of capital projects or unanticipated capital expenditures that may be required by new environmental laws and regulations).

Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.

~~Bank~~

Three months ended September 30, Increase
(in millions) 2019 2018 (decrease) Primary reason(s)
Interest income $ 67
$ 65
$ 2
The increase in interest income was primarily the result of an increase in the loan portfolio balances partly offset by a decrease in balances and yields on the investment portfolio. ASB’s average loan portfolio balance for the three months ended September 30, 2019 increased by $282 million compared to the same period in 2018 due to increases in the average home equity line of credit, residential, commercial and consumer loan portfolios of $113 million, $83 million, $50 million and $34 million, respectively. The yield on the loan portfolio was comparable to the yield on the loan portfolio in the prior year. ASB’s average investment securities portfolio balance for the three months ended September 30, 2019 decreased by $135 million compared to the same period in 2018 as ASB used the investment portfolio repayments to fund the growth in the loan portfolio. The yield on the investment securities portfolio decreased by 16 basis points due to an increase in the amortization of premiums in the investment portfolio. The average balance of interest-earning deposits decreased by $57 million for the three months ended September 30, 2019 compared to the same period in 2018 as excess liquidity was also used to fund the loan portfolio growth.
Noninterest income 16
15
1
Noninterest income increased for the three months ended September 30, 2019 compared to noninterest income for the three months ended September 30, 2018 primarily due to an increase in mortgage banking income and the gain on sale of securities, partly offset by bank owned life insurance policy payouts received in the three months ended September 30, 2018 with no similar payouts in the three months ended September 30 2019.
Revenues 83
80
3
The increase in revenues for the three months ended September 30, 2019 compared to the same period in 2018 was due higher interest and noninterest income.
Interest expense 5
4
1
The increase in interest expense for the three months ended September 30, 2019 compared to the same period in 2018 was due to an increase in term certificate balances and yields. Average deposit balances for the three months ended September 30, 2019 increased by $120 million compared to the same period in 2018 due to an increase in core deposits and term certificates of $72 million and $48 million, respectively. Average cost of deposits for the three months ended September 30, 2019 was 28 basis points, or 4 basis points above the cost of deposits for the same period in 2018. Average other borrowings for the three months ended September 30, 2019 decreased by $19 million compared to the same period in 2018 due to a decrease in repurchase agreements and FHLB advances. The interest-bearing liability rate for the three months ended September 30, 2019 of 43 basis points increased 7 basis points compared to the same period in 2018.
Provision for loan losses 3
6
(3 ) The provision for loan losses decreased for the three months ended September 30, 2019 compared to the provision for loan losses for the three months ended September 30, 2018. The provision for loan losses for 2019 was primarily for additional loan loss reserves for the consumer loan portfolio, and growth in the loan portfolio, partly offset by the release of commercial and commercial real estate loan reserves due to a loan payoff and upgrades in those loan portfolios, and the release of loan loss reserves resulting from improving credit trends throughout the loan portfolio. The provision for loan losses for 2018 was primarily for loan growth and additional loan loss reserves for the consumer and credit-scored loan portfolios, partly offset by the release of reserves due to repayments in the commercial and commercial real estate loan portfolios and improved credit quality in the residential, home equity line of credit, commercial and commercial real estate loan portfolios. Delinquency rates have decreased from 0.52% at September 30, 2018 to 0.41% at September 30, 2019. The annualized net charge-off ratio for the three months ended September 30, 2019 was 0.69% compared to an annualized net charge-off ratio of 0.40% for the same period in 2018. The annualized net charge-off for 2019 was impacted by the partial charge-off of a commercial credit.
Noninterest expense 46
43
3
Noninterest expense increased for the three months ended September 30, 2019 compared to the same period in 2018 primarily due to higher compensation and employee benefits expenses, and higher occupancy expenses, partly offset by lower FDIC insurance premium expenses a result of an assessment credit received from the FDIC. The higher compensation and employee benefits expenses were due to an increase in commissions incentives, an increase in the minimum pay rate for employees and annual merit increases. Occupancy expenses in 2019 included depreciation and occupancy costs related to the new campus while still including the costs of properties being vacated.
Expenses 54
53
1
The increase in expenses for the three months ended September 30, 2019 compared to the same period in 2018 was due to higher interest expense and higher noninterest expenses partly offset by lower provision for loan losses.
Operating income 29
27
2
The increase in operating income for the three months ended September 30, 2019 compared to the same period in 2018 was primarily due to higher interest and noninterest income, and lower provision for loan losses, partly offset by higher interest expense and higher noninterest expenses.
Net income 23
21
2
The increase in net income for the three months ended September 30, 2019 compared to the same period in 2018 was primarily due to higher operating income.

Nine months ended September 30 Increase
(in millions) 2019 2018 (decrease) Primary reason(s)
Interest income $ 202
$ 190
$ 12
The increase in interest income was primarily the result of an increase in loan portfolio balances and yields partly offset by lower investment balances. ASB’s average loan portfolio balance for the nine months ended September 30, 2019 increased by $203 million compared to the same period in 2018 due to increases in the average home equity line of credit, residential, consumer and commercial loan portfolios of $91 million, $57 million, $37 million and $31 million, respectively. The yield on loans benefited from the rising interest rate environment during the past year, which resulted in an increase in yields from the total loan portfolio of 15 basis points. The average investment portfolio balance for the nine months ended September 30, 2019 decreased $35 million compared to the same period in 2018 due to repayments in the portfolio and the lack of new investment security purchases as liquidity was used to fund the loan portfolio growth. The investment portfolio yield for 2019 was comparable to the investment portfolio yield in the prior year. The average interest-earning deposits balance for the nine months ended September 30, 2019 decreased $49 million compared to the same period in 2018.
Noninterest income 46
43
3
Noninterest income increased for the nine months ended September 30, 2019 compared to noninterest income for the nine months ended September 30, 2018 primarily due to higher mortgage banking income and higher bank owned life insurance policy payouts.
Revenues 248
233
15
The increase in revenues for the nine months ended September 30, 2019 compared to the same period in 2018 was due higher interest and noninterest income.
Interest expense 14
11
3
The increase in interest expense for the nine months ended September 30, 2019 compared to the same period in 2018 was due to higher deposit balances and interest rates. Average deposit balances for the nine months ended September 30, 2019 increased by $181 million compared to the same period in 2018 due to an increase in core deposits and term certificates of $136 million and $45 million, respectively. Average cost of deposits for the nine months ended September 30, 2019 was 28 basis points, or 6 basis points above the cost of deposits for the same period in 2018. Average other borrowings for the nine months ended September 30, 2019 decreased by $36 million compared to the same period in 2018 primarily due to a decrease in repurchase agreements. The interest-bearing liability rate for the nine months ended September 30, 2019 of 43 basis points increased by 9 basis points compared to the same period in 2018.
Provision for loan losses 18
12
6
The provision for loan losses increased for the nine months ended September 30, 2019 compared to the provision for loan losses for the nine months ended September 30, 2018. The provision for loan losses for 2019 was due to additional loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial credit and a commercial real estate loan that was downgraded to substandard, partly offset by the release of reserves resulting from recoveries of previously charged-off loans. The provision for loan losses for 2018 was primarily due to additional loan loss reserves for the consumer loan portfolio, partly offset by the release of reserves for improved credit quality of the commercial and commercial real estate loan portfolios. Delinquency rates have decreased from 0.52% at September 30, 2018 to 0.41% at September 30, 2019. The annualized net charge-off ratio for the nine months ended September 30, 2019 was 0.46% compared to an annualized net charge-off ratio of 0.33% for the same period in 2018. The increase was due to higher net charge-offs in the consumer loan portfolio with risk-based pricing and the partial charge-off of a commercial credit.
Noninterest expense 139
131
8
Noninterest expense increased for the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to higher compensation and employee benefits expenses, and higher occupancy expenses. The increase in compensation and employee benefits was due to an increase in performance-based incentives, an increase in the minimum pay rate for employees and annual merit increases. Occupancy expenses in 2019 included depreciation and occupancy costs for the new campus while still including the costs of properties being vacated.
Expenses 171
154
17
The increase in expenses for the nine months ended September 30, 2019 compared to the same period in 2018 was due to higher interest expense, higher provision for loan losses and higher noninterest expenses.
Operating income 76
79
(3 ) The decrease in operating income for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily due to higher provision for loan losses and higher interest and noninterest expenses, partly offset by higher interest and noninterest income.
Net income 61
61
—
Net income for the nine months ended September 30, 2019 was comparable to the same period in 2018 as lower operating income was offset by lower tax expense.

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

~~ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.~~

~~ASB’s return on average assets, return on average equity and net interest margin were as follows:~~

Three months ended September 30 Nine months ended September 30
(%) 2019 2018 2019 2018
Return on average assets 1.29
1.22
1.14
1.18
Return on average equity 13.75
13.80
12.44
13.32
Net interest margin 3.82
3.81
3.87
3.78

Three months ended September 30,
2019 2018
(dollars in thousands) Average
balance
Interest
income/
expense
Yield/
rate (%) Average
balance
Interest income/
expense
Yield/
rate (%)
Assets:

Interest-earning deposits $ 9,764
$ 55
2.20
$ 66,866
$ 339
1.98
FHLB stock 10,029
91
3.63
10,087
120
4.73
Investment securities
Taxable 1,372,821
7,175
2.09
1,518,743
8,691
2.29
Non-taxable 28,341
352
4.86
16,988
190
4.38
Total investment securities 1,401,162
7,527
2.15
1,535,731
8,881
2.31
Loans
Residential 1-4 family 2,196,926
22,550
4.11
2,114,398
21,776
4.12
Commercial real estate 867,164
10,107
4.58
863,468
10,140
4.61
Home equity line of credit 1,064,020
9,961
3.71
951,384
8,936
3.73
Residential land 14,341
202
5.64
14,236
192
5.39
Commercial 630,739
7,314
4.58
581,202
6,759
4.59
Consumer 273,629
9,149
13.26
240,067
8,082
13.36
Total loans ^1,2
5,046,819
59,283
4.66
4,764,755
55,885
4.66
Total interest-earning assets ³
6,467,774
66,956
4.11
6,377,439
65,225
4.06
Allowance for loan losses (58,441 )

(52,781 )

Noninterest-earning assets 707,733

622,721

Total assets $ 7,117,066

$ 6,947,379

Liabilities and shareholder’s equity:

Savings $ 2,338,580
$ 504
0.09
$ 2,352,553
$ 415
0.07
Interest-bearing checking 1,041,485
388
0.15
1,016,490
194
0.08
Money market 141,664
229
0.64
161,363
244
0.60
Time certificates 821,711
3,263
1.58
773,921
2,782
1.43
Total interest-bearing deposits 4,343,440
4,384
0.40
4,304,327
3,635
0.34
Advances from Federal Home Loan Bank 39,880
233
2.32
48,207
241
1.99
Securities sold under agreements to repurchase 75,814
189
0.99
86,547
163
0.75
Total interest-bearing liabilities 4,459,134
4,806
0.43
4,439,081
4,039
0.36
Noninterest bearing liabilities:

Deposits 1,860,080

1,778,751

Other 131,832

114,343

Shareholder’s equity 666,020

615,204

Total liabilities and shareholder’s equity $ 7,117,066

$ 6,947,379

Net interest income $ 62,150

$ 61,186

Net interest margin (%) ⁴

3.82

3.81

Nine months ended September 30
2019 2018
(dollars in thousands) Average
balance
Interest
income/
expense
Yield/
rate (%) Average
balance
Interest
income/
expense
Yield/
rate (%)
Assets:

Interest-earning deposits $ 9,776
$ 172
2.32
$ 59,051
$ 795
1.77
FHLB stock 10,052
276
3.67
10,035
274
3.65
Investment securities
Taxable 1,444,810
24,490
2.26
1,491,378
25,664
2.29
Non-taxable 27,476
1,043
5.00
15,953
502
4.15
Total investment securities 1,472,286
25,533
2.31
1,507,331
26,166
2.31
Loans
Residential 1-4 family 2,178,214
67,280
4.12
2,121,049
65,204
4.10
Commercial real estate 854,252
30,393
4.71
865,603
29,350
4.49
Home equity line of credit 1,026,440
29,295
3.82
935,184
25,278
3.61
Residential land 13,658
557
5.44
15,727
638
5.41
Commercial 609,732
21,196
4.63
578,246
19,752
4.55
Consumer 271,600
27,058
13.32
235,063
23,096
13.14
Total loans ^1,2
4,953,896
175,779
4.73
4,750,872
163,318
4.58
Total interest-earning assets ³
6,446,010
201,760
4.17
6,327,289
190,553
4.01
Allowance for loan losses (55,210 )

(53,510 )

Noninterest-earning assets 691,148

595,952

Total assets $ 7,081,948

$ 6,869,731

Liabilities and shareholder’s equity:

Savings $ 2,335,613
$ 1,392
0.08
$ 2,336,007
$ 1,227
0.07
Interest-bearing checking 1,041,420
918
0.12
993,686
476
0.06
Money market 146,247
725
0.66
133,826
343
0.34
Time certificates 822,483
9,888
1.61
777,816
7,830
1.35
Total interest-bearing deposits 4,345,763
12,923
0.40
4,241,335
9,876
0.31
Advances from Federal Home Loan Bank 42,601
808
2.54
50,487
740
1.96
Securities sold under agreements to repurchase 77,417
553
0.95
105,410
553
0.70
Total interest-bearing liabilities 4,465,781
14,284
0.43
4,397,232
11,169
0.34
Noninterest bearing liabilities:

Deposits 1,835,214

1,758,824

Other 129,642

105,426

Shareholder’s equity 651,311

608,249

Total liabilities and shareholder’s equity $ 7,081,948

$ 6,869,731

Net interest income
$ 187,476

$ 179,384

Net interest margin (%) ⁴

3.87

3.78

¹~~Includes loans held for sale, at lower of cost or fair value.~~


²	Includes recognition of net deferred loan fees of nil and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.2 million for the nine months ended September 30, 2019 and 2018, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.


³	~~For the three months ended and for the nine months ended September 30, 2019 and 2018, the taxable-equivalent basis adjustments made to the table above were not material.~~


⁴	~~Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.~~

~~Earning assets, costing liabilities, contingencies and other factors.~~ Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In the prior year, interest rate increases had resulted in an increase in ASB’s net interest income and net interest margin. However, the recent interest rate reductions have negatively impacted ASB’s net interest income and net interest margin. Future interest reductions may continue to negatively impact ASB’s net interest income and net interest margin.

~~Loans and mortgage-backed securities are ASB’s primary earning assets.~~

~~Loan portfolio~~. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.

~~Home equity— key credit statistics~~. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest-only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below.

September 30, 2019 December 31, 2018
Outstanding balance of home equity loans (in thousands) $ 1,079,262
$ 978,237
Percent of portfolio in first lien position 52.4 % 49.2 %
Annualized net charge-off ratio — % 0.01 %
Delinquency ratio 0.34 % 0.46 %

End of draw period – interest only Current
September 30, 2019 Total Interest only 2019-2020 2021-2023 Thereafter amortizing
Outstanding balance (in thousands) $ 1,079,262
$ 806,692
$ 17,631
$ 110,978
$ 678,083
$ 272,570
% of total 100 % 75 % 2 % 10 % 63 % 25 %

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 75% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of ~~September 30, 2019, approximately 24% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.~~

~~Loan portfolio risk elements~~. ~~See Note 4 of the Condensed Consolidated Financial Statements.~~

~~Investment securities~~. ~~ASB’s investment portfolio was comprised as follows:~~

September 30, 2019 December 31, 2018
(dollars in thousands) Balance % of total Balance % of total
U.S. Treasury and federal agency obligations $ 126,708
9 % $ 154,349
10 %
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies 1,152,009
86
1,303,291
85
Corporate bonds 36,276
3
49,132
3
Mortgage revenue bonds 28,459
2
23,636
2
Total investment securities $ 1,343,452
100 % $ 1,530,408
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). 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 decrease in the investment securities portfolio was primarily due to the lack of purchases for the portfolio as repayments in the portfolio were used to fund the growth in the loan portfolio instead of being reinvested in the investment securities portfolio.

~~Deposits and other borrowings~~. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB

of Des Moines and securities sold under agreements to repurchase continue to be additional sources of funds. As of September 30, 2019 and December 31, 2018, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings. The weighted average cost of deposits for the first ~~nine~~ ~~months of 2019 and 2018 was 0.28% and 0.22%, respectively.~~

~~Federal Home Loan Bank of Des Moines~~. As of September 30, 2019 ASB had advances outstanding at the FHLB of Des Moines of $38 million compared to $45 million as of December 31, 2018. As of September 30, 2019, the unused borrowing capacity with the FHLB of Des Moines was $2.2 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.

~~Contingencies~~. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.

~~Other factors~~. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.

~~As of~~ ~~September 30, 2019~~, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $2.9 million compared to an unrealized loss, net of taxes, of $24.4 million as of December 31, 2018. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.

During the first nine months of 2019, ASB recorded a provision for loan losses of $17.9 million due to additional loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial credit and a commercial real estate loan that was downgraded to substandard, partly offset by the release of reserves resulting from recoveries of previously charged-off loans. During the first ~~nine~~ months of 2018, ASB recorded a provision for loan losses of $12.3 million primarily due to additional loan loss reserves for the consumer loan portfolio, partly offset by the release of reserves for improved credit quality of the commercial and commercial real estate loan portfolios.

Nine months ended September 30
Year ended
December 31,
(in thousands) 2019 2018 2018
Allowance for loan losses, January 1 $ 52,119
$ 53,637
$ 53,637
Provision for loan losses 17,873
12,337
14,745
Less: net charge-offs 16,952
11,847
16,263
Allowance for loan losses, end of period $ 53,040
$ 54,127
$ 52,119
Ratio of net charge-offs during the period to average loans outstanding (annualized) 0.46 % 0.33 % 0.34 %

ASB maintains a reserve for credit losses that consists of two components, the allowance for loan losses and a reserve for unfunded loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in other noninterest expense. As of September 30, 2019 and December 31, 2018, the reserve for unfunded loan commitments was $1.7 million.

~~Sale of Office Building.~~ In October 2019, ASB completed the sale of an office building it had vacated when the bank moved into its new campus headquarters. The sale of the office building resulted in a pretax gain on sale of approximately $8.8 million, which will be reflected in the fourth quarter of 2019 financial statements.

~~Legislation and regulation.~~ ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”

~~Final Capital Rules~~. On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other

requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding companies and propose to apply the FRB’s capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.

Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and addresses shortcomings in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule are:

~~Minimum Capital Requirements~~

Effective dates 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019
Capital conservation buffer
0.625 % 1.25 % 1.875 % 2.50 %
Common equity Tier-1 ratio + conservation buffer 4.50 % 5.125 % 5.75 % 6.375 % 7.00 %
Tier-1 capital ratio + conservation buffer 6.00 % 6.625 % 7.25 % 7.875 % 8.50 %
Total capital ratio + conservation buffer 8.00 % 8.625 % 9.25 % 9.875 % 10.50 %
Tier-1 leverage ratio 4.00 % 4.00 % 4.00 % 4.00 % 4.00 %
Countercyclical capital buffer — not applicable to ASB
0.625 % 1.25 % 1.875 % 2.50 %

~~The final rule was effective January 1, 2015 for ASB and as of~~ ~~September 30, 2019, ASB met the new capital requirements (see “Financial Condition” for a summary of ASB’s capital ratios).~~

Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any.

~~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.

FINANCIAL CONDITION

Liquidity and capital resources. In response to the COVID-19 pandemic, many countries, states, and cities have imposed stay-at-home orders and strict social distancing measures that have had a significant impact on global economic activity. As a result, the capital markets, including the commercial paper markets, have experienced high levels of volatility, and in some cases, disruption. In March 2020, due to elevated concerns regarding corporate credit risk, the commercial paper markets experienced significantly less liquidity, particularly for tier-3 issuers. As a consequence, HEI and Hawaiian Electric were unable to place commercial paper at a reasonable rate and desired maturity and instead borrowed under their respective backup revolving credit facilities (floating rate at an adjusted London interbank offered rate, as defined in the agreements, plus 137.5 basis points or an alternate base rate, as defined in the agreements, plus 37.5 basis points). The Company cannot predict when it will be able to return to the commercial paper markets for borrowings at reasonable rates for the desired maturities and intends to rely on its backup revolving credit facilities. As of March 31, 2020, the balance on HEI’s revolving credit facility was $65 million and the available committed capacity under the revolving credit facility was $85 million. As of March 31, 2020, the balance on Hawaiian Electric’s revolving credit facility was $95 million and the available committed capacity under Hawaiian Electric’s revolving credit facility was $105 million. As of March 31, 2020, ASB’s unused FHLB borrowing capacity was approximately $2.2 billion.

To preserve and enhance the Company’s liquidity position, in light of the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic and its impact on the global economy, the Company has taken a number of steps. First, on April 20, 2020, HEI borrowed $65 million under a 364-day term loan to refinance the outstanding amounts under its revolving credit facility and thereby increase the available committed borrowing capacity under the revolving credit facility. Additionally, on April 20, 2020, the Utilities added an incremental $75 million in committed revolving credit capacity at Hawaiian Electric with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched a $160 million private placement of taxable debt, the proceeds of which will be used to finance capital expenditures, repay short-term debt used to finance or refinance capital expenditures, and/or reimburse funds for payment of capital expenditures. The transaction is expected to close in mid-May 2020. In addition, $50 million of an existing 364-day term loan is expected be refinanced with a new $50 million term loan maturing in April 2021. As of April 30, 2020 the total amount of available borrowing capacity under the Company’s committed lines of credit was $328 million. HEI has no long-term debt maturities in 2020, and the Utilities only have $14 million of long-term debt that will be paid off when it matures on July 1, 2020.

In addition to the foregoing financing transactions, in order to further enhance the Company’s liquidity position, the Company is deferring, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Company is also deferring approximately $5.8 million per month in planned monthly pension contributions, to be paid later in the year, to further strengthen its liquidity position. If further liquidity is necessary, the Utilities could also reduce the pace of capital spending related to non-essential projects. Additionally, the Company has the option to issue new shares rather than purchase currently outstanding shares on the open market to satisfy share issuances under its Dividend Reinvestment and Stock Purchase Plan (DRIP) program. The estimated amount of capital that could be preserved by issuing new shares, rather than utilizing open market purchases, on an annual basis, is estimated to be approximately $30 million based on historical demand, but such future amount is dependent on a number of factors, including, without limitation, future share prices, number of shares/participants in the DRIP program, and the amount of new investment in HEI’s stock by DRIP participants.

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, 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. However, the COVID-19 pandemic is a rapidly evolving situation, and the Company cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impact on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.

(dollars in millions) September 30, 2019 December 31, 2018 % change
Total assets $ 7,135
$ 7,028
2
Investment securities 1,343
1,530
(12 )
Loans held for investment, net 5,031
4,791
5
Deposit liabilities 6,196
6,159
1
Other bank borrowings 129
110
17
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:


(dollars in millions)	March 31, 2020						December 31, 2019
Short-term borrowings—other than bank	$	100	2	%	$	186	4	%
Long-term debt, net—other than bank	2,068		46		1,964		44
Preferred stock of subsidiaries	34		1		34		1
Common stock equity	2,277		51		2,280		51
	$	4,479	100	%	$	4,464	100	%

HEI’s commercial paper borrowings and line of credit facility were as follows:


	Average balance		Balance
(in millions)	Three months ended March 31, 2020		March 31, 2020		December 31, 2019
Commercial paper	$	65	$	—	$	97
Line of credit draws	10		65		—
Undrawn capacity under HEI’s line of credit facility			85		150

Note:This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s external short-term borrowings during the first three months of 2020 was $99 million.

HEI has a $150 million line of credit facility with $65 million outstanding at March 31, 2020. See Note 5 of the Condensed Consolidated Financial Statements.

There were no new issuances of common stock through DRIP, HEIRSP or the ASB 401(k) Plan in the three months ended March 31, 2020 and 2019 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.

For the first three months of 2020, net cash provided by operating activities of HEI consolidated was $61 million. Net cash used by investing activities for the same period was $260 million, primarily due to capital expenditures, ASB’s purchases of available-for-sale investment securities and ASB’s net increase in loans, partly offset by ASB’sreceipt of repayments from available-for-sale investment securities. Net cash provided by financing activities during this period was $208 million as a result of several factors, including net increases in ASB’s deposit liabilities and other bank borrowings and the issuances of short-term and long-term debt, partly offset by net decrease in short-term borrowings and payment of common stock dividends. During the first three months of 2020, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $27 million and $28 million, respectively.

Dividends. The payout ratios for the first three months of 2020 and full year 2019 were 108% and 64%, respectively. 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 its 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 current and expected future economic conditions, including impacts from the COVID-19 pandemic.

MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES

For information about these material estimates and critical accounting policies, see pages 38 to 39, 51 to 52, and 67 to 68 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2019 Form 10-K.

Allowance for credit losses. The Company considers the policies related to the allowance for credit losses as critical to the financial statement presentation. The allowance for credit losses applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, the accounting for credit losses on AFS debt securities and purchased financial assets with credit deterioration are amended. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities is replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The accounting for credit loss models use a probability-of-default, loss given default and exposure at default methodology to estimate the expected credit losses. Within each model or calculation, loans are further segregated based on additional risk characteristics specific to that loan type, such as risk rating, FICO score, bankruptcy score, age of loan and collateral. The Company uses both internal and external historical data, as appropriate, and a blend of economic forecasts to estimate credit losses over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company’s asset liability management system. See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements for further discussion of the Company’s allowance for credit losses.

Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.

Electric utility

Recent developments—COVID-19

See also Recent developments—COVID-19 in HEI’s MD&A.

Economic conditions in Hawaii have been severely impacted by the COVID-19 pandemic. For the month-to-date period ended April 24, 2020, statewide daily passenger counts have declined more than 98%, and year-to-date initial unemployment claims ending April 24, 2020 were up more than eight times compared to the same period last year. As a consequence of the rapid decline in economic activity, the demand for electricity was significantly impacted. Due to the statewide lockdown during the last week of March, the Utilities saw system loads, inclusive of Distributed Generation–Photovoltaics, decline by about 8% compared to the rest of March. Although kWh sales year-to-date through March 31, 2020 were about 4.5% higher than the same period in 2019, the Utilities expect the level of kWh sales in 2020 to be 8%-14% below sales levels achieved in 2019, as long as the in-bound travel quarantine restrictions and shelter-in-place order remain in effect. Due to the lower kWh sales level expected for 2020, the Utilities expect that its RPS level of achievement will increase to 36%-38% because renewable generation will comprise a larger proportion of total kWh sales.

While the Utilities do not expect electric energy revenues to be significantly impacted due to the decoupling mechanism, which allows recovery of the difference between PUC approved target revenues and recorded adjusted revenues regardless of the level of kWh sales, the timing of customer collections would be delayed (or accelerated) if the level of kWh sales decreases below (or increases above) the estimated kWh sales. Annually, the Utilities submit a decoupling filing to the PUC, which requests recovery by the utility (or refund to customers) of the difference between recorded adjusted revenues and target revenues under the RBA. The difference is collected or refunded through an adjustment to customer rates in the following year based on estimated sales, starting on June 1st of that following year, which has an impact on the timing of the Utilities’ cash flow. Additionally, although the Utilities’ decoupling mechanism allows for collection under the RBA, the RBA balance accrues interest only at the short-term debt rate from the last rate case (1.75% for Hawaiian Electric, 1.5% for Hawaii Electric Light and 3.0% for Maui Electric). While lower fuel prices, which have declined approximately 17% since the start of the year, will benefit customers in the form of lower bills during this difficult time, the Utilities expect that its accounts receivable balances, bad debt expense and write-offs will increase significantly due to business shutdowns that have occurred, the high level of unemployment (year-to-date initial unemployment claims as of April 24, 2020 totaled 208,791), and the moratorium on customer disconnections through June 30, 2020. To address the potential financing requirement related to the delayed timing of cash flows collected under the decoupling mechanism through the RBA and the expected slowing or reduction in accounts receivable collections from customers, the Utilities have taken a number of steps to enhance its liquidity position. See “Financial Condition—Liquidity and capital resources” for additional information.

The Utilities provide an essential service to the State of Hawaii and have continued to operate to protect the health and safety of employees and customers and to enhance reliability. The Utilities have also implemented certain aspects of its business continuity plans, which includes the activation of its Incident Management Team to closely manage the response to the pandemic and have implemented practices related to employee and facilities hygiene in order to ensure the reliability and resilience of its operations. For example, plant operators and operations crews have been separated into distinct teams with no overlap of personnel in order to mitigate transmission risk amongst critical personnel and to minimize to the risk of not having appropriate backup personnel available to perform essential functions. Plans are being developed in the event sequestration of critical personal is required. Further, work plans have been modified to prioritize “must do” work over other non-essential

work, which has been deferred. While costs related to COVID-19 incurred during the first quarter of 2020, other than the increase in bad debt expense, have been immaterial, continued separation of distinct teams, requiring alternating teams to stay at home, and costs of sequestration of critical personnel could result in higher future costs. On April 22, 2020, the Utilities filed a request with the PUC for deferral treatment of COVID-19 related expenses, and on May 4, 2020, the PUC authorized the recording of regulatory assets for costs resulting from the suspension of disconnections (see also discussion under Item 1A. “Risk Factors” and “Subsequent event–regulatory order” in Note 3 of the Condensed Consolidated Financial Statements). Looking forward, the prolonged impact of COVID-19 could adversely affect the ability of the Utilities’ contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, or require modifications to existing contracts, which could adversely affect the Utilities’ business, increase expenses, and impact the Utilities’ ability to achieve its RPS goals beyond 2020. Additionally, while the state’s aggressive response to the pandemic has dramatically reduced the spread of the coronavirus, the measures taken have had a severe economic impact on the state’s businesses and residents, which may influence the PUC’s actions regarding requested rate increases. See “Item 1A. Risk Factors” in Part II for additional discussion of risks.

At this time, the Utilities are not able to predict what the full impact of the COVID-19 pandemic will have on its results of operations, financial position and cash flows because it is uncertain the extent to which the protective measures to prevent the spread of the virus will be in place.

For a discussion regarding the impact of economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.”

RESULTS OF OPERATIONS


Three months ended March 31						Increase
2020		2019		(decrease)					(dollars in millions, except per barrel amounts)
$	597	$	578	$	19			Revenues. Net increase largely due to:
						$	13	higher kWh generated and higher fuel oil prices¹
						8		higher purchased power energy prices and higher kWh purchased²
						1		higher electric rates
						1		MPIR for West Loch Generating Station and Grid Modernization project
						(2)		renewable RFP Phase 1 PIM in 2019
						(2)		billing to a third party for mutual assistance work reimbursement in 2019
173		161		12				Fuel oil expense¹. Net increase largely due to higher kWh generated, coupled with higher fuel oil prices
140		134		6				Purchased power expense^{1 ,2}. Net increase largely due to higher purchased power energy prices and higher kWh purchased
127		118		9				Operation and maintenance expenses. Net increase largely due to:
						3		increase in allowance for bad debt in light of COVID-19
						3		2019 PUC approval of deferral treatment for previously-incurred expense to modify existing generating units on Maui to run at lower loads in order to accept more renewable generation
						2		increase in vegetation management work
						3		higher outside services for system support (Interactive Voice Response, Customer Information System, Energy Management and development of portal for CBRE)
						(2)		cost for a third party mutual assistance work in 2019
113		109		4				Other expenses. Increase due to higher depreciation expense for plant investments in 2019 and higher revenue taxes
44		57		(13)				Operating income. Decrease largely due to higher operation and maintenance, and depreciation expenses
30		42		(12)				Income before income taxes. Decrease due to higher operation and maintenance and depreciation expense and lower AFUDC, offset in part by lower interest expense related to the hybrid securities redemption replaced with lower cost debt (in May 2019) and refinancing of revenue bonds (in July 2019).
24		32		(8)				Net income for common stock. Decrease due to higher operation and maintenance, and depreciation expenses
2,006		1,916		90				Kilowatthour sales (millions)³
$	80.78	$	80.39	$	0.39			Average fuel oil cost per barrel
465,787		463,964		1,823				Customer accounts (end of period)

¹The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.

²The 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 when compared to the same quarter in the prior year due largely to warmer weather in the first quarter of 2020 than 2019.

The Utilities’ effective tax rate for the first three months of 2020 and 2019 were at 18% and 22%, respectively. The effective tax rate was lower for the three months ended March 31, 2020 compared to the same period in 2019 due primarily to higher 2020 amortization of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in federal income tax rate.

Hawaiian Electric’s consolidated ROACE was 7.4% and 7.8% for the twelve months ended March 31, 2020 and March 31, 2019, respectively.

The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of March 31, 2020 amounted to $4 billion, of which approximately 29% related to generation PPE, 63% related to transmission and

distribution PPE, and 8% related to other PPE. Approximately 11% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission.

See “Economic conditions” in the “HEI Consolidated” section above.

Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, 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).

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 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 and the first quarter of 2020), 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.

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 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 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 (GSPA) 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 have selected the next set of aggregators in the first quarter of 2020 and commenced GSPA contract negotiations. The Utilities are planning to file the executed contracts by May 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 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, has been closed on April 9, 2020.

By PUC order, CBRE Phase 2 commenced on April 9, 2020 with the goal to develop a robust CBRE market with competitive pricing anticipating that clean energy projects and programs, such as CBRE, can meaningfully contribute to the State’s recovery from the COVID-19 Emergency. CBRE Phase 2 capacity is substantially larger than Phase 1 and allows up to 235 MW across all Hawaiian Electric service territories. The capacities are allocated by island and allow for small and large system sizes to encourage a variety of system sizes. Projects will be selected through a competitive process with increased rigor around price and non-price criteria. To provide opportunities for low- to moderate-income (LMI) customers to participate in the program, separate project proposals may be submitted specifically targeting LMI customers. LMI projects do not have a size cap nor do they decrease the 235 MW capacity available to other projects. In addition to its administrative role, the Utilities and its affiliates are eligible to participate in the solicitations. The Utilities will also have opportunities to earn based on shared savings mechanisms for specific solicitations.

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 four 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 filed a Draft Microgrid Services Tariff and updated language for various DER Rules on March 30, 2020.Parties to the docket filed comments on and proposed revisions to the Draft Tariff on April 27, 2020.

Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.

As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2019, 2018 and 2017 did not trigger the earnings sharing mechanism for the Utilities.

Regulated returns. Actual and PUC-allowed returns, as of March 31, 2020, were as follows:


%	Rate-making Return on rate base (RORB)*					ROACE**				Rate-making ROACE***
Twelve months ended March 31 2020	Hawaiian Electric	Hawaii Electric Light	Maui Electric	Hawaiian Electric	Hawaii Electric Light	Maui Electric	Hawaiian Electric	Hawaii Electric Light	Maui Electric
Utility returns	6.63	6.24	5.61	7.66	7.25	6.39	8.50	7.38	6.57
PUC-allowed returns	7.57	7.52	7.43	9.50	9.50	9.50	9.50	9.50	9.50
Difference	(0.94)	(1.28)	(1.82)	(1.84)	(2.25)	(3.11)	(1.00)	(2.12)	(2.93)

* 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.

Most recent rate proceedings. As of March 31, 2020, the status of ongoing rate case for each utility was as follows:


Test year (dollars in millions)	Date (filed/ implemented)	Amount		% over rates in effect	ROACE (%)	RORB (%)	Rate base		Common equity %	Stipulated agreement reached with Consumer Advocate
Hawaiian Electric











2020
Request	8/21/19	$	77.6	4.1	10.50	7.97	$	2,477	57.15
Hawaii Electric Light













2019¹
Request	12/14/18	$	13.4	3.4	10.50	8.30	$	537	56.91	Yes
Interim increase	1/1/20	0.0		0.0	9.50	7.52	534		56.83

¹The Interim D&O issued on November 13, 2019 approved an adjustment to base rates to maintain revenues at current effective rates.

See “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.

Performance-based regulation. See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Condensed Consolidated Financial Statements.

Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:

New renewable PPAs.

•In 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 a contested case hearing and appeal of the Board of Land and Natural Resources’ decision to approve NPM’s Habitat Conservation Plan and Incidental Take Permit/License. NPM received its Incidental Take Permit from the Department of Fish and Wildlife Service on September 7, 2018 and is constructing the project.

Keep the North Shore Country (KNSC) has appealed this decision and the case has been transferred to the Hawaii Supreme Court. No additional activity has occurred regarding KNSC’s 40-day Notice of Intent to Sue that was filed on November 15, 2019. The Notice alleges the NPM Final Environmental Impact Study did not adequately address certain project aspects related to the transport route and security provisions. KNSC and Kahuku Community Association have also petitioned to appeal NPM’s Conditional Use Permits. A hearing date for motions was scheduled for April 9, 2020 but was delayed and has not yet been rescheduled.

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. On April 16, 2020, the PUC issued an order denying LOL’s Motion for Relief. On April 27, 2020, LOL filed a Notice of Appeal of the PUC’s order with the Supreme Court of the State of Hawaii.

•In July 2018, the PUC approved Maui Electric’s PPA with Molokai New Energy Partners (MNEP) 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. On March 25, 2020, MNEP filed a complaint in the United Stated District Court for the District of Hawaii against Maui Electric claiming breach of contract. Management disputes the facts presented by MNEP and all claims within the complaint.

•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.

Tariffed renewable resources.

•As of March 31, 2020, there were approximately 480MW, 106 MW and 120 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 March 31, 2020, 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 March 31, 2020, there were 34 MW, 2 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 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 2021, 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.


Utilities	Number of contracts	Total photovoltaic size (MW)	BESS Size (MW/MWh)	Guaranteed commercial operation dates	Contract term (years)	Total projected annual payment (in millions)
Hawaiian Electric	4	139.5	139.5/558	9/30/21 & 12/31/21	20 & 25	$	30.9
Hawaii Electric Light	2	60	60/240	7/20/21 & 6/30/22	25	14.1
Maui Electric	2	75	75/300	7/20/21 & 6/30/22	25	17.6
Total	8	274.5	274.5/1,098			$	62.6

•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 procurement 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 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 filed an update to the Lanai RFP on March 10, 2020 and awaiting PUC approval to reissue the RFP.

Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.

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 costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs.

FINANCIAL CONDITION

Liquidity and capital resources. In response to the COVID-19 pandemic, many countries, states, and cities have imposed strict social distancing measures that have had a significant impact on global economic activity. As a result, the capital markets,

including the commercial paper markets, have experienced high levels of volatility, and in some cases, disruption. In March 2020, due to elevated concerns regarding corporate credit risk, the commercial paper markets experienced significantly less liquidity, particularly for tier-3 issuers. As a consequence, placing commercial paper at a reasonable rate and maturity became difficult and Hawaiian Electric instead borrowed under its revolving credit facility (floating rate at adjusted London interbank offered rate, as defined in the agreements, plus 137.5 basis points or an alternate base rate, as defined in the agreement, plus 37.5 basis points). As of March 31, 2020, the balance on Hawaiian Electric’s revolving credit facility was $95 million and the available committed capacity under the revolving credit facility was $105 million.

To preserve and enhance the Utilities’ liquidity position, given the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic, the Utilities have taken a number of steps. First, on April 20, 2020, Hawaiian Electric added an incremental $75 million in committed revolving credit capacity with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched and successfully priced a $160 million private placement of taxable debt, the proceeds of which will be used to finance capital expenditures, repay short-term debt used to finance or refinance capital expenditures and/or reimburse funds for payment of capital expenditures. The transaction is expected to close in mid-May 2020. In addition, $50 million of an existing 364-day term loan is expected to be refinanced with a new $50 million term loan maturing in April 2021. As of April 30, 2020, the total amount of available borrowing capacity under the Utilities’ committed lines of credit was $180 million. The Utilities have $14 million of long-term debt that will be paid off when it matures on July 1, 2020.

In addition to the foregoing financing transactions, in order to further enhance the Utilities’ liquidity position, the Utilities are deferring, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Utilities are also deferring approximately $5.7 million per month in planned monthly pension contributions, to be instead paid later in the year, to further strengthen is liquidity position. If further liquidity is necessary, the Utilities could also reduce the pace of capital spending related to non-essential projects.

The Utilities believe that its ability to generate cash, both internally from operations and externally from issuances of equity and debt securities, 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. However, the COVID-19 pandemic is a rapidly evolving situation, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities’ ability, as well as the cost, to access additional capital, or the future impacts on the Utilities’ financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.

Hawaiian Electric’s consolidated capital structure was as follows:


(dollars in millions)	March 31, 2020						December 31, 2019
Short-term borrowings	$	100	3	%	$	89	2	%
Long-term debt, net	1,511		41		1,498		41
Preferred stock	34		1		34		1
Common stock equity	2,044		55		2,047		56
	$	3,689	100	%	$	3,668	100	%

Information about Hawaiian Electric’s commercial paper borrowings, borrowings from HEI and line of credit facility were as follows:


	Average balance		Balance
(in millions)	Three months ended March 31, 2020		March 31, 2020		December 31, 2019
Short-term borrowings ¹
Commercial paper	$	71	$	—	$	39
Borrowings from HEI	—		—		—
Line of credit draws	14		95		—
Undrawn capacity under line of credit facility	—		105		200

¹ The maximum amount of external short-term borrowings by Hawaiian Electric during the first three months of 2020 was approximately $194 million. As of March 31, 2020, Hawaii Electric Light and Maui Electric had short-term borrowings from Hawaiian Electric of $2.5 million and $42.2 million, respectively, which intercompany borrowings are eliminated in consolidation. In addition to the short-term borrowings above, Hawaiian Electric drew the second $50 million of their $100 million, 364-day term loan facility, on March 11, 2020.

Hawaiian Electric has a $200 million line of credit facility with $95 million outstanding at March 31, 2020. See Note 5 of the Condensed Consolidated Financial Statements.

Credit ratings. S&P revised Hawaiian Electric’s rating outlook to “positive” from “stable” on February 20, 2020. The revision to the rating outlook was primarily based on the progress of regulatory reform for the Utilities. S&P 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 Condensed Consolidated Financial Statements.

SPRBs. Special purpose revenue bonds (SPRBs) have been issued by the Department of Budget and Finance of the State of Hawaii (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 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 March 31, 2020, Hawaiian Electric had $30.9 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of March 31, 2020.

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 the second $50 million on March 11, 2020.

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.

As of March 31, 2020, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $305 million, $125 million, and $110 million, respectively, of remaining taxable debt to issue prior to December 31, 2022. See summary table below.


(in millions)	Hawaiian Electric		Hawaii Electric Light		Maui Electric
Total “up to” amounts of taxable debt authorized through 2022	$	410	$	150	$	130
Less:
Taxable debt authorized and issued in 2018 under April 2018 Approval	$	75	$	15	$	10
Taxable debt issuance to refinance the 2004 QUIDS in 2019	30		10		10
Remaining authorized amounts	$	305	$	125	$	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. As of March 31, 2020, Hawaiian Electric, Hawaii Electric Light, Maui Electric have $309.8 million, $110 million, and $98.8, respectively, of remaining common stock to issue prior to December 31, 2022. See summary table below.


(in millions)	Hawaiian Electric		Hawaii Electric Light		Maui Electric
Total “up to” amounts of common stock authorized to issue and sell through 2021	$	150.0	$	10.0	$	10.0
Supplemental increase authorized	280.0		100.0		100.0
Total “up to” amounts of common stock authorized to issue and sell through 2022	430.0		110.0		110.0
Common stock authorized and issued in 2017, 2018 and 2019	120.2		—		11.2
Remaining authorized amounts	$	309.8	$	110.0	$	98.8

Cash flows. The following table reflects the changes in cash flows for the three months ended March 31, 2020 compared to the three months ended March 31, 2019:


	Three months ended March 31,
(in thousands)	2020		2019		Change
Net cash provided by operating activities	$	39,141	$	69,416	$	(30,275)
Net cash used in investing activities	(116,431)		(102,097)		(14,334)
Net cash provided by financing activities	78,707		5,185		73,522

Net cash provided by operating activities. The decrease in net cash provided by operating activities was primarily driven by lower cash from an increase in accounts receivable due to timing, partially offset by lower cash paid for fuel oil stock largely due to lower fuel oil prices.

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 increase in net cash provided by financing activities was primarily driven by higher net cash from long-term borrowings.

Forecast capital expenditures. The Utilities continuously monitor the impact of COVID-19, and 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).

Bank

Recent Developments—COVID-19

While the extent and duration of the economic slowdown caused by COVID-19 is difficult to predict, there already has been significant disruption to the global financial markets, including impacts to the capital markets and to the level of interest rates. As a result, due to lower interest rates across the curve, ASB expects that its net interest income and its net interest margin will decline year-over-year. The impact of COVID-19 to the bank’s 2020 first quarter net interest margin was not significant as the drop in interest rates occurred in late March 2020. ASB’s net interest margin was 3.72% in the first quarter of 2020, compared to 3.74% in the prior quarter. However, the lower interest rate environment will have a larger negative impact to ASB’s net interest income and net interest margin in future quarters. Additionally, ASB’s funding of short-term loans at a fixed rate of 1% under the Paycheck Protection Program (PPP) is also expected to reduce net interest margin modestly, but the income impact will be partially offset by the receipt of processing fees under the program. The state and local responses to the COVID-19 pandemic include a statewide stay-at-home order and a mandatory 14-day self-quarantine for any person traveling to Hawaii, which had a severe adverse economic impact to businesses and residents. Delays in receiving federal stimulus checks and the State of Hawaii’s inability to process unemployment filings on a timely basis has also impacted households in Hawaii. ASB expects that its provision for credit losses will increase due to forecasted credit deterioration as a result of the COVID-19 pandemic. For the three months ended March 31, 2020, the provision for credit losses was $10.4 million, compared to $6.9 million for the three months ended March 31, 2019. In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of the end of April 2020, short-term loan modifications were made to approximately 10% of the total loans outstanding. In addition to lower net interest income and higher provision for credit losses, ASB expects to collect lower fee income as fees are waived to accommodate the hardships facing its customers. ASB expects higher operating expenses related to COVID-19 throughout 2020 as the Bank has purchased additional safety protection equipment to ensure its employees are protected and its facilities are sanitized. As of April 13, 2020, ASB has temporarily closed 15 of its 49 branches and reduced banking hours at the branches that remain open in an effort to reduce social gathering and protect employees and customers. Further branch closures may occur if the negative impacts of COVID-19 accelerate. ASB’s senior management team meets on a daily basis to manage the response to the pandemic and discuss key focus areas such as the safety of the bank’s employees and customers as well as any impacts to the operations of the bank. There are weekly meetings with ASB’s board of directors to keep them apprised of the impacts of the COVID-19 pandemic.

The CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act provides over $2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration (SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2 years at a fixed interest rate of 1%. Loan payments will be deferred up to six months after origination. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP, including that its employees are kept on the payroll for eight weeks following receipt of the loan proceeds and at least 75% of the loan proceeds are used for payroll costs, subject to several conditions. In addition to payroll costs, loan proceeds may be used to cover interest on mortgages, rent and utility expenses. Lenders will process and approve the PPP loans under delegated authority of the SBA. As an existing SBA certified lender, ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. The bank has secured more than $300 million in PPP loans for approximately 2,500 small businesses that support roughly 40,000 jobs, ASB will receive a processing fee ranging from 1%-5% of the loan disbursement based on the loan size.

To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (PPPLF), authorized under section 13(3) of the Federal Reserve Act, will lend to eligible borrowers on a non-recourse basis, taking PPP loans as collateral. The maturity date of an extension of credit under this facility will equal the maturity date of the PPP loan pledged to secure the extension of credit. The maturity date of the facility’s extension of credit will be accelerated if the underlying PPP loan goes into default and ASB sells the loan to the SBA to realize on the SBA guarantee. The maturity date of the facility’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by ASB from the SBA.

Other provisions of the Cares Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes.

Also in response to the COVID-19 pandemic, the Board of Governors of the FRB, the FDIC, the National Credit Union Administration, the OCC, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7,

2020). Some of the provisions applicable to the Company include, but are not limited to accounting for loan modifications, past due reporting and nonaccrual status and charge-offs.

Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral. Lastly, during short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

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

ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.


	Three months ended March 31						Increase
(in millions)	2020		2019		(decrease)		Primary reason(s)
Interest income	$	65	$	68	$	(3)	The decrease in interest income was primarily the result of a decrease in loan portfolio yields and lower investment portfolio balances and yields, partly offset by higher loan portfolio balances. ASB’s average loan portfolio balance for the three months ended March 31, 2020 increased by $258 million compared to the same period in 2019 due to increases in the average home equity line of credit, commercial, commercial real estate and residential loan portfolios of $108 million, $99 million, $53 million and $18 million, respectively. However, the yield on loans was impacted by the declining interest rate environment which started during the last half of 2019 and has continued this year, which resulted in an decrease in yields from the total loan portfolio of 44 basis points. The average investment portfolio balance for the three months ended March 31, 2020 decreased $123 million compared to the same period in 2019 due to repayments in the portfolio and the lack of new investment security purchases for most of 2019 as liquidity was used to fund the loan portfolio growth. The investment portfolio yield for 2020 was 11 basis points lower than the investment portfolio yield in the prior year.
Noninterest income	15		15		—		Noninterest income for the three months ended March 31, 2020 was flat compared to noninterest income for the three months ended March 31, 2019 as higher mortgage banking income was offset by lower bank owned life insurance income. The higher mortgage banking income in 2020 was due to an increase in residential mortgage loans sold in the secondary market as a result of higher loan production volumes. The higher bank owned life insurance income in the prior year was due to insurance policy payouts.
Revenues	80		83		(3)		The decrease in revenues for the three months ended March 31, 2020 compared to the same period in 2019 was due to lower interest income.
Interest expense	4		5		(1)		The decrease in interest expense for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to lower term certificate balances and yields, and repayments of FHLB advances. Average deposit balances for the three months ended March 31, 2020 increased by $121 million compared to the same period in 2019 due to an increase in core deposits of $182 million, partly offset by a decrease in term certificates of $61 million. Average cost of deposits for the three months ended March 31, 2020 was 23 basis points, or 5 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the three months ended March 31, 2020 decreased by $14 million compared to the same period in 2019 due to a decrease in FHLB advances of $31 million, partly offset by an increase in repurchase agreements and federal funds purchased of $17 million. The interest-bearing liability rate for the three months ended March 31, 2020 of 35 basis points decreased by 8 basis points compared to the same period in 2019.
Provision for credit losses	10		7		3		The provision for credit losses increased for the three months ended March 31, 2020 compared to the provision for credit losses for the three months ended March 31, 2019. The provision for credit losses for 2020 was primarily due to additional loss reserves for the consumer loan portfolio and increased reserves for the commercial, commercial real estate and the consumer portfolio for expected credit deterioration due to the COVID-19 pandemic. The provision for credit losses for 2019 was primarily due to increased loss reserves for the consumer loan portfolio and additional reserves for an impaired commercial loan and a commercial real estate loan that was downgraded. Delinquency rates have decreased from 0.63% at March 31, 2019 to 0.48% at March 31, 2020. The annualized net charge-off ratio for the three months ended March 31, 2020 was 0.44% compared to an annualized net charge-off ratio of 0.39% for the same period in 2019. The increase was due to higher net charge-offs in the consumer loan portfolio with risk-based pricing.
Noninterest expense	46		45		1		Noninterest expense increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to higher occupancy expenses.
Expenses	60		57		3		The increase in expenses for the three months ended March 31, 2020 compared to the same period in 2019 was due to higher provision for credit losses.
Operating income	19		26		(7)		The decrease in operating income for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to lower interest income and higher provision for credit losses.
Net income	16		21		(5)		Net income for the three months ended March 31, 2020 was lower than the same period in 2019 due to lower operating income.

ASB’s return on average assets, return on average equity and net interest margin were as follows:


	Three months ended March 31
(%)	2020	2019
Return on average assets	0.87	1.18
Return on average equity	9.15	13.09
Net interest margin	3.72	3.99


	Three months ended March 31
	2020									2019
(dollars in thousands)	Average balance		Interest income/ expense		Yield/ rate (%)	Average balance		Interest income/ expense		Yield/ rate (%)
Assets:
Interest-earning deposits	$	26,654	$	92	1.36	$	10,359	$	62	2.41
FHLB stock	9,375		78		3.37	10,345		96		3.76
Investment securities
Taxable	1,388,466		9,019		2.60	1,513,925		10,210		2.70
Non-taxable	28,683		305		4.20	25,966		329		5.07
Total investment securities	1,417,149		9,324		2.63	1,539,891		10,539		2.74
Loans
Residential 1-4 family	2,178,480		21,922		4.03	2,160,284		22,250		4.12
Commercial real estate	898,162		9,509		4.21	845,315		10,173		4.83
Home equity line of credit	1,099,694		9,220		3.37	992,029		9,493		3.88
Residential land	14,050		197		5.60	12,801		183		5.71
Commercial	687,303		6,730		3.91	588,709		6,860		4.70
Consumer	249,917		7,989		12.86	270,220		8,901		13.36
Total loans ^1,2	5,127,606		55,567		4.34	4,869,358		57,860		4.78
Total interest-earning assets ³	6,580,784		65,061		3.96	6,429,953		68,557		4.29
Allowance for credit losses	(72,501)					(52,051)
Noninterest-earning assets	722,233					682,251
Total assets	$	7,230,516				$	7,060,153
Liabilities and shareholder’s equity:
Savings	$	2,395,751	$	540	0.09	$	2,335,046	$	402	0.07
Interest-bearing checking	1,049,010		230		0.09	1,041,916		264		0.10
Money market	147,776		250		0.68	150,448		241		0.65
Time certificates	770,350		2,567		1.34	831,326		3,345		1.63
Total interest-bearing deposits	4,362,887		3,587		0.33	4,358,736		4,252		0.40
Advances from Federal Home Loan Bank	23,195		90		1.56	54,289		353		2.64
Securities sold under agreements to repurchase and federal funds purchased	96,013		223		0.93	78,776		175		0.90
Total interest-bearing liabilities	4,482,095		3,900		0.35	4,491,801		4,780		0.43
Noninterest bearing liabilities:
Deposits	1,914,774					1,797,646
Other	144,609					133,743
Shareholder’s equity	689,038					636,963
Total liabilities and shareholder’s equity	$	7,230,516				$	7,060,153
Net interest income			$	61,161				$	63,777
Net interest margin (%) ⁴					3.72					3.99

¹ Includes loans held for sale, at lower of cost or fair value.

² Includes recognition of net deferred loan fees of nil for three months ended March 31, 2020 and 2019, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.

³ For the three months ended March 31, 2020 and 2019, the taxable-equivalent basis adjustments made to the table above were not material.

⁴ Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.

Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In the prior year, interest rate increases had resulted in an increase in ASB’s net interest income and net interest margin. However, the recent interest rate reductions have negatively impacted ASB’s net interest income and net interest margin. Future interest reductions may continue to negatively impact ASB’s net interest income and net interest margin.

Loans and mortgage-backed securities are ASB’s primary earning assets.

Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.

Home equity— key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest-only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below.


	March 31, 2020			December 31, 2019
Outstanding balance of home equity loans (in thousands)	$	1,095,677		$	1,092,125
Percent of portfolio in first lien position	54.3		%	53.7		%
Annualized net charge-off ratio	—		%	0.01		%
Delinquency ratio	0.30		%	0.27		%


							End of draw period – interest only												Current
March 31, 2020	Total			Interest only			2020-2021			2022-2024			Thereafter			amortizing
Outstanding balance (in thousands)	$	1,095,677		$	825,688		$	37,657		$	112,990		$	675,041		$	269,989
% of total	100		%	75		%	3		%	10		%	62		%	25		%

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 77% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of March 31, 2020, approximately 22% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.

Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements.

Investment securities. ASB’s investment portfolio was comprised as follows:


	March 31, 2020						December 31, 2019
(dollars in thousands)	Balance		% of total		Balance		% of total
U.S. Treasury and federal agency obligations	$	110,293	7	%	$	117,787	9	%
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,276,108		87		1,165,836		85
Corporate bonds	59,770		4		60,057		4
Mortgage revenue bonds	28,726		2		28,597		2
Total investment securities	$	1,474,897	100	%	$	1,372,277	100	%

are also backed by the full faith of the U.S. government. The increase in the investment securities portfolio was primarily due to the purchase of securities with excess liquidity.

In April 2020, ASB sold two available-for-sale corporate bonds with a par value of $28.5 million. The sales resulted in a realized gain of approximately $1.3 million, which will be recorded in the second quarter of 2020.

Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of March 31, 2020 and December 31, 2019, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings. The weighted average cost of deposits for the first three months of 2020 and 2019 was 0.23% and 0.28%, respectively.

Federal Home Loan Bank of Des Moines. As of March 31, 2020 ASB had advances outstanding at the FHLB of Des Moines of $27 million compared to nil as of December 31, 2019. As of March 31, 2020, the unused borrowing capacity with the FHLB of Des Moines was $2.2 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.

ASB had previously reported that in February 2020, the FHLB of Des Moines notified the bank that certain assets, which included high-quality home equity lines of credit, would no longer qualify as collateral for FHLB Advances, reducing ASB’s total FHLB borrowing capacity. In March 2020, the FHLB of Des Moines notified ASB that they have provisionally accepted the previously disqualified assets as collateral while they assess the eligibility of those assets.

Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.

Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.

As of ~~September 30,~~March 31, 2020, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $21.9 million compared to an unrealized gain, net of taxes, of $2.5 million as of December 31, 2019. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.

During the first three months of 2020, ASB recorded a provision for credit losses of $10.4 million primarily due to additional loss reserves for the consumer loan portfolio, increased loss rates for the commercial and commercial real estate loan portfolios and reserves for forecasted credit deterioration due to the COVID-19 pandemic. During the first three months of 2019, ASB recorded a provision for credit losses of $6.9 million primarily due to increased loss reserves for the consumer loan portfolio and additional reserves for an impaired commercial loan and a commercial real estate loan that was downgraded.


	Three months ended March 31									Year ended December 31,
(in thousands)	2020			2019			2019
Allowance for credit losses, prior to adoption of ASU No. 2016-13	$	53,355		$	52,119		$	52,119
Impact of adopting ASU No. 2016-13	19,441			—			—
Provision for credit losses	9,901			6,870			23,480
Less: net charge-offs	5,613			4,692			22,244
Allowance for credit losses, end of period	$	77,084		$	54,297		$	53,355
Ratio of net charge-offs during the period to average loans outstanding (annualized)	0.44		%	0.39		%	0.45		%

ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. As of March 31, 2020 and December 31, 2019, the reserve for unfunded loan commitments was $3.8 million and $1.7 million, respectively.

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.”

Changes to Community Bank Leverage Ratio. In April 2020, the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that:

•Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and

•Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent.

Under the interim final rules, the community bank leverage ratio will be 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio.

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.

FINANCIAL CONDITION

Liquidity and capital resources.


(dollars in millions)	March 31, 2020		December 31, 2019		% change
Total assets	$	7,386	$	7,233	2
Investment securities	1,475		1,372		8
Loans held for investment, net	5,104		5,068		1
Deposit liabilities	6,384		6,272		2
Other bank borrowings	158		115		37

As of March 31, 2020, ASB was one of Hawaii’s largest financial institutions based on assets of ~~$7.1~~$7.4 billion and deposits of ~~$6.2~~$6.4 billion.

As of ~~September 30, 2019~~,March 31, 2020, ASB’s unused FHLB borrowing capacity was approximately $2.2 billion. As of ~~September 30, 2019~~,March 31, 2020, 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.

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, net cash provided by ASB’s operating activities was ~~$71~~$29 million. Net cash used during the same period by ASB’s investing activities was ~~$65~~$140 million, primarily due to purchases of available-for-sale securities of $159 million, a net increase in loans of ~~$258~~$66 million, additions to premises and equipment of ~~$22~~$2 million ~~purchases of available-for-sale securities of $5 million,~~and contributions to low income housing investments of ~~$6 million and purchase of bank owned life insurance of $4~~$1 million, partly offset by the receipt of repayments from ~~available-for-sale~~ investment securities of ~~$195~~$82 million and proceeds from the sale of ~~investment securities~~low income housing investments of ~~$20 million, proceeds from the redemption of bank owned life insurance policies of $6 million and the receipt of held-to-maturity investment securities of $9~~$7 million. Net cash provided by financing activities during this period was $5$122 million, primarily due to increases in deposit liabilities of ~~$37~~$112 million, ~~and a~~ net increase in ~~retail repurchase agreements~~other bank borrowings with original maturities of ~~$26~~three months or less of $42 million, partly offset by ~~a net decrease in FHLB advances of $7 million,~~ a net decrease in mortgage escrow deposits of $5 million and ~~$47~~$28 million in common stock dividends to HEI (through ASB Hawaii).

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, net cash provided by ASB’s operating activities was ~~$76~~$15 million. Net cash ~~used~~provided during the same period by ASB’s investing activities was ~~$230~~$23 million, primarily due to purchases of available-for-sale investment securities of $190 million, a net increase in loans of $96 million, additions to premises and equipment of $59 million, purchases of held-to-maturity investment securities of $62 million and contributions to low income housing investments of $8 million, partly offset by receipt of repayments from available-for-sale investment securities of ~~$168~~$57 million, ~~proceeds from the sale of commercial~~partly offset by a net increase in loans of $7$20 million, additions to premises and equipment of $14 million and ~~receipts~~purchases of ~~repayments from held-to-maturity~~available-for-sale investment securities of $4 million. Net cash provided by financing activities during this period was ~~$79~~$4 million, primarily due to increases in deposit liabilities of ~~$137 million and a net increase in retail repurchase agreements of $33~~$47 million, partly offset by a net decrease in ~~FHLB advances~~other bank borrowings with original maturities of ~~$50~~three months or less of $20 million and ~~$36~~$18 million in common stock dividends to HEI (through ASB Hawaii).

ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of ~~September 30, 2019,~~March 31, 2020, ASB was well-capitalized ~~(minimum~~(well-capitalized ratio requirements noted in parentheses) with a Common equity Tier-1 ratio of 12.8% (6.5%), a Tier-1 capital ratio of 12.8% (8.0%), a Total capital ratio of ~~14.0%~~13.9% (10.0%) and a Tier-1 leverage ratio of 8.8% (5.0%). As of December 31, ~~2018,~~2019, ASB was well-capitalized with a common equity Tier-1 ratio of ~~12.8%~~13.2%, Tier-1 capital ratio of ~~12.8%~~13.2%, a Total capital ratio of ~~13.9%~~14.3% and a Tier-1 leverage ratio of ~~8.7%~~9.1%. All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company considers interest-rate risk (a non-trading market risk) to be a significant market risk for ASB as it could potentially have material impacts on the Company’s results of operations, financial condition and liquidity. For additional quantitative and qualitative information about the Company’s market risks, see HEI’s and Hawaiian Electric’s Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of HEI’s ~~2018~~2019 Form 10-K (pages 6869 to ~~70)~~71).

ASB’s interest-rate risk sensitivity measures as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 constitute “forward-looking statements” and were as follows:


Change in interest rates	Change in NII (gradual change in interest rates)				Change in EVE (instantaneous change in interest rates)				Change in interest rates	Change in NII (gradual change in interest rates)						Change in EVE (instantaneous change in interest rates)
(basis points)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		(basis points)	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
+300	3.4	%	2.5	%	18.6	%	10.0	%	+300	3.1	%	2.8	%	23.3	%	15.3	%
+200	2.6		1.9		14.7		8.1		+200	2.4		2.1		18.1		12.2
+100	1.5		1.1		9.0		5.1		+100	1.3		1.3		10.7		7.5
-100	(2.3	)	(2.3	)	(15.2	)	(11.0	)	-100	(3.1)		(2.0)		(18.8)		(12.7)



Exact Name of Registrant as Specified in Its Charter	Commission File Number	I.R.S. Employer Identification No.
HAWAIIAN ELECTRIC INDUSTRIES, INC.	1-8503	99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC.	1-4955	99-0040500



Registrant	Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Hawaiian Electric Industries, Inc.	Common Stock, Without Par Value	HE	New York Stock Exchange


Terms		Definitions
ACL		Allowance for credit losses, which is the current credit loss standard, requires recording the allowance based on the expected loss model
AES Hawaii		AES Hawaii, Inc.
AFS		Available for sale
ALL		Allowance for loan losses, as determined under the prior credit loss standard, required recording the allowance based on an incurred loss model

~~Terms~~AOCI		~~Definitions~~
~~AES Hawaii~~	~~AES Hawaii, Inc.~~
~~AFUDC~~	~~Allowance for funds used during construction~~
~~AOCI~~	Accumulated other comprehensive income/(loss)
ASB		American Savings Bank, F.S.B., a wholly-owned subsidiary of ASB Hawaii, Inc.
ASB Hawaii		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.
~~ASC~~		~~Accounting Standards Codification~~
ASU		Accounting Standards Update
~~CBRE~~CARES Act		The Coronavirus Aid, Relief, and Economic Security Act enacted March 27, 2020
CBRE		Community-based renewable energy
Company		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.)
Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
D&O		Decision and order from the PUC
DER		Distributed energy resources
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOH		Department of Health of the State of Hawaii
DRIP		HEI Dividend Reinvestment and Stock Purchase Plan
~~ECAC~~		~~Energy cost adjustment clause~~
ECRC		Energy cost recovery clause
EIP		2010 Equity and Incentive Plan, as amended and restated
EPA		Environmental Protection Agency — federal
EPS		Earnings per share
ERP/EAM		Enterprise Resource Planning/Enterprise Asset Management
EVE		Economic value of equity
Exchange Act		Securities Exchange Act of 1934
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
federal		U.S. Government
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FNMA		Federal National Mortgage Association
FRB		Federal Reserve Board
GAAP		Accounting principles generally accepted in the United States of America
GNMA		Government National Mortgage Association
Hamakua Energy		Hamakua Energy, LLC, an indirect subsidiary of HEI 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.



Terms						Definitions
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, Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp. HECO Capital Trust III (unconsolidated financing subsidiary) was canceled effective June 10, 2019.
HEI						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.)
HEIRSP						Hawaiian Electric Industries Retirement Savings Plan
HELOC						Home equity line of credit
HPOWER						City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
IPP						Independent power producer
Kalaeloa						Kalaeloa Partners, L.P.
kWh						Kilowatthour/s (as applicable)
LTIP						Long-term incentive plan
Maui Electric						Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Mauo						Mauo, LLC, an indirect subsidiary of HEI
MPIR						Major Project Interim Recovery
MSR						Mortgage servicing right
MW						Megawatt/s (as applicable)
NII						Net interest income
NPBC						Net periodic benefit costs
NPPC						Net periodic pension costs
O&M						Other operation and maintenance
OCC						Office of the Comptroller of the Currency
OPEB						Postretirement benefits other than pensions
Pacific Current						Pacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC and Mauo Holdings, LLC
PBR						Performance-based regulation
~~PIMs~~PGV						Puna Geothermal Venture
PIMs						Performance incentive mechanisms
PPA						Power purchase agreement
PPAC						Purchased power adjustment clause
PUC						Public Utilities Commission of the State of Hawaii
PV						Photovoltaic
RAM						Rate adjustment mechanism
RBA						Revenue balancing account
RFP						Request for proposals
ROACE						Return on average common equity
RORB						Return on rate base
RPS						Renewable portfolio standards
SEC						Securities and Exchange Commission
See						Means the referenced material is incorporated by reference
Tax Act						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)
TDR						Troubled debt restructuring
~~Trust III~~						~~HECO Capital Trust III was canceled effective June 10, 2019.~~
Utilities						Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
VIE						Variable interest entity



	Three months ended September 30						Nine months ended September 30
(in thousands, except per share amounts)	2019			2018			2019			2018
Revenues
Electric utility	$	688,330		$	687,409		$	1,900,609		$	1,865,962
Bank	83,201			80,496			247,940			233,019
Other	4			143			86			218
Total revenues	771,535			768,048			2,148,635			2,099,199
Expenses
Electric utility	616,537			613,373			1,716,562			1,685,413
Bank	54,240			53,232			171,605			153,951
Other	3,450			3,379			12,589			11,083
Total expenses	674,227			669,984			1,900,756			1,850,447
Operating income (loss)
Electric utility	71,793			74,036			184,047			180,549
Bank	28,961			27,264			76,335			79,068
Other	(3,446		)	(3,236		)	(12,503		)	(10,865		)
Total operating income	97,308			98,064			247,879			248,752
Retirement defined benefits expense—other than service costs	(648		)	(1,276		)	(2,172		)	(4,673		)
Interest expense, net—other than on deposit liabilities and other bank borrowings	(22,425		)	(22,523		)	(69,081		)	(66,042		)
Allowance for borrowed funds used during construction	1,208			1,006			3,465			3,815
Allowance for equity funds used during construction	3,250			1,962			9,335			8,239
Income before income taxes	78,693			77,233			189,426			190,091
Income taxes	14,803			10,862			36,390			36,473
Net income	63,890			66,371			153,036			153,618
Preferred stock dividends of subsidiaries	471			471			1,417			1,417
Net income for common stock	$	63,419		$	65,900		$	151,619		$	152,201
Basic earnings per common share	$	0.58		$	0.61		$	1.39		$	1.40
Diluted earnings per common share	$	0.58		$	0.60		$	1.39		$	1.40
Weighted-average number of common shares outstanding	108,973			108,879			108,941			108,847
Net effect of potentially dilutive shares	390			176			437			243
Weighted-average shares assuming dilution	109,363			109,055			109,378			109,090


•	~~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” in 2020, which may require an increase in the allowance for loan losses and result in more volatility in the provision for loan losses;



	Common stock			Retained			Accumulated other comprehensive
(in thousands)	Shares	Amount		Earnings			income (loss)			Total
Balance, December 31, 2018	108,879	$	1,669,267	$	543,623		$	(50,610	)	$	2,162,280
Net income for common stock	—	—		45,688			—			45,688
Other comprehensive income, net of taxes	—	—		—			9,241			9,241
Share-based expenses and other, net	58	1,166		—			—			1,166
Common stock dividends (32¢ per share)	—	—		(34,860		)	—			(34,860		)
Balance, March 31, 2019	108,937	1,670,433		554,451			(41,369		)	2,183,515
Net income for common stock	—	—		42,512			—			42,512
Other comprehensive income, net of taxes	—	—		—			13,699			13,699
Share-based expenses and other, net	35	3,720		—			—			3,720
Common stock dividends (32¢ per share)	—	—		(34,860		)	—			(34,860		)
Balance, June 30, 2019	108,972	1,674,153		562,103			(27,670		)	2,208,586
Net income for common stock	—	—		63,419			—			63,419
Other comprehensive income, net of taxes	—	—		—			3,297			3,297
Share-based expenses and other, net	1	2,258		—			—			2,258
Common stock dividends (32¢ per share)	—	—		(34,871		)	—			(34,871		)
Balance, September 30, 2019	108,973	$	1,676,411	$	590,651		$	(24,373	)	$	2,242,689
Balance, December 31, 2017	108,788	$	1,662,491	$	476,836		$	(41,941	)	$	2,097,386
Net income for common stock	—	—		40,247			—			40,247
Other comprehensive loss, net of tax benefits	—	—		—			(12,773		)	(12,773		)
Share-based expenses and other, net	53	658		—			—			658
Common stock dividends (31¢ per share)	—	—		(33,741		)	—			(33,741		)
Balance, March 31, 2018	108,841	1,663,149		483,342			(54,714		)	2,091,777
Net income for common stock	—	—		46,054			—			46,054
Other comprehensive loss, net of tax benefits	—	—		—			(3,825		)	(3,825		)
Share-based expenses and other, net	38	2,752		—			—			2,752
Common stock dividends (31¢ per share)	—	—		(33,740		)	—			(33,740		)
Balance, June 30, 2018	108,879	1,665,901		495,656			(58,539		)	2,103,018
Net income for common stock	—	—		65,900			—			65,900
Other comprehensive loss, net of tax benefits	—	—		—			(4,589		)	(4,589		)
Share-based expenses and other, net	—	1,470		—			—			1,470
Common stock dividends (31¢ per share)	—	—		(33,754		)	—			(33,754		)
Balance, September 30, 2018	108,879	$	1,667,371	$	527,802		$	(63,128	)	$	2,132,045


(dollars in thousands, except par value)	September 30, 2019			December 31, 2018			(dollars in thousands, except par value)	March 31, 2020		December 31, 2019
Assets							Assets
Property, plant and equipment							Property, plant and equipment
Utility property, plant and equipment							Utility property, plant and equipment
Land	$	51,330		$	49,667		Land	$	51,607	$	51,816
Plant and equipment	7,097,286			6,809,671			Plant and equipment	7,305,655		7,240,288
Less accumulated depreciation	(2,686,388		)	(2,577,342		)	Less accumulated depreciation	(2,726,103)		(2,690,157)
Construction in progress	226,556			233,145			Construction in progress	199,529		193,074
Utility property, plant and equipment, net	4,688,784			4,515,141			Utility property, plant and equipment, net	4,830,688		4,795,021
Nonutility property, plant and equipment, less accumulated depreciation of $110 and $1,255 as of September 30, 2019 and December 31, 2018, respectively	6,958			6,961
Nonutility property, plant and equipment, less accumulated depreciation of $112 and $111 as of March 31, 2020 and December 31, 2019, respectively							Nonutility property, plant and equipment, less accumulated depreciation of $112 and $111 as of March 31, 2020 and December 31, 2019, respectively	6,956		6,956
Total property, plant and equipment, net	4,695,742			4,522,102			Total property, plant and equipment, net	4,837,644		4,801,977
Current assets							Current assets
Cash and cash equivalents	32,507			35,877			Cash and cash equivalents	12,409		11,022
Restricted cash							Restricted cash	30,902		30,872
Customer accounts receivable, net	163,093			177,896			Customer accounts receivable, net	158,680		152,790
Accrued unbilled revenues, net	123,820			121,738			Accrued unbilled revenues, net	113,780		117,227
Other accounts receivable, net	4,618			6,215			Other accounts receivable, net	11,247		11,568
Fuel oil stock, at average cost	84,543			79,935			Fuel oil stock, at average cost	89,527		91,937
Materials and supplies, at average cost	60,810			55,204			Materials and supplies, at average cost	61,198		60,702
Prepayments and other	46,321			32,118			Prepayments and other	35,907		116,980
Regulatory assets	32,951			71,016			Regulatory assets	28,967		30,710
Total current assets	548,663			579,999			Total current assets	542,617		623,808
Other long-term assets							Other long-term assets
Operating lease right-of-use assets	192,254			—			Operating lease right-of-use assets	177,097		176,809
Regulatory assets	716,316			762,410			Regulatory assets	669,677		684,370

Other	107,993			102,992			Other	108,893		101,718
Total other long-term assets	1,016,563			865,402			Total other long-term assets	955,667		962,897
Total assets	$	6,260,968		$	5,967,503		Total assets	$	6,335,928	$	6,388,682
Capitalization and liabilities							Capitalization and liabilities
Capitalization							Capitalization
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 16,751,488 shares at September 30, 2019 and December 31, 2018)	$	111,696		$	111,696
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at March 31, 2020 and December 31, 2019)							Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at March 31, 2020 and December 31, 2019)	$	113,678	$	113,678
Premium on capital stock	681,305			681,305			Premium on capital stock	714,824		714,824
Retained earnings	1,200,081			1,164,541			Retained earnings	1,217,250		1,220,129
Accumulated other comprehensive income, net of taxes-retirement benefit plans	172			99			Accumulated other comprehensive income, net of taxes-retirement benefit plans	(1,253)		(1,279)
Common stock equity	1,993,254			1,957,641			Common stock equity	2,044,499		2,047,352
Cumulative preferred stock — not subject to mandatory redemption	34,293			34,293			Cumulative preferred stock — not subject to mandatory redemption	34,293		34,293
Long-term debt, net	1,322,255			1,418,802			Long-term debt, net	1,496,638		1,401,714
Total capitalization	3,349,802			3,410,736			Total capitalization	3,575,430		3,483,359
Commitments and contingencies (Note 3)							Commitments and contingencies (Note 3)
Current liabilities							Current liabilities
Current portion of operating lease liabilities	62,758			—			Current portion of operating lease liabilities	63,743		63,707
Current portion of long-term debt	95,965			—
Current portion of long-term debt, net							Current portion of long-term debt, net	13,997		95,953
Short-term borrowings from non-affiliates	112,353			25,000			Short-term borrowings from non-affiliates	99,956		88,987

Accounts payable	152,562			171,791			Accounts payable	145,935		187,770
Interest and preferred dividends payable	27,540			23,215			Interest and preferred dividends payable	27,941		20,728
Taxes accrued, including revenue taxes	204,839			233,333			Taxes accrued, including revenue taxes	158,991		207,992
Regulatory liabilities	19,516			17,977			Regulatory liabilities	42,711		30,724
Other	67,899			60,003			Other	65,748		67,305
Total current liabilities	743,432			531,319			Total current liabilities	619,022		763,166
Deferred credits and other liabilities							Deferred credits and other liabilities
Operating lease liabilities	128,812			—			Operating lease liabilities	118,953		113,400
Deferred income taxes	392,561			383,197			Deferred income taxes	380,869		377,150
Regulatory liabilities	944,224			932,259			Regulatory liabilities	947,259		941,586
Unamortized tax credits	90,720			91,522			Unamortized tax credits	114,878		117,868
Defined benefit pension and other postretirement benefit plans liability	500,186			503,659			Defined benefit pension and other postretirement benefit plans liability	470,811		478,763
Other	111,231			114,811			Other	108,706		113,390
Total deferred credits and other liabilities	2,167,734			2,025,448			Total deferred credits and other liabilities	2,141,476		2,142,157

Total capitalization and liabilities	$	6,260,968		$	5,967,503		Total capitalization and liabilities	$	6,335,928	$	6,388,682


																	Common stock					Premium on capital		Retained		Accumulated other comprehensive
(in thousands)																(in thousands)	Shares	Amount		stock		earnings		income (loss)		Total
Balance, December 31, 2019																Balance, December 31, 2019	17,048	$	113,678	$	714,824	$	1,220,129	$	(1,279)	$	2,047,352
Net income for common stock																Net income for common stock	—	—		—		23,905		—		23,905
Other comprehensive income, net of taxes																Other comprehensive income, net of taxes	—	—		—		—		26		26
Common stock dividends																Common stock dividends	—	—		—		(26,784)		—		(26,784)

Balance, March 31, 2020																Balance, March 31, 2020	17,048	$	113,678	$	714,824	$	1,217,250	$	(1,253)	$	2,044,499

	Common stock			Premium on capital			Retained			Accumulated other comprehensive
(in thousands)	Shares	Amount		stock			earnings			income (loss)			Total

Balance, December 31, 2018	16,751	$	111,696	$	681,305		$	1,164,541		$	99		$	1,957,641		Balance, December 31, 2018	16,751	$	111,696	$	681,305	$	1,164,541	$	99	$	1,957,641
Net income for common stock	—	—		—			32,126			—			32,126			Net income for common stock	—	—		—		32,126		—		32,126
Other comprehensive income, net of taxes	—	—		—			—			24			24			Other comprehensive income, net of taxes	—	—		—		—		24		24
Common stock dividends	—	—		—			(25,313		)	—			(25,313		)	Common stock dividends	—	—		—		(25,313)		—		(25,313)

Balance, March 31, 2019	16,751	111,696		681,305			1,171,354			123			1,964,478			Balance, March 31, 2019	16,751	$	111,696	$	681,305	$	1,171,354	$	123	$	1,964,478
Net income for common stock	—	—		—			32,574			—			32,574
Other comprehensive income, net of taxes	—	—		—			—			23			23
Common stock dividends	—	—		—			(25,313		)	—			(25,313		)
Balance, June 30, 2019	16,751	111,696		681,305			1,178,615			146			1,971,762
Net income for common stock	—	—		—			46,779			—			46,779
Other comprehensive income, net of taxes	—	—		—			—			26			26
Common stock dividends	—	—		—			(25,313		)	—			(25,313		)
Balance, September 30, 2019	16,751	$	111,696	$	681,305		$	1,200,081		$	172		$	1,993,254
Balance, December 31, 2017	16,142	$	107,634	$	614,675		$	1,124,193		$	(1,219	)	$	1,845,283
Net income for common stock	—	—		—			27,475			—			27,475
Other comprehensive income, net of taxes	—	—		—			—			31			31
Common stock dividends	—	—		—			(25,826		)	—			(25,826		)
Common stock issuance expenses	—	—		(8		)	—			—			(8		)
Balance, March 31, 2018	16,142	107,634		614,667			1,125,842			(1,188		)	1,846,955
Net income for common stock	—	—		—			31,169			—			31,169
Other comprehensive income, net of taxes	—	—		—			—			26			26
Common stock dividends	—	—		—			(25,826		)	—			(25,826		)
Balance, June 30, 2018	16,142	107,634		614,667			1,131,185			(1,162		)	1,852,324
Net income for common stock	—	—		—			49,712			—			49,712
Other comprehensive income, net of taxes	—	—		—			—			28			28
Common stock dividends	—	—		—			(25,827		)	—			(25,827		)
Balance, September 30, 2018	16,142	$	107,634	$	614,667		$	1,155,070		$	(1,134	)	$	1,876,237


	January 1, 2020
(in thousands)	Pre-ASU No. 2016-13 adoption		Impact of ASU No. 2016-13		As reported under ASU No. 2016-13
HEI consolidated
Loans held for investments, net¹	$	5,067,821	$	(19,441)	$	5,048,380
Total assets	$	13,745,251	$	(19,441)	$	13,725,810
Deferred income taxes	$	379,324	$	(5,628)	$	373,696
Other¹	583,545		1,559		585,104
Total liabilities	11,430,698		(4,069)		11,426,629
Retained earnings	622,042		(15,372)		606,670
Total shareholders’ equity	2,280,260		(15,372)		2,264,888
Total liabilities and shareholders’ equity	$	13,745,251	$	(19,441)	$	13,725,810


•	~~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.~~


¹ ¹Includes hydro power and other PPAs	~~Includes hydro power and other PPAs~~


	Three months ended September 30,					Nine months ended September 30					Three months ended March 31
(in thousands)	2019			2018		2019		2018		(in thousands)	2020		2019
Interest and dividend income										Interest and dividend income
Interest and fees on loans	$	59,260		$	55,885	$	175,740	$	163,318	Interest and fees on loans	$	55,545	$	57,860
Interest and dividends on investment securities	7,599			9,300		25,762		27,130		Interest and dividends on investment securities	9,430		10,628
Total interest and dividend income	66,859			65,185		201,502		190,448		Total interest and dividend income	64,975		68,488
Interest expense										Interest expense
Interest on deposit liabilities	4,384			3,635		12,923		9,876		Interest on deposit liabilities	3,587		4,252
Interest on other borrowings	422			404		1,361		1,293		Interest on other borrowings	313		528
Total interest expense	4,806			4,039		14,284		11,169		Total interest expense	3,900		4,780
Net interest income	62,053			61,146		187,218		179,279		Net interest income	61,075		63,708
Provision for loan losses	3,315			6,033		17,873		12,337
Net interest income after provision for loan losses	58,738			55,113		169,345		166,942
Provision for credit losses										Provision for credit losses	10,401		6,870
Net interest income after provision for credit losses										Net interest income after provision for credit losses	50,674		56,838
Noninterest income										Noninterest income
Fees from other financial services	5,085			4,543		14,445		13,941		Fees from other financial services	4,571		4,562
Fee income on deposit liabilities	5,320			5,454		15,402		15,781		Fee income on deposit liabilities	5,113		5,078
Fee income on other financial products	1,706			1,746		5,129		5,075		Fee income on other financial products	1,872		1,593
Bank-owned life insurance	1,660			2,663		6,309		4,667		Bank-owned life insurance	794		2,259
Mortgage banking income	1,490			169		3,080		1,399		Mortgage banking income	2,000		614
Gains on sale of investment securities, net	653			—		653		—

Other income, net	428			736		1,420		1,708		Other income, net	413		458
Total noninterest income	16,342			15,311		46,438		42,571		Total noninterest income	14,763		14,564
Noninterest expense										Noninterest expense
Compensation and employee benefits	25,364			23,952		76,626		72,047		Compensation and employee benefits	25,777		25,512
Occupancy	5,694			4,363		15,843		12,837		Occupancy	5,267		4,670
Data processing	3,763			3,583		11,353		10,587		Data processing	3,837		3,738
Services	2,829			2,485		7,861		8,560		Services	2,809		2,426
Equipment	2,163			1,783		6,416		5,385		Equipment	2,339		2,064
Office supplies, printing and postage	1,297			1,556		4,320		4,554		Office supplies, printing and postage	1,341		1,360
Marketing	1,142			993		3,455		2,723		Marketing	802		990
FDIC insurance	(5		)	638		1,249		2,078		FDIC insurance	102		626
Other expense	3,676			4,240		12,049		12,897		Other expense	4,194		3,854
Total noninterest expense	45,923			43,593		139,172		131,668		Total noninterest expense	46,468		45,240
Income before income taxes	29,157			26,831		76,611		77,845		Income before income taxes	18,969		26,162
Income taxes	6,269			5,610		15,868		17,103		Income taxes	3,208		5,323
Net income	$	22,888		$	21,221	$	60,743	$	60,742	Net income	15,761		20,839
Other comprehensive income, net of taxes										Other comprehensive income, net of taxes	19,847		6,252
Comprehensive income										Comprehensive income	$	35,608	$	27,091


	Amortized cost		Gross unrealized gains			Gross unrealized losses				Estimated fair value				Gross unrealized losses																						Amortized cost			Gross unrealized gains			Gross unrealized losses			Estimated fair value			Gross unrealized losses
					Less than 12 months											12 months or longer																																		Less than 12 months															12 months or longer
(dollars in thousands)					Number of issues								Fair value				Amount			Number of issues			Fair value			Amount			(dollars in thousands)																						Number of issues			Fair value			Amount		Number of issues			Fair value				Amount
September 30, 2019
March 31, 2020																																	March 31, 2020
Available-for-sale																																			Available-for-sale
U.S. Treasury and federal agency obligations	$	126,084	$	822			$	(198	)		$	126,708			—			$	—		$	—			4		$	32,686			$	(198	)	U.S. Treasury and federal agency obligations			$	108,298		$	1,995		$	—		$	110,293		—			$	—		$	—		—		$	—		$	—
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,017,256		6,647				(4,598		)		1,019,305				12			67,163			(252		)		85		389,212				(4,346		)
Mortgage-backed securities*																																	Mortgage-backed securities*			1,114,580			27,493			(621)			1,141,452			6			28,937			(129)			15		40,892			(492)
Corporate bonds	34,926		1,350			—				36,276				—			—			—				—		—				—			Corporate bonds			58,681			1,236			(147)			59,770			1			14,753			(147)			—		—			—
Mortgage revenue bonds	28,459		—			—				28,459				—			—			—				—		—				—			Mortgage revenue bonds			28,726			—			—			28,726			—									—		—			—
	$	1,206,725	$	8,819		$	(4,796	)		$	1,210,748			12			$	67,163		$	(252	)		89		$	421,898			$	(4,544	)				$	1,310,285		$	30,724		$	(768)		$	1,340,241		7			$	43,690		$	(276)		15		$	40,892		$	(492)
Held-to-maturity																																	Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	132,704	$	4,793		$	—			$	137,497			—			$	—		$	—			—		$	—			$	—
Mortgage-backed securities*																																	Mortgage-backed securities*			$	134,656		$	7,914		$	—		$	142,570		—			$	—		$	—		—		$	—		$	—
	$	132,704	$	4,793		$	—			$	137,497			—			$	—		$	—			—		$	—			$	—					$	134,656		$	7,914		$	—		$	142,570		—			$	—		$	—		—		$	—		$	—
December 31, 2018
December 31, 2019																																	December 31, 2019
Available-for-sale																																	Available-for-sale
U.S. Treasury and federal agency obligations	$	156,694	$	62		$	(2,407	)		$	154,349			5			$	25,882		$	(208	)		19		$	118,405			$	(2,199	)	U.S. Treasury and federal agency obligations			$	117,255		$	652		$	(120)		$	117,787		2			$	4,110		$	(11)		3		$	27,637		$	(109)
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,192,169		789			(31,542		)		1,161,416				22			129,011			(1,330		)		145		947,890				(30,212		)
Mortgage-backed securities*																																	Mortgage-backed securities*			1,024,892			6,000			(4,507)			1,026,385			19			152,071			(819)			75		318,020			(3,688)
Corporate bonds	49,398		103			(369		)		49,132				6			23,175			(369		)		—		—				—			Corporate bonds			58,694			1,363			—			60,057			—			—			—			—		—			—
Mortgage revenue bonds	23,636		—			—				23,636				—			—			—				—		—				—			Mortgage revenue bonds			28,597			—			—			28,597			—			—			—			—		—			—
	$	1,421,897	$	954		$	(34,318	)		$	1,388,533			33			$	178,068		$	(1,907	)		164		$	1,066,295			$	(32,411	)				$	1,229,438		$	8,015		$	(4,627)		$	1,232,826		21			$	156,181		$	(830)		78		$	345,657		$	(3,797)
Held-to-maturity																																	Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	141,875	$	1,446		$	(1,264	)		$	142,057			3			$	29,814		$	(400	)		2		$	31,505			$	(864	)
Mortgage-backed securities*																																	Mortgage-backed securities*			$	139,451		$	4,087		$	(71)		$	143,467		1			$	12,986		$	(71)		—		$	—		$	—
	$	141,875	$	1,446		$	(1,264	)		$	142,057			3			$	29,814		$	(400	)		2		$	31,505			$	(864	)				$	139,451		$	4,087		$	(71)		$	143,467		1			$	12,986		$	(71)		—		$	—		$	—



September 30, 2019	Amortized cost		Fair value
(in thousands)
Available-for-sale
Due in one year or less	$	47,046	$	47,021
Due after one year through five years	89,085		90,675
Due after five years through ten years	37,911		38,320
Due after ten years	15,427		15,427
	189,469		191,443
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,017,256		1,019,305
Total available-for-sale securities	$	1,206,725	$	1,210,748
Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	132,704	$	137,497
Total held-to-maturity securities	$	132,704	$	137,497


(in thousands)	Residential 1-4 family		Commercial real estate		Home equity line of credit		Residential land		Commercial construction		Residential construction		Commercial loans		Consumer loans		Total














Three months ended March 31, 2020
Allowance for credit losses:
Beginning balance, prior to adoption of ASU No. 2016-13	$	2,380	$	15,053	$	6,922	$	449	$	2,097	$	3	$	10,245	$	16,206	$	53,355
Impact of adopting ASU No. 2016-13	2,150		208		(541)		(64)		289		14		922		16,463		19,441
Charge-offs	—		—		—		(8)		—		—		(369)		(6,254)		(6,631)
Recoveries	53		—		6		9		—		—		186		764		1,018
Provision	(107)		1,326		(162)		(34)		1,060		(3)		1,993		5,828		9,901
Ending balance	$	4,476	$	16,587	$	6,225	$	352	$	3,446	$	14	$	12,977	$	33,007	$	77,084







Three months ended March 31, 2019
Allowance for credit losses:
Beginning balance	$	1,976	$	14,505	$	6,371	$	479	$	2,790	$	4	$	9,225	$	16,769	$	52,119
Charge-offs	(14)		—		—		—		—		—		(618)		(5,559)		(6,191)
Recoveries	609		—		5		7		—		—		180		698		1,499
Provision	(660)		320		117		(61)		53		(1)		2,027		5,075		6,870
Ending balance	$	1,911	$	14,825	$	6,493	$	425	$	2,843	$	3	$	10,814	$	16,983	$	54,297
December 31, 2019
Ending balance: individually evaluated for impairment	$	898	$	2	$	322	$	—	$	—	$	—	$	1,015	$	454	$	2,691
Ending balance: collectively evaluated for impairment	$	1,482	$	15,051	$	6,600	$	449	$	2,097	$	3	$	9,230	$	15,752	$	50,664
Financing Receivables:
Ending balance	$	2,178,135	$	824,830	$	1,092,125	$	14,704	$	70,605	$	11,670	$	670,674	$	257,921	$	5,120,664
Ending balance: individually evaluated for impairment	$	15,600	$	1,048	$	12,073	$	3,091	$	—	$	—	$	8,418	$	507	$	40,737
Ending balance: collectively evaluated for impairment	$	2,162,535	$	823,782	$	1,080,052	$	11,613	$	70,605	$	11,670	$	662,256	$	257,414	$	5,079,927


(in thousands)	Home equity line of credit		Commercial construction		Commercial loans		Total
Three months ended March 31, 2020
Allowance for loan commitments:
Beginning balance, prior to adoption of ASU No. 2016-13	$	392	$	931	$	418	$	1,741
Impact of adopting ASU No. 2016-13	(92)		1,745		(94)		1,559
Provision	—		515		(15)		500
Ending balance	$	300	$	3,191	$	309	$	3,800


(in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total financing receivables		Amortized cost> 90 days and accruing
March 31, 2020
Real estate:
Residential 1-4 family	$	2,781	$	1,630	$	1,276	$	5,687	$	2,156,207	$	2,161,894	$	—
Commercial real estate	—		—		—		—		852,120		852,120		—
Home equity line of credit	1,225		224		1,804		3,253		1,092,424		1,095,677		—
Residential land	—		—		—		—		13,720		13,720		—
Commercial construction	—		—		2,289		2,289		77,088		79,377		—
Residential construction	—		—		—		—		9,190		9,190		—
Commercial	3,712		311		309		4,332		718,315		722,647		—
Consumer	3,672		2,616		2,786		9,074		236,679		245,753		—
Total loans	$	11,390	$	4,781	$	8,464	$	24,635	$	5,155,743	$	5,180,378	$	—
December 31, 2019
Real estate:
Residential 1-4 family	$	2,588	$	290	$	1,808	$	4,686	$	2,173,449	$	2,178,135	$	—
Commercial real estate	—		—		—		—		824,830		824,830		—
Home equity line of credit	813		—		2,117		2,930		1,089,195		1,092,125		—
Residential land	—		—		25		25		14,679		14,704		—
Commercial construction	—		—		—		—		70,605		70,605		—
Residential construction	—		—		—		—		11,670		11,670		—
Commercial	1,077		311		172		1,560		669,114		670,674		—
Consumer	4,386		3,257		2,907		10,550		247,371		257,921		—
Total loans	$	8,864	$	3,858	$	7,029	$	19,751	$	5,100,913	$	5,120,664	$	—



	September 30, 2019						Three months ended September 30, 2019				Nine months ended September 30, 2019
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	8,277	$	8,877	$	—	$	8,562	$	175	$	8,515	$	422
Commercial real estate	—		—		—		—		—		—		—
Home equity line of credit	1,806		1,967		—		1,797		12		2,091		78
Residential land	3,194		3,398		—		3,205		40		2,507		90
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	6,749		11,894		—		4,812		239		4,470		239
Consumer	2		2		—		21		4		27		4
	$	20,028	$	26,138	$	—	$	18,397	$	470	$	17,610	$	833
With an allowance recorded
Real estate:
Residential 1-4 family	$	8,279	$	8,332	$	906	$	8,296	$	86	$	8,377	$	265
Commercial real estate	877		877		7		881		9		894		28
Home equity line of credit	11,103		11,133		500		11,332		143		11,606		425
Residential land	—		—		—		—		—		36		—
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	2,621		2,621		905		8,330		38		8,026		94
Consumer	556		556		504		556		12		301		14
	$	23,436	$	23,519	$	2,822	$	29,395	$	288	$	29,240	$	826
Total
Real estate:
Residential 1-4 family	$	16,556	$	17,209	$	906	$	16,858	$	261	$	16,892	$	687
Commercial real estate	877		877		7		881		9		894		28
Home equity line of credit	12,909		13,100		500		13,129		155		13,697		503
Residential land	3,194		3,398		—		3,205		40		2,543		90
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	9,370		14,515		905		13,142		277		12,496		333
Consumer	558		558		504		577		16		328		18
	$	43,464	$	49,657	$	2,822	$	47,792	$	758	$	46,850	$	1,659



	December 31, 2018						Three months ended September 30, 2018				Nine months ended September 30, 2018
(in thousands)	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	7,822	$	8,333	$	—	$	8,940	$	239	$	8,779	$	396
Commercial real estate	—		—		—		—		—		—		—
Home equity line of credit	2,743		3,004		—		2,234		23		2,103		35
Residential land	2,030		2,228		—		1,773		6		1,358		16
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	3,722		4,775		—		3,915		6		3,099		26
Consumer	32		32		—		33		—		18		—
	$	16,349	$	18,372	$	—	$	16,895	$	274	$	15,357	$	473
With an allowance recorded
Real estate:
Residential 1-4 family	$	8,672	$	8,875	$	876	$	8,820	$	84	$	8,909	$	274
Commercial real estate	915		915		7		985		11		997		32
Home equity line of credit	12,057		12,086		701		12,090		111		10,083		288
Residential land	29		29		6		20		—		45		3
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	1,618		1,618		628		1,774		28		1,824		94
Consumer	57		57		4		57		1		58		3
	$	23,348	$	23,580	$	2,222	$	23,746	$	235	$	21,916	$	694
Total
Real estate:
Residential 1-4 family	$	16,494	$	17,208	$	876	$	17,760	$	323	$	17,688	$	670
Commercial real estate	915		915		7		985		11		997		32
Home equity line of credit	14,800		15,090		701		14,324		134		12,186		323
Residential land	2,059		2,257		6		1,793		6		1,403		19
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	5,340		6,393		628		5,689		34		4,923		120
Consumer	89		89		4		90		1		76		3
	$	39,697	$	41,952	$	2,222	$	40,641	$	509	$	37,273	$	1,167


Loans modified as a TDR	Three months ended March 31, 2020
(dollars in thousands)	Number of contracts	Outstanding recorded investment (as of period end)¹		Related allowance (as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	1	$	148	$	8
Commercial real estate	2	16,584		4,281
Home equity line of credit	—	—		—
Residential land	—	—		—
Commercial construction	—	—		—
Residential construction	—	—		—
Commercial	4	756		278
Consumer	—	—		—
	7	$	17,488	$	4,567

	Three months ended March 31, 2019
(dollars in thousands)	Number of contracts	Outstanding recorded investment (as of period end)¹		Related allowance (as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	8	$	1,048	$	5
Commercial real estate	—	—		—
Home equity line of credit	2	264		23
Residential land	1	335		—
Commercial construction	—	—		—
Residential construction	—	—		—
Commercial	1	195		17
Consumer	—	—		—
	12	$	1,842	$	45


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.~~


	December 31, 2019
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	756,747	$	68,316	$	621,657	$	1,446,720
Special mention	4,451		—		29,921		34,372
Substandard	63,632		2,289		19,096		85,017
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	824,830	$	70,605	$	670,674	$	1,566,109



(in thousands)	Gross carrying amount		Accumulated amortization			Valuation allowance		Net carrying amount
September 30, 2019	$	20,413	$	(11,846	)	$	—	$	8,567
December 31, 2018	18,556		(10,494		)	—		8,062


(in thousands)	Gross carrying amount¹		Accumulated amortization		Valuation allowance		Net carrying amount

March 31, 2020	$	22,178	$	13,058	$	—	$	9,120
December 31, 2019	21,543		(12,442)		—		9,101


(in millions)	Gross amount of recognized liabilities		Gross amount offset in the Balance Sheets		Net amount of liabilities presented in the Balance Sheets		(in millions)	Gross amount of recognized liabilities		Gross amount offset in the Balance Sheets		Net amount of liabilities presented in the Balance Sheets
Repurchase agreements							Repurchase agreements
September 30, 2019	$	91	$	—	$	91
December 31, 2018	65		—		65
March 31, 2020							March 31, 2020	$	81	$	—	$	81
December 31, 2019							December 31, 2019	115		—		115



	Gross amount not offset in the Balance Sheets
(in millions)	Net amount of liabilities presented in the Balance Sheets		Financial instruments		Cash collateral pledged
Commercial account holders
September 30, 2019	$	91	$	111	$	—
December 31, 2018	65		92		—


Derivative Financial Instruments Not Designated as Hedging Instruments ¹	September 30, 2019				December 31, 2018				Derivative Financial Instruments Not Designated as Hedging Instruments ¹	March 31, 2020						December 31, 2019
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives		(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	477	$	7	$	91	$	—	Interest rate lock commitments	$	1,852	$	—	$	297	$	—
Forward commitments	9		85		—		43		Forward commitments	—		585		3		45
	$	486	$	92	$	91	$	43		$	1,852	$	585	$	300	$	45



Derivative Financial Instruments Not Designated as Hedging Instruments	Location of net gains (losses) recognized in the Statements of Income	Three months ended September 30,						Nine months ended September 30
(in thousands)		2019			2018			2019			2018
Interest rate lock commitments	Mortgage banking income	$	(3	)	$	(248	)	$	379		$	(131	)
Forward commitments	Mortgage banking income	39			62			(33		)	24
		$	36		$	(186	)	$	346		$	(107	)



	~~Series 2019A~~
~~Aggregate principal amount~~	~~$50 million~~
~~Fixed coupon interest rate~~	~~4.21%~~
~~Maturity date~~	~~May 15, 2034~~
~~Principal amount by company:~~
~~Hawaiian Electric~~	~~$30 million~~
~~Hawaii Electric Light~~	~~$10 million~~
~~Maui Electric~~	~~$10 million~~



	~~2004 Junior subordinated deferrable interest debentures redeemed~~
~~Aggregate principal amount~~	~~$51.5 million~~
~~Fixed coupon interest rate~~	~~6.50%~~
~~Maturity date~~	~~May 15, 2034~~
~~Principal amount by company:~~
~~Hawaiian Electric~~	~~$31.5 million~~
~~Hawaii Electric Light~~	~~$10 million~~
~~Maui Electric~~	~~$10 million~~



	~~Refunding Series 2019 Special Purpose Revenue Bonds~~
~~Aggregate principal amount~~	~~$150 million~~
~~Fixed coupon interest rate~~	~~3.20%~~
~~Maturity date~~	~~July 1, 2039~~
~~DBF loaned the proceeds to:~~
~~Hawaiian Electric~~	~~$90 million~~
~~Hawaii Electric Light~~	~~$60 million~~



	~~Series 2009 Special Purpose Revenue Bonds Redeemed~~
~~Aggregate principal amount~~	~~$150 million~~
~~Fixed coupon interest rate~~	~~6.50%~~
~~Maturity date~~	~~July 1, 2039~~
~~Principal amount by company:~~
~~Hawaiian Electric~~	~~$90 million~~
~~Hawaii Electric Light~~	~~$60 million~~



	~~Series 2019 Special Purpose Revenue Bonds~~
~~Aggregate principal amount~~	~~$80 million~~
~~Fixed coupon interest rate~~	~~3.50%~~
~~Maturity date~~	~~October 1, 2049~~
~~DBF loaned the proceeds to:~~
~~Hawaiian Electric~~	~~$70 million~~
~~Hawaii Electric Light~~	~~$2.5 million~~
~~Maui Electric~~	~~$7.5 million~~