HAWAIIAN ELECTRIC INDUSTRIES INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Exact Name of Registrant as Specified in Its Charter	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

State of Hawaii

(State or other jurisdiction of incorporation or organization)

Hawaiian Electric Industries, Inc. – 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813

Hawaiian Electric Company, Inc. – 1001 Bishop Street, Suite, 2500, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

Hawaiian Electric Industries, Inc. – (808) 543-5662

Hawaiian Electric Company, Inc. – (808) 543-7771

(Registrant’s telephone number, including area code)

900 Richards Street, Honolulu, Hawaii 96813 - Hawaiian Electric Company, Inc. (Hawaiian Electric)

(Former name, former address and former fiscal year, if changed since last report)



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Hawaiian Electric Industries, Inc.	Yes	☒	No	☐	Hawaiian Electric Company, Inc.	Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Hawaiian Electric Industries, Inc.	Yes	☒	No	☐	Hawaiian Electric Company, Inc.	Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.



Hawaiian Electric Industries, Inc.:				Hawaiian Electric Company, Inc.:
Large accelerated filer	☒	Smaller reporting company	☐	Large accelerated filer	☐	Smaller reporting company	☐
Accelerated filer	☐	Emerging growth company	☐	Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☐			Non-accelerated filer	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Hawaiian Electric Industries, Inc.	☐	Hawaiian Electric Company, Inc.	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Hawaiian Electric Industries, Inc.	Yes	☐	No	☒	Hawaiian Electric Company, Inc.	Yes	☐	No	☒

Securities registered pursuant to 12(b) of the Act:

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.



Class of Common Stock	Outstanding October 25, 2019
Hawaiian Electric Industries, Inc. (Without Par Value)	108,972,564	Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)	16,751,488	Shares (not publicly traded)

Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.

This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2019

TABLE OF CONTENTS



Page No.
ii	Glossary of Terms
iv	Cautionary Note Regarding Forward-Looking Statements

	PART I. FINANCIAL INFORMATION
1	Item 1.	Financial Statements
		Hawaiian Electric Industries, Inc. and Subsidiaries
1		Condensed Consolidated Statements of Income (unaudited) - three and nine months ended September 30, 2019 and 2018
2		Condensed Consolidated Statements of Comprehensive Income (unaudited) - three and nine months ended September 30, 2019 and 2018
3		Condensed Consolidated Balance Sheets (unaudited) - September 30, 2019 and December 31, 2018
4		Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - three and nine months ended September 30, 2019 and 2018
5		Condensed Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2019 and 2018
		Hawaiian Electric Company, Inc. and Subsidiaries
6		Condensed Consolidated Statements of Income (unaudited) - three and nine months ended September 30, 2019 and 2018
6		Condensed Consolidated Statements of Comprehensive Income (unaudited) - three and nine months ended September 30, 2019 and 2018
7		Condensed Consolidated Balance Sheets (unaudited) - September 30, 2019 and December 31, 2018
8		Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited) - three and nine months ended September 30, 2019 and 2018
9		Condensed Consolidated Statements of Cash Flows (unaudited) - nine months ended September 30, 2019 and 2018
10		Notes to Condensed Consolidated Financial Statements (unaudited)
57	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
57		HEI consolidated
60		Electric Utilities
70		Bank
77	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
78	Item 4.	Controls and Procedures

	PART II.	OTHER INFORMATION
80	Item 1.	Legal Proceedings
80	Item 1A.	Risk Factors
80	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
81	Item 6.	Exhibits
82	Signatures

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2019

GLOSSARY OF TERMS



Terms		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		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.

GLOSSARY OF TERMS, continued



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		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

iii

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic, political and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:

•

international, national and local economic and political conditions—including the state of the Hawaii tourism, defense and construction industries; the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by ASB, which could result in higher loan loss provisions and write-offs); decisions concerning the extent of the presence of the federal government and military in Hawaii; the implications and potential impacts of future Federal government shutdowns, including the impact to our customers to pay their electric bills and/or bank loans and the impact on the state of Hawaii economy; the implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international responses to those conditions; and the potential impacts of global developments (including global economic conditions and uncertainties; unrest; conflicts or other crisis; the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade; terrorist acts; and potential pandemics);


•	the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling or budget funding, monetary policy, trade policy and tariffs, and other policy and regulatory changes advanced or proposed by President Trump and his administration;


•	weather, natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the increasing effects of climate change, such as more severe storms, droughts, heat waves, and rising sea levels) and wildfires, including their impact on the Company’s and Utilities’ operations and the economy;


•	the timing, speed and extent of changes in interest rates and the shape of the yield curve;


•	the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile and challenging market conditions, and the cost of such financings, if available;


•	the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale, and the risks inherent in changes in the value of the Company’s pension liabilities, including changes driven by interest rates;


•	changes in laws, regulations (including tax regulations), market conditions, interest rates and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;


•	the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated, as amended by the Economic Growth, Regulatory Relief and Consumer Protection Act;


•	increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);

•

the potential delay by the Public Utilities Commission of the State of Hawaii (PUC) in considering (and potential disapproval of actual or proposed) renewable energy proposals and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; and uncertainties surrounding technologies, solar power, wind power, biofuels, environmental assessments required to meet renewable portfolio standards (RPS) goals and the impacts of implementation of the renewable energy proposals on future costs of electricity;

•

the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans included in their updated Power Supply Improvement Plans, Demand Response Portfolio Plan, Distributed Generation Interconnection Plan, Grid Modernization Plans, and business model changes, which have been and are continuing to be developed and updated in response to the orders issued by the PUC, the PUC’s April 2014 statement of its inclinations on the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and the state’s public policy goals, and subsequent orders of the PUC;


•	capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management, distributed generation (DG), combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;


•	fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs) and energy cost recovery clauses (ECRC);


•	the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;


•	the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;


•	the ability of the Utilities to achieve performance incentive goals currently in place;


•	the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Act 005, Session Laws 2018, including the potential addition of new performance incentive mechanisms, third-party proposals adopted by the PUC in its implementation of performance-based regulation (PBR), and the implications of not achieving performance incentive goals;


•	the impact of fuel price levels and volatility on customer satisfaction and political and regulatory support for the Utilities;


•	the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;


•	the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities’ electric systems and as customers reduce their energy usage;


•	the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);


•	the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;


•	the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements;


•	new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors such as the commercial development of energy storage and microgrids and banking through alternative channels;


•	cybersecurity risks and the potential for cyber incidents, including potential incidents at HEI, its third-party vendors, and its subsidiaries (including at ASB branches and electric utility plants) and incidents at data processing centers used, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general IT controls;


•	failure to achieve cost savings consistent with the minimum $246 million in Enterprise Resource Planning/Enterprise Asset Management

(ERP/EAM) project-related benefits (including $150 million in operation and maintenance (O&M) benefits) to be delivered to customers over its 12-year estimated useful life;

•

federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), the regulation of greenhouse gas emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);


•	developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies;


•	discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight;


•	decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);


•	decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS);

•

potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);


•	the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);


•	changes in accounting principles applicable to HEI and its subsidiaries, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting, the effects of potentially required consolidation of variable interest entities (VIEs), or required capital/finance lease or on-balance-sheet operating lease accounting for PPAs with IPPs;


•	downgrades by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and their impact on results of financing efforts;


•	faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage-servicing assets of ASB;


•	changes in ASB’s loan portfolio credit profile and asset quality and/or mix, which may increase or decrease the required level of provision for loan losses, allowance for loan losses and charge-offs;


•	the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” in 2020, which may require an increase in the allowance for loan losses and result in more volatility in the provision for loan losses;


•	changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;


•	unanticipated changes from the expected discontinuance of LIBOR and the transition to an alternative reference rate, which may include adverse impacts to the Company’s cost of capital, loan portfolio and interest income on loans;


•	the final outcome of tax positions taken by HEI and its subsidiaries;


•	the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits);


•	the ability of the Company’s non-regulated subsidiary, Pacific Current, LLC (Pacific Current), to achieve its performance and growth objectives, which in turn could affect its ability to service its non-recourse debt;


•	the Company’s reliance on third parties and the risk of their non-performance;


•	the impact of activism that could delay the construction, or preclude the completion, of third-party or Utility projects that are required to meet electricity demand and RPS goals; and


•	other risks or uncertainties described elsewhere in this report and in other reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or Hawaiian Electric with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, Hawaiian Electric, ASB, Pacific Current and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)



	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

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Net income for common stock	$	63,419		$	65,900		$	151,619		$	152,201
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $(1,557), $1,876, $(10,194) and $8,335, respectively	4,253			(5,123		)	27,846			(22,768		)
Reclassification adjustment for net realized gains included in net income, net of taxes of $175, nil, $175, and nil, respectively	(478		)	—			(478		)	—
Derivatives qualifying as cash flow hedges:
Unrealized interest rate hedging losses arising during the period, net of tax benefits of $208, nil, $577 and nil, respectively	(600		)	—			(1,663		)	—
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $741, $1,832, $2,482 and $5,486, respectively	2,615			5,259			7,621			15,755
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $865, $1,639, $2,459 and $4,916, respectively	(2,493		)	(4,725		)	(7,089		)	(14,174		)
Other comprehensive income (loss), net of taxes	3,297			(4,589		)	26,237			(21,187		)
Comprehensive income attributable to Hawaiian Electric Industries, Inc.	$	66,716		$	61,311		$	177,856		$	131,014

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)



(dollars in thousands)	September 30, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	176,988		$	169,208
Accounts receivable and unbilled revenues, net	311,235			325,672
Available-for-sale investment securities, at fair value	1,210,748			1,388,533
Held-to-maturity investment securities, at amortized cost	132,704			141,875
Stock in Federal Home Loan Bank, at cost	9,953			9,958
Loans held for investment, net	5,031,296			4,790,902
Loans held for sale, at lower of cost or fair value	17,115			1,805
Property, plant and equipment, net of accumulated depreciation of $2,762,118 and $2,659,230 at September 30, 2019 and December 31, 2018, respectively	5,006,394			4,830,118
Operating lease right-of-use assets	213,910			—
Regulatory assets	749,174			833,426
Other	576,263			530,364
Goodwill	82,190			82,190
Total assets	$	13,517,970		$	13,104,051
Liabilities and shareholders’ equity
Liabilities
Accounts payable	$	189,244		$	214,773
Interest and dividends payable	32,338			28,254
Deposit liabilities	6,196,223			6,158,852
Short-term borrowings—other than bank	163,836			73,992
Other bank borrowings	129,190			110,040
Long-term debt, net—other than bank	1,885,454			1,879,641
Deferred income taxes	393,140			372,518
Operating lease liabilities	213,166			—
Regulatory liabilities	963,740			950,236
Defined benefit pension and other postretirement benefit plans liability	534,670			538,384
Other	539,987			580,788
Total liabilities	11,240,988			10,907,478
Preferred stock of subsidiaries - not subject to mandatory redemption	34,293			34,293
Commitments and contingencies (Notes 3 and 4)
Shareholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none	—			—
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,972,564 shares and 108,879,245 shares at September 30, 2019 and December 31, 2018, respectively	1,676,411			1,669,267
Retained earnings	590,651			543,623
Accumulated other comprehensive loss, net of tax benefits	(24,373		)	(50,610		)
Total shareholders’ equity	2,242,689			2,162,280
Total liabilities and shareholders’ equity	$	13,517,970		$	13,104,051

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)



	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

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Industries, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)



	Nine months ended September 30
(in thousands)	2019			2018
Cash flows from operating activities
Net income	$	153,036		$	153,618
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	172,307			159,646
Other amortization	35,553			31,473
Provision for loan losses	17,873			12,337
Loans originated, held for sale	(190,700		)	(105,956		)
Proceeds from sale of loans, held for sale	177,345			109,335
Deferred income taxes	265			10,823
Share-based compensation expense	8,142			5,891
Allowance for equity funds used during construction	(9,335		)	(8,239		)
Other	(11,540		)	(4,524		)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net	12,373			(79,128		)
Increase in fuel oil stock	(3,438		)	(5,060		)
Decrease (increase) in regulatory assets	54,274			(6,474		)
Increase (decrease) in accounts, interest and dividends payable	215			(7,122		)
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes	(32,436		)	(32,006		)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability	(2,794		)	7,517
Change in other assets and liabilities	(39,712		)	15,548
Net cash provided by operating activities	341,428			257,679
Cash flows from investing activities
Available-for-sale investment securities purchased	(4,823		)	(190,411		)
Principal repayments on available-for-sale investment securities	194,845			168,334
Proceeds from sale of available-for-sale investment securities	19,810			—
Purchases of held-to-maturity investment securities	—			(62,096		)
Principal repayments of held-to-maturity investment securities	9,183			4,007
Purchase of stock from Federal Home Loan Bank	(80,475		)	(9,933		)
Redemption of stock from Federal Home Loan Bank	80,480			11,480
Net increase in loans held for investment	(258,064		)	(96,212		)
Proceeds from sale of commercial loans	—			7,149
Capital expenditures	(332,273		)	(380,623		)
Contributions to low income housing investments	(5,612		)	(7,714		)
Other	3,495			14,258
Net cash used in investing activities	(373,434		)	(541,761		)
Cash flows from financing activities
Net increase in deposit liabilities	37,371			137,443
Net increase in short-term borrowings with original maturities of three months or less	64,844			85,369
Net increase (decrease) in other bank borrowings with original maturities of three months or less	19,150			(17,374		)
Proceeds from issuance of short-term debt	25,000			—
Proceeds from issuance of long-term debt	208,970			100,000
Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds	(204,278		)	(1,867		)
Withheld shares for employee taxes on vested share-based compensation	(997		)	(996		)
Common stock dividends	(104,591		)	(101,235		)
Preferred stock dividends of subsidiaries	(1,417		)	(1,417		)
Other	(4,266		)	(5,668		)
Net cash provided by financing activities	39,786			194,255
Net increase (decrease) in cash and cash equivalents	7,780			(89,827		)
Cash and cash equivalents, beginning of period	169,208			261,881
Cash and cash equivalents, end of period	$	176,988		$	172,054

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Revenues	$	688,330		$	687,409		$	1,900,609		$	1,865,962
Expenses
Fuel oil	199,093			206,551			541,322			545,236
Purchased power	175,037			177,590			472,336			478,238
Other operation and maintenance	124,415			113,553			361,805			333,805
Depreciation	53,935			50,983			161,795			151,810
Taxes, other than income taxes	64,057			64,696			179,304			176,324
Total expenses	616,537			613,373			1,716,562			1,685,413
Operating income	71,793			74,036			184,047			180,549
Allowance for equity funds used during construction	3,250			1,962			9,335			8,239
Retirement defined benefits expense—other than service costs	(723		)	(682		)	(2,127		)	(2,934		)
Interest expense and other charges, net	(17,429		)	(18,968		)	(53,945		)	(54,822		)
Allowance for borrowed funds used during construction	1,208			1,006			3,465			3,815
Income before income taxes	58,099			57,354			140,775			134,847
Income taxes	10,822			7,144			27,800			24,995
Net income	47,277			50,210			112,975			109,852
Preferred stock dividends of subsidiaries	228			228			686			686
Net income attributable to Hawaiian Electric	47,049			49,982			112,289			109,166
Preferred stock dividends of Hawaiian Electric	270			270			810			810
Net income for common stock	$	46,779		$	49,712		$	111,479		$	108,356

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Net income for common stock	$	46,779		$	49,712		$	111,479		$	108,356
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $874, $1,648, $2,484 and $4,945, respectively	2,519			4,753			7,162			14,259
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $865, $1,639, $2,459 and $4,916, respectively	(2,493		)	(4,725		)	(7,089		)	(14,174		)
Other comprehensive income, net of taxes	26			28			73			85
Comprehensive income attributable to Hawaiian Electric Company, Inc.	$	46,805		$	49,740		$	111,552		$	108,441

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)



(dollars in thousands, except par value)	September 30, 2019			December 31, 2018
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	51,330		$	49,667
Plant and equipment	7,097,286			6,809,671
Less accumulated depreciation	(2,686,388		)	(2,577,342		)
Construction in progress	226,556			233,145
Utility property, plant and equipment, net	4,688,784			4,515,141
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
Total property, plant and equipment, net	4,695,742			4,522,102
Current assets
Cash and cash equivalents	32,507			35,877
Customer accounts receivable, net	163,093			177,896
Accrued unbilled revenues, net	123,820			121,738
Other accounts receivable, net	4,618			6,215
Fuel oil stock, at average cost	84,543			79,935
Materials and supplies, at average cost	60,810			55,204
Prepayments and other	46,321			32,118
Regulatory assets	32,951			71,016
Total current assets	548,663			579,999
Other long-term assets
Operating lease right-of-use assets	192,254			—
Regulatory assets	716,316			762,410
Other	107,993			102,992
Total other long-term assets	1,016,563			865,402
Total assets	$	6,260,968		$	5,967,503
Capitalization and liabilities
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
Premium on capital stock	681,305			681,305
Retained earnings	1,200,081			1,164,541
Accumulated other comprehensive income, net of taxes-retirement benefit plans	172			99
Common stock equity	1,993,254			1,957,641
Cumulative preferred stock — not subject to mandatory redemption	34,293			34,293
Long-term debt, net	1,322,255			1,418,802
Total capitalization	3,349,802			3,410,736
Commitments and contingencies (Note 3)
Current liabilities
Current portion of operating lease liabilities	62,758			—
Current portion of long-term debt	95,965			—
Short-term borrowings from non-affiliates	112,353			25,000
Accounts payable	152,562			171,791
Interest and preferred dividends payable	27,540			23,215
Taxes accrued, including revenue taxes	204,839			233,333
Regulatory liabilities	19,516			17,977
Other	67,899			60,003
Total current liabilities	743,432			531,319
Deferred credits and other liabilities
Operating lease liabilities	128,812			—
Deferred income taxes	392,561			383,197
Regulatory liabilities	944,224			932,259
Unamortized tax credits	90,720			91,522
Defined benefit pension and other postretirement benefit plans liability	500,186			503,659
Other	111,231			114,811
Total deferred credits and other liabilities	2,167,734			2,025,448
Total capitalization and liabilities	$	6,260,968		$	5,967,503

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited)



	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
Net income for common stock	—	—		—			32,126			—			32,126
Other comprehensive income, net of taxes	—	—		—			—			24			24
Common stock dividends	—	—		—			(25,313		)	—			(25,313		)
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

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)



	Nine months ended September 30
(in thousands)	2019			2018
Cash flows from operating activities
Net income	$	112,975		$	109,852
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	161,795			151,810
Other amortization	21,476			19,823
Deferred income taxes	(1,386		)	12,835
Allowance for equity funds used during construction	(9,335		)	(8,239		)
Other	(5,629		)	(1,952		)
Changes in assets and liabilities
Decrease (increase) in accounts receivable	14,337			(53,139		)
Increase in accrued unbilled revenues	(2,082		)	(20,648		)
Increase in fuel oil stock	(4,608		)	(4,949		)
Increase in materials and supplies	(5,606		)	(4,110		)
Decrease (increase) in regulatory assets	54,274			(6,474		)
Decrease in accounts payable	(9,261		)	(8,712		)
Change in prepaid and accrued income taxes, tax credits and revenue taxes	(32,094		)	(37,137		)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability	(2,837		)	5,888
Change in other assets and liabilities	(9,401		)	38,874
Net cash provided by operating activities	282,618			193,722
Cash flows from investing activities
Capital expenditures	(297,807		)	(310,369		)
Other	2,662			9,811
Net cash used in investing activities	(295,145		)	(300,558		)
Cash flows from financing activities
Common stock dividends	(75,939		)	(77,479		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(1,496		)	(1,496		)
Proceeds from issuance of short-term debt	25,000			—
Proceeds from issuance of long-term debt	200,000			100,000
Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds	(201,546		)	—
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	62,353			80,914
Other	785			(396		)
Net cash provided by financing activities	9,157			101,543
Net decrease in cash and cash equivalents	(3,370		)	(5,293		)
Cash and cash equivalents, beginning of period	35,877			12,517
Cash and cash equivalents, end of period	$	32,507		$	7,224

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2018 Form 10-K.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 · Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited condensed consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 2018.

In the opinion of HEI’s and Hawaiian Electric’s management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments required by GAAP to fairly state consolidated HEI’s and Hawaiian Electric’s financial positions as of September 30, 2019 and December 31, 2018 and the results of their operations for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. All such adjustments are of a normal recurring nature, unless otherwise disclosed below or in other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.

Recent accounting pronouncements.

Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset, representing its right to use the underlying asset for the lease term, for all leases (except short-term leases) at the commencement date. For finance leases, a lessee is required to recognize interest on the lease liability separately from amortization of the ROU asset in the consolidated statements of income. For operating leases, a lessee is required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

The Company adopted ASU No. 2016-02 on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information for dates and periods before January 1, 2019 will not be updated and the disclosures required under the new standard will not be provided (i.e., the Company will continue to report prior comparative periods presented in the financial statements under Accounting Standards Codification (ASC) 840, including the required disclosures under ASC 840).

The most significant effect of the new standard relates to the recognition of new ROU assets and lease liabilities on the Company’s balance sheet for purchase power agreements and real estate operating leases. On adoption, the Company recognized lease liabilities of approximately $257 million for the Company and approximately $236 million for the Utilities ($215 million related to PPAs), based on the present value of the remaining minimum rental payments, with corresponding ROU assets for existing operating leases, under current leasing standards. In determining the lease liability upon transition, the Company used the incremental borrowing rates as of the adoption date based on the remaining lease term and remaining lease payments. See Note 6 for more information.

Credit losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU No. 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date (based on historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The other-than-temporary impairment model of accounting for credit losses on available-for-sale debt securities will be replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The available-for-sale debt security model will also require the use of an allowance to record the estimated losses (and subsequent recoveries).

The Company has assembled a cross-functional team that continues to work through its implementation plan. The Company is in the final stages of validating and testing the models that will be used to calculate the credit loss reserve for its loan portfolio and is conducting parallel runs of its new processes and controls. The allowance for credit losses is a material

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

estimate of the Company, and given the change from an incurred loss model to a methodology that considers the credit loss over the expected life of the loan, the Company believes that the allowance for loan losses for its loans held for investment will increase at the adoption date. The magnitude of the increase will depend on the composition, characteristics and quality of its loans and off balance sheet credit exposures as well as the prevailing economic conditions as of the adoption date. Based on its assessment, the Company does not expect that the new standard will have a material impact to the Utilities’ customer and other accounts receivables and accrued unbilled revenue. The Company will continue to make refinements to its credit loss model throughout the remainder of 2019 and plans to adopt ASU No. 2016-13 in the first quarter of 2020. The guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application (January 1, 2020), and the Company expects the bank to remain well capitalized under the regulatory framework after the initial application of ASU No. 2016-03.

Codification Improvements. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which is intended to clarify certain issues related to the accounting for financial instruments.

•

With respect to Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04 allows entities to measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets, or to make an accounting policy election not to measure an allowance for credit losses on accrued interest receivable amounts if an entity writes off the uncollectible accrued interest receivable balance in a timely manner and makes certain disclosures. ASU No. 2019-04 also allows an entity to make an accounting policy election regarding the presentation and disclosure of accrued interest receivables and the related allowance for credit losses for those accrued interest receivables. ASU No. 2019-04 also clarifies certain issues related to transfers between classifications or categories for loans and debt securities, recoveries, variable interest rates and prepayments, vintage disclosures, and contractual extensions and renewal options.


•	With respect to Topic 815, Derivatives and Hedging, ASU No. 2019-04 provides amendments, among others, that address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements.


•	With respect to Topic 825, Financial Instruments, ASU No. 2019-04 clarifies the scope of the guidance and disclosure requirements with respect to recognizing and measuring financial instruments.

The amended guidance in ASU No. 2019-04 will be effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The Company plans to adopt ASU No. 2019-04 in the first quarter of 2020 and is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.

Reclassifications. Reclassifications made to prior year financial statements to conform to the 2019 presentation include classifying contributions in aid of construction with capital expenditures in the cash flows from investing activities section of the condensed consolidated statements of cash flows for HEI and Hawaiian Electric. In addition, prior period disclosure of proceeds and repayments of other bank borrowings and the net increase in retail repurchase agreements contained in the “Net cash provided by financing activities” section of the consolidated statements of cash flows have been combined to conform to the current period presentation.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 2 · Segment financial information



(in thousands)	Electric utility		Bank		Other			Total
Three months ended September 30, 2019
Revenues from external customers	$	688,299	$	83,201	$	35		$	771,535
Intersegment revenues (eliminations)	31		—		(31		)	—
Revenues	$	688,330	$	83,201	$	4		$	771,535
Income (loss) before income taxes	$	58,099	$	29,157	$	(8,563	)	$	78,693
Income taxes (benefit)	10,822		6,269		(2,288		)	14,803
Net income (loss)	47,277		22,888		(6,275		)	63,890
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	$	46,779	$	22,888	$	(6,248	)	$	63,419
Nine months ended September 30, 2019
Revenues from external customers	$	1,900,552	$	247,940	$	143		$	2,148,635
Intersegment revenues (eliminations)	57		—		(57		)	—
Revenues	$	1,900,609	$	247,940	$	86		$	2,148,635
Income (loss) before income taxes	$	140,775	$	76,611	$	(27,960	)	$	189,426
Income taxes (benefit)	27,800		15,868		(7,278		)	36,390
Net income (loss)	112,975		60,743		(20,682		)	153,036
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	$	111,479	$	60,743	$	(20,603	)	$	151,619
Total assets (at September 30, 2019)	$	6,260,968	$	7,135,250	$	121,752		$	13,517,970
Three months ended September 30, 2018
Revenues from external customers	$	687,396	$	80,496	$	156		$	768,048
Intersegment revenues (eliminations)	13		—		(13		)	—
Revenues	$	687,409	$	80,496	$	143		$	768,048
Income (loss) before income taxes	$	57,354	$	26,831	$	(6,952	)	$	77,233
Income taxes (benefit)	7,144		5,610		(1,892		)	10,862
Net income (loss)	50,210		21,221		(5,060		)	66,371
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	$	49,712	$	21,221	$	(5,033	)	$	65,900
Nine months ended September 30, 2018
Revenues from external customers	$	1,865,922	$	233,019	$	258		$	2,099,199
Intersegment revenues (eliminations)	40		—		(40		)	—
Revenues	$	1,865,962	$	233,019	$	218		$	2,099,199
Income (loss) before income taxes	$	134,847	$	77,845	$	(22,601	)	$	190,091
Income taxes (benefit)	24,995		17,103		(5,625		)	36,473
Net income (loss)	109,852		60,742		(16,976		)	153,618
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	$	108,356	$	60,742	$	(16,897	)	$	152,201
Total assets (at December 31, 2018)	$	5,967,503	$	7,027,894	$	108,654		$	13,104,051

Intercompany electricity sales of the Utilities to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.

Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution and the profit on such fees is nominal.

Hamakua Energy, LLC’s (Hamakua Energy’s) sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 3 · Electric utility segment

HECO Capital Trust III. Trust III, a statutory trust, which was formed to effect the issuance of $50 million of cumulative quarterly income trust preferred securities in 2004 (2004 Trust Preferred Securities), and had at all times been a wholly-owned unconsolidated subsidiary of Hawaiian Electric, redeemed $50 million of its outstanding 2004 Trust Preferred Securities and $1.5 million of trust common securities on May 15, 2019. Subsequently, a Certificate of Cancellation of Statutory Trust was filed with the Delaware Secretary of State in order to cancel the Trust III, which became effective on June 10, 2019.

For the year-to-date period ending on the Trust’s cancellation date on June 10, 2019 and nine month ended September 30, 2018, Trust III’s income statements consisted of $1.2 million and $2.5 million of interest income received from the 2004 Debentures; $1.2 million and $2.4 million of distributions to holders of the Trust Preferred Securities; $37,000 and $75,000 of common dividends on the trust common securities to Hawaiian Electric, respectively.

Unconsolidated variable interest entities.

Power purchase agreements. As of September 30, 2019, the Utilities had four PPAs for firm capacity (excluding the PGV PPA as PGV has been offline since May 2018 due to lava flow on Hawaii Island) and other PPAs with independent power producers (IPPs) and Schedule Q providers (i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs.

Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and Hamakua Energy in its condensed consolidated financial statements. Hamakua Energy is an indirect subsidiary of Pacific Current and is consolidated in HEI’s condensed consolidated financial statements.

For the other PPAs with IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the Utilities do not have variable interests in the IPPs due to the absence of an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPP was considered a “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Two IPPs of as-available energy declined to provide the information necessary for Utilities to determine the applicability of accounting standards for VIEs. If information is ultimately received from the IPPs, a possible outcome of future analyses of such information is the consolidation of one or both of such IPPs in the unaudited condensed consolidated financial statements. The consolidation of any significant IPP could have a material effect on the unaudited condensed consolidated financial statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs to the IPP.

Commitments and contingencies.

Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC, for the Utilities' low sulfur fuel oil, high sulfur fuel oil, No. 2 diesel, and ultra-low sulfur diesel requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. The existing fuel contracts with Island Energy Services, LLC (IES), terminated on April 27, 2019, as agreed with IES under a mutual termination and release agreement entered into in November 2018.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Power purchase agreements. Purchases from all IPPs were as follows:



	Three months ended September 30				Nine months ended September 30
(in millions)	2019		2018		2019		2018
Kalaeloa	$	58	$	62	$	159	$	154
AES Hawaii	38		38		102		107
HPOWER	20		19		57		51
Puna Geothermal Venture	—		—		—		15
Hamakua Energy	17		17		51		39
Wind IPPs	30		31		73		84
Solar IPPs	11		8		26		22
Other IPPs ¹	2		2		4		6
Total IPPs	$	176	$	177	$	472	$	478


¹	Includes hydro power and other PPAs

Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. Hawaiian Electric and Kalaeloa are currently in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA (which has been subject to automatic extension on a month-to-month basis) prior to July 31, 2020, to allow for a negotiated resolution and PUC approval.

AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years ending September 2022, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. Hawaiian Electric and AES Hawaii have been in dispute over an additional 9 MW of capacity. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on an amendment to the PPA. However, in June 2018, the PUC issued an order suspending review of the amendment pending a Department of Health of the State of Hawaii (DOH) decision on AES Hawaii’s request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric. If approved by the PUC, the amendment will resolve AES Hawaii’s claims related to the additional capacity.

Hu Honua Bioenergy, LLC (Hu Honua). In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. Under the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction and litigation delays, which resulted in an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 5, 2017. In July 2017, the PUC approved the amended and restated PPA, which becomes effective once the PUC’s order is final and non-appealable. In August 2017, the PUC’s approval was appealed by a third party. On May 10, 2019, the Hawaii Supreme Court issued a decision remanding the matter to the PUC for further proceedings consistent with the court’s decision which must include express consideration of Green House Gas emissions that would result from approving the PPA, whether the cost of energy under the PPA is reasonable in light of the potential for GHG emissions, and whether the terms of the PPA are prudent and in the public interest, in light of its potential hidden and long-term consequences. On June 20, 2019, the PUC issued an order reopening the docket for further proceedings. On September 29, 2019, the PUC issued an order setting the procedural schedule for the matter. Pre-hearing matters will be conducted through February 3, 2020. Thereafter, the PUC will set the date for an evidentiary hearing and post-hearing briefing. Hu Honua expects to complete construction of the plant in the fourth quarter of 2019.

Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.

Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) implementation project. The ERP/EAM Implementation Project went live in October 2018. In the Hawaiian Electric 2017 rate case, a settlement agreement approved by the PUC included authorization for the deferred project costs to accrue a return at 1.75% after the project went into service and until the deferred project costs are included in rate base, and for amortization of the deferred costs to not begin until the amortization expense is incorporated in rates and the unamortized deferred project costs are included in rate base. As of September 30, 2019, the total deferred project costs and accrued carrying costs after the project went into service amounted to $59.1 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

In February 2019, the PUC approved a methodology for passing the future cost saving benefits of the new ERP/EAM system to customers developed by the Utilities in collaboration with the Consumer Advocate. The Utilities filed a benefits clarification document on June 10, 2019, reflecting $150 million in future net O&M expense reductions and cost avoidance, and $96 million in capital cost reductions and tax savings over the 12-year service life. To the extent the reduction in O&M expense relates to amounts reflected in electric rates, the Utilities would reduce future rates for such amounts. As of September 30, 2019, the Utilities recorded a total of $1.4 million as a regulatory liability for amounts to be returned to customers for reduction in O&M expense included in rates.

On September 13, 2019, the Utilities filed their Semi-Annual Enterprise System Benefits Report for the period January 1 through June 30, 2019. In October 2019, the PUC approved the Utilities and the Consumer Advocate’s Stipulated Performance Metrics and Tracking Mechanism.

West Loch PV Project. In June 2017, the PUC approved the expenditure of funds for Hawaiian Electric to build, own and operate a utility-owned, grid-tied 20-MW (ac) solar facility on property owned by the Department of the Navy, including a proposed project cost cap of $67 million and a performance guarantee to provide energy at 9.56 cents/kWh or less to the system.

In approving the project, the PUC agreed that the project is eligible for recovery of costs offset by related net benefits under the newly-established major project interim recovery (MPIR) adjustment mechanism. (See “Decoupling” section below for MPIR guidelines and cost recovery discussion.) Hawaiian Electric has provided supplemental materials, as requested by the PUC, to support meeting the MPIR guidelines, accompanied by system performance guarantee and cost savings sharing mechanisms. A decision on these matters is pending.

Construction of the facility began in the second quarter of 2018, and the facility is expected to be placed in service in November 2019. Project costs incurred as of September 30, 2019 amounted to $49.3 million.

Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances.

Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.

Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the Hawaii Department of Health and EPA, Maui Electric further investigated the Site and the Adjacent Parcel to determine the extent of impacts of polychlorinated biphenyls (PCBs), residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of September 30, 2019, representing the probable and reasonably estimable cost for remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on cleanup approach implemented.

Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for the costs of investigation and cleanup of PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant.

As of September 30, 2019, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.4 million. The reserve balance represents the probable and reasonably estimable cost for the onshore investigation and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the potential onshore source control requirements and actual offshore cleanup costs.

Regulatory proceedings

Decoupling. Decoupling is a regulatory model that is intended to provide the Utilities with financial stability and facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The decoupling mechanism has the following major components: (1) monthly revenue balancing account (RBA) revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthour sales, (2) RAM revenues for escalation in certain O&M expenses and rate base changes,

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

(3) MPIR component, (4) performance incentive mechanisms (PIMs), and (5) an earnings sharing mechanism, which would provide for a reduction of revenues between rate cases in the event the utility exceeds the return on average common equity (ROACE) allowed in its most recent rate case. Under the decoupling mechanism, triennial general rate cases are required.

Rate adjustment mechanism. The RAM is based on the lesser of: a) an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes, or b) cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). Annualized target revenues reset upon the issuance of an interim or final decision and order (D&O) in a rate case. Each of the Utilities’ RAM revenues was below its respective RAM Cap in 2019. The 2019 RAM also incorporated additional amortization of the regulatory liability associated with certain excess deferred taxes resulting from the 2017 Tax Cuts and Jobs Act decrease in tax rates. The reduction in the RAM revenues will be counterbalanced by the lower income tax expense and, therefore, will have no net income impact.

Major project interim recovery. On April 27, 2017, the PUC issued an order that provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.

The PUC approved recovery of capital costs under the MPIR for Schofield Generating Station, which increased revenues in 2018 by $3.6 million and are being collected in customer bills beginning in June 2019. In February 2019, Hawaiian Electric submitted an MPIR filing of $19.8 million for 2019 (which accrued effective January 1, 2019) that included the 2019 return on project amount (up to the capped amount) in rate base, depreciation and incremental O&M expenses, for collection from June 2020 through May 2021. The PUC has also indicated that it intends to approve MPIR for the West Loch PV Project.

Performance incentive mechanisms. The PUC has established the following PIMs:


•	Service Quality performance incentives are measured on a calendar-year basis. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to be re-determined upon issuance of an interim or final order in a general rate case for each utility.

•

Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $6.7 million - for both indices in total for the three utilities).

•

Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or incentive is 8 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties or incentives of approximately $1.3 million - in total for the three utilities).

•

In 2018, the Utilities accrued $2.1 million in estimated penalties for service reliability net of call center performance incentives for 2018. As a result of a PUC order denying the exclusion of the impact of a specific project on the service reliability performance, in May 2019, Hawaiian Electric accrued an additional $1.3 million in service reliability penalties related to 2018. The net service quality performance penalties related to 2018 were reflected in the 2019 annual decoupling filing and will reduce customer rates in the period June 1, 2019 through May 31, 2020.

•

In May 2019, the Utilities filed an application for approval to, among other things, modify the measurement of performance for the System Average Interruption Duration and Frequency Indexes, adjust the PIM targets, deadbands, and financial incentive levels for each of the PIMs upon issuance of a final order in a general rate case, and adjust the call center performance PIM level for Hawaii Electric Light.

•

Procurement of low-cost variable renewable resources through the request for proposal process in 2018 is measured by comparison of the procurement price to target prices. The incentive is a percentage of the savings determined by comparing procured price to a target of 11.5 cents per kilowatt-hour for renewable projects with storage capability and 9.5 cents per kilowatt-hour for energy-only renewable projects. For PPAs filed by December 31, 2018 and subsequently approved by the PUC, the incentive is 20% of the savings, with a cap of $3.5 million for the three utilities in total. For PPAs filed in January, February, and March 2019 and subsequently approved by the PUC, scaled incentives are 15%, 10% and 5%, respectively, of the savings for PPAs, with a cap of $3 million for the three utilities in total. There are no penalties. On March 25, 2019, the PUC approved six contracts, which were filed by December 31, 2018 and qualified for incentives. A seventh contract, which was filed in February 2019 and approved in August 2019, also qualified for incentives. Half of the incentive is earned upon PUC approval of the contract and the other half is eligible to be earned in the year following the in-service date of the projects. The Utilities accrued $1.7 million

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

in incentives in March 2019, which were reflected in the 2019 annual decoupling filing and will be recovered in rates in the period June 1, 2019 through May 31, 2020.

On October 9, 2019, the PUC issued an order establishing PIMs for the Utilities with regards to the Variable Renewable Dispatchable Generation and Energy Storage requests for proposals (RFPs) as well as the Delivery of Grid Services via Customer-sited Distributed Energy Resources RFPs, that were issued on August 22, 2019 for Oahu, Maui and Hawaii island. The order establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. The earliest the Utilities would be eligible for a PIM pursuant to this order is upon PUC approval of executed contracts resulting from the Phase 2 RFPs. The order requires contracts under the Grid Service RFP be filed for approval by May 2020, and by September 2020 under the Renewable RFPs. There is no set time period for approval. The Utilities filed a motion for reconsideration and/or clarification regarding the order on October 21, 2019, relating to certain design aspects and eligibility criteria for the PIMs.

Annual decoupling filings. The net annual incremental amounts approved to be collected (refunded) from June 1, 2019 through May 31, 2020 are as follows:



(in millions)	Hawaiian Electric			Hawaii Electric Light			Maui Electric			Total
2019 Annual incremental RAM adjusted revenues, net of changes in Tax Act adjustment*	$	6.5		$	1.1		$	5.4		$	13.0
Annual change in accrued RBA balance as of December 31, 2018 (and associated revenue taxes) which incorporates MPIR recovery	(12.2		)	(2.0		)	0.8			(13.4		)
Performance Incentive Mechanisms (net)	(1.3		)	—			(0.4		)	(1.7		)
Net annual incremental amount to be collected (refunded) under the tariffs	$	(7.0	)	$	(0.9	)	$	5.8		$	(2.1	)

* The 2017 Tax Cuts and Jobs Act (the Tax Act) had two incremental impacts in 2019. First, the 2019 RAM calculation for all of the Utilities incorporated additional amortization of the regulatory liability associated with certain deferred taxes. Secondly, Maui Electric incorporated a $2.8 million adjustment in its 2018 annual decoupling filing related to the Tax Act which is not recurring in 2019.

Performance-based regulation proceeding. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). The PUC stated that PBR seeks to utilize both revenue adjustment mechanisms and performance mechanisms to more strongly align utilities’ incentives with customer interests.

The order stated that, in general, the PUC is interested in ratemaking elements and/or mechanisms that result in:


•	Greater cost control and reduced rate volatility;


•	Efficient investment and allocation of resources regardless of classification as capital or operating expense;


•	Fair distribution of risks between utilities and customers; and


•	Fulfillment of State policy goals.

The proceeding has two phases. Phase 1 examined the current regulatory framework and identified those areas of utility performance that are deserving of further focus in Phase 2. In May 2019, the PUC issued an order concluding Phase 1, which established guiding principles, regulatory goals, and priority outcomes to guide the development of the PBR mechanisms in Phase 2. The PUC identified the following guiding principles, which will inform the development of the PBR framework: 1) a customer-centric approach, 2) administrative efficiency to reduce regulatory burdens; and 3) utility financial integrity to maintain the utility’s financial health. Priority goals (and priority outcomes) identified by the PUC were: enhance customer experience (affordability, reliability, interconnection experience, and customer engagement), improve utility performance (cost control, distributed energy resources (DER) asset effectiveness, and grid investment efficiency), and advance societal outcomes (capital formation, customer equity, greenhouse gas reduction, electrification of transportation, and resilience).

The order also outlined the PUC’s vision of a comprehensive PBR framework that would be further developed in Phase 2. The framework envisioned would include 1) a five-year multi-year rate plan with an index-driven annual revenue adjustment based on an inflation factor, an X-factor which would encompass productivity, a Z-factor to account for exceptional circumstances not in the utility’s control and a customer dividend, 2) a symmetric earnings sharing mechanism that would help ensure that utility earnings do not excessively benefit or suffer from external factors outside of utility control or unforeseen results of regulatory mechanisms, 3) off-ramp provisions, 4) continuation of the RBA, MPIR adjustment mechanism, the pension and OPEB tracking mechanism, and other recovery mechanisms, and 5) a portfolio of performance incentive mechanisms for customer engagement and DER asset effectiveness (rewards only), and interconnection experience (both rewards and penalties), in addition to scorecards to track progress against targeted performance levels, shared savings mechanisms to apportion savings to the utility and customers, and reported metrics.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

The Phase 2 schedule includes working group meetings through the first half of 2020, followed by statements of positions, evidentiary hearing in October 2020 and anticipated decision in December 2020.

Most recent rate proceedings.

Hawaiian Electric 2020 test year rate case. On August 21, 2019, Hawaiian Electric filed an application for a general rate increase for its 2020 test year rate case, requesting an increase of $77.6 million over revenues at current effective rates (for a 4.1% increase in revenues), based on an 8% rate of return (which incorporates a ROACE of 10.5%). In September 2019, the PUC issued an order ruling that Hawaiian Electric’s application was complete as of the date of filing. It also ordered that an outside consultant, selected by the PUC, would independently conduct a management audit of Hawaiian Electric. The PUC expects the audit to conclude in May 2020.

Maui Electric consolidated 2015 and 2018 test year rate cases. On August 9, 2018, the PUC approved an interim rate increase based on a stipulated settlement, that included the effects of the 2017 Tax Act, between Maui Electric and the Consumer Advocate. On March 18, 2019, the PUC issued its D&O that approved, with certain modifications, the stipulated settlement, which addressed all issues in the rate case.

Revised tariffs reflecting a final increase of $12.2 million over revenues at current effective rates based on the approved 7.43% rate of return (which incorporates a ROACE of 9.5% and a capital structure that includes a 57% common equity capitalization) on a $454 million rate base became effective on June 1, 2019. Maui Electric’s ECRC tariff, resulting in the recovery of all fuel and purchased energy through the ECRC and the removal of the recovery of these costs from base rates, became effective on September 1, 2019. The ECRC reflects a 98%/2% fossil fuel generation cost risk-sharing split between ratepayers and Maui Electric, with an annual maximum increase or decrease to revenues to $0.6 million for the utility.

Hawaii Electric Light 2019 test year rate case. On December 14, 2018, Hawaii Electric Light filed an application for a general rate increase for its 2019 test year rate case, requesting an increase of $13.4 million over revenues at current effective rates (for a 3.4% increase in revenues), based on an 8.3% rate of return (which incorporates a ROACE of 10.5%).

On September 24, 2019, Hawaii Electric Light and the Consumer Advocate (Parties) filed a Stipulated Partial Settlement Letter which documented agreements reached with the Consumer Advocate on all of the issues in the proceeding except for the ROACE, capital structure, amortization period for the state investment tax credit (ITC), and symmetric or asymmetric automatic annual target heat rate adjustment. On October 1, 2019, the Parties filed separate statements of probable entitlement, proposing the amount of interim revenue increase according to their respective proposed ROACE based on the scenario which excludes Hu Honua from the 2019 test year revenue requirement. In Hawaii Electric Light’s Statement of Probable Entitlement, the utility requested the PUC to issue an interim D&O by November 13, 2019, approving the interim rate increase of $2.79 million over revenues at current effective rates, based on a ROACE of 9.50% for interim only, an adjusted capitalization structure consisting of a 58% equity ratio, a 40-year amortization of state ITC and the proposed tariff changes to be effective on November 21, 2019. Hawaii Electric Light requested final increase in revenues be based on a ROACE of 10.50% for its 2019 test year.

Hawaii Electric Light filed rebuttal testimonies on October 9, 2019, which addressed the unresolved issues between Hawaiian Electric and the Consumer Advocate and responded to the Participants’ proposals and comments made in their direct testimonies. The evidentiary hearing is scheduled during the week of December 16, 2019.

Condensed consolidating financial information. Condensed consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the three and nine month periods ended September 30, 2019 and 2018, and as of September 30, 2019 and December 31, 2018.

Hawaiian Electric unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, and (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income

Three months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	491,723		93,576		103,236		—	(205	)	$	688,330
Expenses
Fuel oil	139,747			21,427		37,919		—	—		199,093
Purchased power	135,447			24,342		15,248		—	—		175,037
Other operation and maintenance	80,582			19,868		23,965		—	—		124,415
Depreciation	35,867			10,453		7,615		—	—		53,935
Taxes, other than income taxes	46,433			8,359		9,265		—	—		64,057
Total expenses	438,076			84,449		94,012		—	—		616,537
Operating income	53,647			9,127		9,224		—	(205	)	71,793
Allowance for equity funds used during construction	2,685			229		336		—	—		3,250
Equity in earnings of subsidiaries	11,048			—		—		—	(11,048	)	—
Retirement defined benefits expense—other than service costs	(582		)	(105	)	(36	)	—	—		(723		)
Interest expense and other charges, net	(12,771		)	(2,524	)	(2,339	)	—	205		(17,429		)
Allowance for borrowed funds used during construction	990			95		123		—	—		1,208
Income before income taxes	55,017			6,822		7,308		—	(11,048	)	58,099
Income taxes	7,968			1,420		1,434		—	—		10,822
Net income	47,049			5,402		5,874		—	(11,048	)	47,277
Preferred stock dividends of subsidiaries	—			133		95		—	—		228
Net income attributable to Hawaiian Electric	47,049			5,269		5,779		—	(11,048	)	47,049
Preferred stock dividends of Hawaiian Electric	270			—		—		—	—		270
Net income for common stock	$	46,779		5,269		5,779		—	(11,048	)	$	46,779

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income

Three months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net income for common stock	$	46,779		5,269		5,779		—	(11,048	)	$	46,779
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	2,519			387		309		—	(696	)	2,519
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(2,493		)	(387	)	(309	)	—	696		(2,493		)
Other comprehensive income, net of taxes	26			—		—		—	—		26
Comprehensive income attributable to common shareholder	$	46,805		5,269		5,779		—	(11,048	)	$	46,805

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income

Three months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	488,210		98,981		100,273		—	(55	)	$	687,409
Expenses
Fuel oil	141,357			26,429		38,765		—	—		206,551
Purchased power	138,135			24,091		15,364		—	—		177,590
Other operation and maintenance	78,988			15,253		19,312		—	—		113,553
Depreciation	34,282			10,072		6,629		—	—		50,983
Taxes, other than income taxes	46,096			9,215		9,385		—	—		64,696
Total expenses	438,858			85,060		89,455		—	—		613,373
Operating income	49,352			13,921		10,818		—	(55	)	74,036
Allowance for equity funds used during construction	1,648			39		275		—	—		1,962
Equity in earnings of subsidiaries	16,636			—		—		—	(16,636	)	—
Retirement defined benefits expense—other than service costs	(475		)	(104	)	(103	)	—	—		(682		)
Interest expense and other charges, net	(13,542		)	(3,026	)	(2,455	)	—	55		(18,968		)
Allowance for borrowed funds used during construction	810			49		147		—	—		1,006
Income before income taxes	54,429			10,879		8,682		—	(16,636	)	57,354
Income taxes	4,447			1,571		1,126		—	—		7,144
Net income	49,982			9,308		7,556		—	(16,636	)	50,210
Preferred stock dividends of subsidiaries	—			133		95		—	—		228
Net income attributable to Hawaiian Electric	49,982			9,175		7,461		—	(16,636	)	49,982
Preferred stock dividends of Hawaiian Electric	270			—		—		—	—		270
Net income for common stock	$	49,712		9,175		7,461		—	(16,636	)	$	49,712

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income

Three months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net income for common stock	$	49,712		9,175		7,461		—	(16,636	)	$	49,712
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	4,753			705		606		—	(1,311	)	4,753
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(4,725		)	(705	)	(606	)	—	1,311		(4,725		)
Other comprehensive income, net of taxes	28			—		—		—	—		28
Comprehensive income attributable to common shareholder	$	49,740		9,175		7,461		—	(16,636	)	$	49,740

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income

Nine months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	1,347,412		270,697		282,939		—	(439	)	$	1,900,609
Expenses
Fuel oil	374,100			62,210		105,012		—	—		541,322
Purchased power	367,541			67,548		37,247		—	—		472,336
Other operation and maintenance	240,311			56,635		64,859		—	—		361,805
Depreciation	107,602			31,359		22,834		—	—		161,795
Taxes, other than income taxes	127,654			25,170		26,480		—	—		179,304
Total expenses	1,217,208			242,922		256,432		—	—		1,716,562
Operating income	130,204			27,775		26,507		—	(439	)	184,047
Allowance for equity funds used during construction	7,746			579		1,010		—	—		9,335
Equity in earnings of subsidiaries	30,983			—		—		—	(30,983	)	—
Retirement defined benefits expense—other than service costs	(1,716		)	(316	)	(95	)	—	—		(2,127		)
Interest expense and other charges, net	(38,961		)	(8,345	)	(7,078	)	—	439		(53,945		)
Allowance for borrowed funds used during construction	2,854			242		369		—	—		3,465
Income before income taxes	131,110			19,935		20,713		—	(30,983	)	140,775
Income taxes	18,821			4,431		4,548		—	—		27,800
Net income	112,289			15,504		16,165		—	(30,983	)	112,975
Preferred stock dividends of subsidiaries	—			400		286		—	—		686
Net income attributable to Hawaiian Electric	112,289			15,104		15,879		—	(30,983	)	112,289
Preferred stock dividends of Hawaiian Electric	810			—		—		—	—		810
Net income for common stock	$	111,479		15,104		15,879		—	(30,983	)	$	111,479

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income

Nine months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net income for common stock	$	111,479		15,104		15,879		—	(30,983	)	$	111,479
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	7,162			1,091		887		—	(1,978	)	7,162
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(7,089		)	(1,089	)	(887	)	—	1,976		(7,089		)
Other comprehensive income, net of taxes	73			2		—		—	(2	)	73
Comprehensive income attributable to common shareholder	$	111,552		15,106		15,879		—	(30,985	)	$	111,552

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Income

Nine months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Revenues	$	1,321,089		276,462		268,567		—	(156	)	$	1,865,962
Expenses
Fuel oil	375,862			64,348		105,026		—	—		545,236
Purchased power	367,317			72,589		38,332		—	—		478,238
Other operation and maintenance	228,773			50,366		54,666		—	—		333,805
Depreciation	103,112			30,165		18,533		—	—		151,810
Taxes, other than income taxes	125,214			25,835		25,275		—	—		176,324
Total expenses	1,200,278			243,303		241,832		—	—		1,685,413
Operating income	120,811			33,159		26,735		—	(156	)	180,549
Allowance for equity funds used during construction	7,123			274		842		—	—		8,239
Equity in earnings of subsidiaries	35,041			—		—		—	(35,041	)	—
Retirement defined benefits expense—other than service costs	(2,091		)	(312	)	(531	)	—	—		(2,934		)
Interest expense and other charges, net	(38,967		)	(8,855	)	(7,156	)	—	156		(54,822		)
Allowance for borrowed funds used during construction	3,198			190		427		—	—		3,815
Income before income taxes	125,115			24,456		20,317		—	(35,041	)	134,847
Income taxes	15,949			5,017		4,029		—	—		24,995
Net income	109,166			19,439		16,288		—	(35,041	)	109,852
Preferred stock dividends of subsidiaries	—			400		286		—	—		686
Net income attributable to Hawaiian Electric	109,166			19,039		16,002		—	(35,041	)	109,166
Preferred stock dividends of Hawaiian Electric	810			—		—		—	—		810
Net income for common stock	$	108,356		19,039		16,002		—	(35,041	)	$	108,356

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Comprehensive Income

Nine months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net income for common stock	$	108,356		19,039		16,002		—	(35,041	)	$	108,356
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits	14,259			2,114		1,817		—	(3,931	)	14,259
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes	(14,174		)	(2,113	)	(1,817	)	—	3,930		(14,174		)
Other comprehensive income, net of taxes	85			1		—		—	(1	)	85
Comprehensive income attributable to common shareholder	$	108,441		19,040		16,002		—	(35,042	)	$	108,441

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consoli- dating adjustments		Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	42,112		5,606		3,612		—	—		$	51,330
Plant and equipment	4,676,163			1,282,065		1,139,058		—	—		7,097,286
Less accumulated depreciation	(1,595,962		)	(569,878	)	(520,548	)	—	—		(2,686,388		)
Construction in progress	185,022			17,219		24,315		—	—		226,556
Utility property, plant and equipment, net	3,307,335			735,012		646,437		—	—		4,688,784
Nonutility property, plant and equipment, less accumulated depreciation	5,311			115		1,532		—	—		6,958
Total property, plant and equipment, net	3,312,646			735,127		647,969		—	—		4,695,742
Investment in wholly owned subsidiaries, at equity	588,886			—		—		—	(588,886	)	—
Current assets
Cash and cash equivalents	22,073			5,003		5,330		101	—		32,507
Advances to affiliates	22,200			15,000		—		—	(37,200	)	—
Customer accounts receivable, net	111,171			25,676		26,246		—	—		163,093
Accrued unbilled revenues, net	90,015			15,880		17,925		—	—		123,820
Other accounts receivable, net	10,994			1,516		2,056		—	(9,948	)	4,618
Fuel oil stock, at average cost	62,645			10,694		11,204		—	—		84,543
Materials and supplies, at average cost	33,747			10,170		16,893		—	—		60,810
Prepayments and other	38,439			4,622		4,655		—	(1,395	)	46,321
Regulatory assets	29,410			1,684		1,857		—	—		32,951
Total current assets	420,694			90,245		86,166		101	(48,543	)	548,663
Other long-term assets
Operating lease right-of-use assets	190,300			1,560		394		—	—		192,254
Regulatory assets	502,254			112,900		101,162		—	—		716,316
Other	72,386			17,096		18,511		—	—		107,993
Total other long-term assets	764,940			131,556		120,067		—	—		1,016,563
Total assets	$	5,087,166		956,928		854,202		101	(637,429	)	$	6,260,968
Capitalization and liabilities
Capitalization
Common stock equity	$	1,993,254		303,345		285,440		101	(588,886	)	$	1,993,254
Cumulative preferred stock—not subject to mandatory redemption	22,293			7,000		5,000		—	—		34,293
Long-term debt, net	937,211			203,952		181,092		—	—		1,322,255
Total capitalization	2,952,758			514,297		471,532		101	(588,886	)	3,349,802
Current liabilities
Current portion of operating lease liabilities	62,634			94		30		—	—		62,758
Current portion of long-term debt	61,976			13,992		19,997		—	—		95,965
Short-term borrowings from non-affiliates	112,353			—		—		—	—		112,353
Short-term borrowings from affiliate	15,000			—		22,200		—	(37,200	)	—
Accounts payable	113,544			17,654		21,364		—	—		152,562
Interest and preferred dividends payable	19,699			3,695		4,215		—	(69	)	27,540
Taxes accrued	143,156			30,874		32,204		—	(1,395	)	204,839
Regulatory liabilities	9,255			5,836		4,425		—	—		19,516
Other	51,943			10,187		15,648		—	(9,879	)	67,899
Total current liabilities	589,560			82,332		120,083		—	(48,543	)	743,432
Deferred credits and other liabilities
Operating lease liabilities	126,979			1,466		367		—	—		128,812
Deferred income taxes	282,336			53,939		56,286		—	—		392,561
Regulatory liabilities	663,414			181,472		99,338		—	—		944,224
Unamortized tax credits	60,095			16,054		14,571		—	—		90,720
Defined benefit pension and other postretirement benefit plans liability	359,420			71,112		69,654		—	—		500,186
Other	52,604			36,256		22,371		—	—		111,231
Total deferred credits and other liabilities	1,544,848			360,299		262,587		—	—		2,167,734
Total capitalization and liabilities	$	5,087,166		956,928		854,202		101	(637,429	)	$	6,260,968

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consoli- dating adjustments		Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	40,449		5,606		3,612		—	—		$	49,667
Plant and equipment	4,456,090			1,259,553		1,094,028		—	—		6,809,671
Less accumulated depreciation	(1,523,861		)	(547,848	)	(505,633	)	—	—		(2,577,342		)
Construction in progress	193,677			8,781		30,687		—	—		233,145
Utility property, plant and equipment, net	3,166,355			726,092		622,694		—	—		4,515,141
Nonutility property, plant and equipment, less accumulated depreciation	5,314			115		1,532		—	—		6,961
Total property, plant and equipment, net	3,171,669			726,207		624,226		—	—		4,522,102
Investment in wholly owned subsidiaries, at equity	576,838			—		—		—	(576,838	)	—
Current assets
Cash and cash equivalents	16,732			15,623		3,421		101	—		35,877
Customer accounts receivable, net	125,960			26,483		25,453		—	—		177,896
Accrued unbilled revenues, net	88,060			17,051		16,627		—	—		121,738
Other accounts receivable, net	21,962			3,131		3,033		—	(21,911	)	6,215
Fuel oil stock, at average cost	54,262			11,027		14,646		—	—		79,935
Materials and supplies, at average cost	30,291			7,155		17,758		—	—		55,204
Prepayments and other	23,214			5,212		3,692		—	—		32,118
Regulatory assets	60,093			3,177		7,746		—	—		71,016
Total current assets	420,574			88,859		92,376		101	(21,911	)	579,999
Other long-term assets
Regulatory assets	537,708			120,658		104,044		—	—		762,410
Other	69,749			15,944		17,299		—	—		102,992
Total other long-term assets	607,457			136,602		121,343		—	—		865,402
Total assets	$	4,776,538		951,668		837,945		101	(598,749	)	$	5,967,503
Capitalization and liabilities
Capitalization
Common stock equity	$	1,957,641		295,874		280,863		101	(576,838	)	$	1,957,641
Cumulative preferred stock—not subject to mandatory redemption	22,293			7,000		5,000		—	—		34,293
Long-term debt, net	1,000,137			217,749		200,916		—	—		1,418,802
Total capitalization	2,980,071			520,623		486,779		101	(576,838	)	3,410,736
Current liabilities
Short-term borrowings-non-affiliate	25,000			—		—		—	—		25,000
Accounts payable	126,384			20,045		25,362		—	—		171,791
Interest and preferred dividends payable	16,203			4,203		2,841		—	(32	)	23,215
Taxes accrued	164,747			34,128		34,458		—	—		233,333
Regulatory liabilities	7,699			4,872		5,406		—	—		17,977
Other	46,391			15,077		20,414		—	(21,879	)	60,003
Total current liabilities	386,424			78,325		88,481		—	(21,911	)	531,319
Deferred credits and other liabilities
Deferred income taxes	271,438			54,936		56,823		—	—		383,197
Regulatory liabilities	657,210			176,101		98,948		—	—		932,259
Unamortized tax credits	60,271			16,217		15,034		—	—		91,522
Defined benefit pension and other postretirement benefit plans liability	359,174			73,147		71,338		—	—		503,659
Other	61,950			32,319		20,542		—	—		114,811
Total deferred credits and other liabilities	1,410,043			352,720		262,685		—	—		2,025,448
Total capitalization and liabilities	$	4,776,538		951,668		837,945		101	(598,749	)	$	5,967,503

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Changes in Common Stock Equity

Nine months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Balance, December 31, 2018	$	1,957,641		295,874		280,863		101	(576,838	)	$	1,957,641
Net income for common stock	111,479			15,104		15,879		—	(30,983	)	111,479
Other comprehensive income, net of taxes	73			2		—		—	(2	)	73
Common stock dividends	(75,939		)	(7,635	)	(11,301	)	—	18,936		(75,939		)
Common stock issuance expenses	—			—		(1	)	—	1		—
Balance, September 30, 2019	$	1,993,254		303,345		285,440		101	(588,886	)	$	1,993,254

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Changes in Common Stock Equity

Nine months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Balance, December 31, 2017	$	1,845,283		286,647		270,265		101	(557,013	)	$	1,845,283
Net income for common stock	108,356			19,039		16,002		—	(35,041	)	108,356
Other comprehensive income, net of taxes	85			1		—		—	(1	)	85
Common stock dividends	(77,479		)	(11,467	)	(9,014	)	—	20,481		(77,479		)
Common stock issuance expenses	(8		)	—		—		—	—		(8		)
Balance, September 30, 2018	$	1,876,237		294,220		277,253		101	(571,574	)	$	1,876,237

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Nine months ended September 30, 2019



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net cash provided by operating activities	$	223,733		41,694		36,126		—	(18,935	)	$	282,618
Cash flows from investing activities
Capital expenditures	(223,803		)	(29,119	)	(44,885	)	—	—		(297,807		)
Advances to affiliates	(22,200		)	(15,000	)	—		—	37,200		—
Other	2,975			(283	)	(30	)	—	—		2,662
Net cash used in investing activities	(243,028		)	(44,402	)	(44,915	)	—	37,200		(295,145		)
Cash flows from financing activities
Common stock dividends	(75,939		)	(7,635	)	(11,301	)	—	18,936		(75,939		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(810		)	(400	)	(286	)	—	—		(1,496		)
Proceeds from issuance of short-term debt	25,000			—		—		—	—		25,000
Proceeds from issuance of long-term debt	120,000			70,000		10,000		—	—		200,000
Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds	(121,546		)	(70,000	)	(10,000	)	—	—		(201,546		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	77,353			—		22,200		—	(37,200	)	62,353
Other	578			123		85		—	(1	)	785
Net cash provided by financing activities	24,636			(7,912	)	10,698		—	(18,265	)	9,157
Net increase (decrease) in cash and cash equivalents	5,341			(10,620	)	1,909		—	—		(3,370		)
Cash and cash equivalents, beginning of period	16,732			15,623		3,421		101	—		35,877
Cash and cash equivalents, end of period	$	22,073		5,003		5,330		101	—		$	32,507

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Hawaiian Electric Company, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Nine months ended September 30, 2018



(in thousands)	Hawaiian Electric			Hawaii Electric Light		Maui Electric		Other subsidiaries	Consolidating adjustments		Hawaiian Electric Consolidated
Net cash provided by operating activities	$	159,876		35,203		19,455		—	(20,812	)	$	193,722
Cash flows from investing activities
Capital expenditures	(225,907		)	(40,457	)	(44,005	)	—	—		(310,369		)
Other	4,518			1,177		3,785		—	331		9,811
Advances (to) from affiliates	(2,000		)	—		12,000		—	(10,000	)	—
Net cash used in investing activities	(223,389		)	(39,280	)	(28,220	)	—	(9,669	)	(300,558		)
Cash flows from financing activities
Common stock dividends	(77,479		)	(11,467	)	(9,014	)	—	20,481		(77,479		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(810		)	(400	)	(286	)	—	—		(1,496		)
Proceeds from issuance of long-term debt	75,000			15,000		10,000		—	—		100,000
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	68,914			—		2,000		—	10,000		80,914
Other	(304		)	(54	)	(38	)	—	—		(396		)
Net cash provided by financing activities	65,321			3,079		2,662		—	30,481		101,543
Net increase (decrease) in cash and cash equivalents	1,808			(998	)	(6,103	)	—	—		(5,293		)
Cash and cash equivalents, beginning of period	2,059			4,025		6,332		101	—		12,517
Cash and cash equivalents, end of period	$	3,867		3,027		229		101	—		$	7,224

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 4 · Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended September 30,					Nine months ended September 30
(in thousands)	2019			2018		2019		2018
Interest and dividend income
Interest and fees on loans	$	59,260		$	55,885	$	175,740	$	163,318
Interest and dividends on investment securities	7,599			9,300		25,762		27,130
Total interest and dividend income	66,859			65,185		201,502		190,448
Interest expense
Interest on deposit liabilities	4,384			3,635		12,923		9,876
Interest on other borrowings	422			404		1,361		1,293
Total interest expense	4,806			4,039		14,284		11,169
Net interest income	62,053			61,146		187,218		179,279
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
Noninterest income
Fees from other financial services	5,085			4,543		14,445		13,941
Fee income on deposit liabilities	5,320			5,454		15,402		15,781
Fee income on other financial products	1,706			1,746		5,129		5,075
Bank-owned life insurance	1,660			2,663		6,309		4,667
Mortgage banking income	1,490			169		3,080		1,399
Gains on sale of investment securities, net	653			—		653		—
Other income, net	428			736		1,420		1,708
Total noninterest income	16,342			15,311		46,438		42,571
Noninterest expense
Compensation and employee benefits	25,364			23,952		76,626		72,047
Occupancy	5,694			4,363		15,843		12,837
Data processing	3,763			3,583		11,353		10,587
Services	2,829			2,485		7,861		8,560
Equipment	2,163			1,783		6,416		5,385
Office supplies, printing and postage	1,297			1,556		4,320		4,554
Marketing	1,142			993		3,455		2,723
FDIC insurance	(5		)	638		1,249		2,078
Other expense	3,676			4,240		12,049		12,897
Total noninterest expense	45,923			43,593		139,172		131,668
Income before income taxes	29,157			26,831		76,611		77,845
Income taxes	6,269			5,610		15,868		17,103
Net income	$	22,888		$	21,221	$	60,743	$	60,742

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:



	Three months ended September 30,						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Interest and dividend income	66,859			65,185			$	201,502		$	190,448
Noninterest income	16,342			15,311			46,438			42,571
*Revenues-Bank	83,201			80,496			247,940			233,019
Total interest expense	4,806			4,039			14,284			11,169
Provision for loan losses	3,315			6,033			17,873			12,337
Noninterest expense	45,923			43,593			139,172			131,668
Less: Retirement defined benefits gain (expense)—other than service costs	196			(433		)	276			(1,223		)
*Expenses-Bank	54,240			53,232			171,605			153,951
*Operating income-Bank	28,961			27,264			76,335			79,068
Add back: Retirement defined benefits (gain) expense—other than service costs	(196		)	433			(276		)	1,223
Income before income taxes	$	29,157		$	26,831		$	76,611		$	77,845

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30,						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Net income	$	22,888		$	21,221		$	60,743		$	60,742
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $(1,557), $1,876, $(10,194) and $8,335, respectively	4,253			(5,123		)	27,846			(22,768		)
Reclassification adjustment for net realized gains included in net income, net of taxes of $175, nil, $175, and nil, respectively	(478		)	—			(478		)	—
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of (taxes) benefits of $13, $141, $(1,109) and $968, respectively	34			382			(3,032		)	1,970
Other comprehensive income (loss), net of taxes	3,809			(4,741		)	24,336			(20,798		)
Comprehensive income	$	26,697		$	16,480		$	85,079		$	39,944

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2019						December 31, 2018
Assets
Cash and due from banks				$	135,813					$	122,059
Interest-bearing deposits				1,315						4,225
Investment securities
Available-for-sale, at fair value				1,210,748						1,388,533
Held-to-maturity, at amortized cost (fair value of $137,497 and $142,057, respectively)				132,704						141,875
Stock in Federal Home Loan Bank, at cost				9,953						9,958
Loans held for investment				5,084,336						4,843,021
Allowance for loan losses				(53,040		)				(52,119		)
Net loans				5,031,296						4,790,902
Loans held for sale, at lower of cost or fair value				17,115						1,805
Other				514,116						486,347
Goodwill				82,190						82,190
Total assets				$	7,135,250					$	7,027,894
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,885,028					$	1,800,727
Deposit liabilities—interest-bearing				4,311,195						4,358,125
Other borrowings				129,190						110,040
Other				135,606						124,613
Total liabilities				6,461,019						6,393,505
Commitments and contingencies
Common stock				1						1
Additional paid-in capital				348,933						347,170
Retained earnings				339,029						325,286
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	2,945					$	(24,423	)
Retirement benefit plans	(16,677		)	(13,732		)	(13,645		)	(38,068		)
Total shareholder’s equity				674,231						634,389
Total liabilities and shareholder’s equity				$	7,135,250					$	7,027,894

Other assets
Bank-owned life insurance				$	156,077					$	151,172
Premises and equipment, net				207,659						214,415
Accrued interest receivable				19,743						20,140
Mortgage-servicing rights				8,567						8,062
Low-income housing equity investments				69,286						67,626
Real estate acquired in settlement of loans, net				—						406
Real estate held for sale				9,074						—
Other				43,710						24,526
				$	514,116					$	486,347
Other liabilities
Accrued expenses				$	41,264					$	54,084
Federal and state income taxes payable				9,472						2,012
Cashier’s checks				27,498						26,906
Advance payments by borrowers				5,164						10,183
Other				52,208						31,428
				$	135,606					$	124,613

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of $91.2 million and $38.0 million, respectively, as of September 30, 2019 and $65.0 million and $45.0 million, respectively, as of December 31, 2018.

Investment securities. The major components of investment securities were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Gross unrealized losses
										Less than 12 months						12 months or longer
(dollars in thousands)										Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
September 30, 2019
Available-for-sale
U.S. Treasury and federal agency obligations	$	126,084	$	822	$	(198	)	$	126,708	—	$	—	$	—		4	$	32,686	$	(198	)
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		)
Corporate bonds	34,926		1,350		—			36,276		—	—		—			—	—		—
Mortgage revenue bonds	28,459		—		—			28,459		—	—		—			—	—		—
	$	1,206,725	$	8,819	$	(4,796	)	$	1,210,748	12	$	67,163	$	(252	)	89	$	421,898	$	(4,544	)
Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	132,704	$	4,793	$	—		$	137,497	—	$	—	$	—		—	$	—	$	—
	$	132,704	$	4,793	$	—		$	137,497	—	$	—	$	—		—	$	—	$	—
December 31, 2018
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	)
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		)
Corporate bonds	49,398		103		(369		)	49,132		6	23,175		(369		)	—	—		—
Mortgage revenue bonds	23,636		—		—			23,636		—	—		—			—	—		—
	$	1,421,897	$	954	$	(34,318	)	$	1,388,533	33	$	178,068	$	(1,907	)	164	$	1,066,295	$	(32,411	)
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	)
	$	141,875	$	1,446	$	(1,264	)	$	142,057	3	$	29,814	$	(400	)	2	$	31,505	$	(864	)

ASB does not believe that the investment securities that were in an unrealized loss position at September 30, 2019, represent an other-than-temporary impairment (OTTI). Total gross unrealized losses were primarily attributable to change in market conditions. On a quarterly basis the investment securities are evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and agency mortgage-backed securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for the quarters and nine months ended September 30, 2019 and 2018.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds have contractual terms to maturity. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.

The contractual maturities of investment securities were as follows:



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

Proceeds from the sale of available-for-sale securities were $19.8 million for both the three and nine months ended September 30, 2019, respectively, and nil for both the three and nine months ended September 30, 2018, respectively. Gross realized gains and losses were $0.7 million for both the three and nine months ended September 30, 2019, respectively, and nil for both the three and nine months ended September 30, 2018, respectively.

Loans. The components of loans were summarized as follows:



	September 30, 2019			December 31, 2018
(in thousands)
Real estate:
Residential 1-4 family	$	2,183,888		$	2,143,397
Commercial real estate	810,971			748,398
Home equity line of credit	1,079,262			978,237
Residential land	15,095			13,138
Commercial construction	76,382			92,264
Residential construction	10,104			14,307
Total real estate	4,175,702			3,989,741
Commercial	638,213			587,891
Consumer	269,741			266,002
Total loans	5,083,656			4,843,634
Less: Deferred fees and discounts	680			(613		)
Allowance for loan losses	(53,040		)	(52,119		)
Total loans, net	$	5,031,296		$	4,790,902

ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Allowance for loan losses. The allowance for loan losses (balances and changes) and financing receivables were as follows:



(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 September 30, 2019
Allowance for loan losses:
Beginning balance	$	2,015		$	15,811		$	6,881		$	537		$	2,046		$	2		$	13,073		$	18,060		$	58,425
Charge-offs	(7		)	—			(13		)	—			—			—			(4,900		)	(5,311		)	(10,231		)
Recoveries	27			—			4			28			—			—			726			746			1,531
Provision	(56		)	(396		)	135			(104		)	196			1			(517		)	4,056			3,315
Ending balance	$	1,979		$	15,415		$	7,007		$	461		$	2,242		$	3		$	8,382		$	17,551		$	53,040
Three months ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	2,939		$	15,298		$	7,334		$	642		$	4,616		$	4		$	10,161		$	11,809		$	52,803
Charge-offs	—			—			(80		)	(1		)	—			—			(788		)	(4,508		)	(5,377		)
Recoveries	5			—			71			122			—			—			105			365			668
Provision	(623		)	(1,033		)	(347		)	(296		)	(356		)	—			1,255			7,433			6,033
Ending balance	$	2,321		$	14,265		$	6,978		$	467		$	4,260		$	4		$	10,733		$	15,099		$	54,127
Nine months ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	1,976		$	14,505		$	6,371		$	479		$	2,790		$	4		$	9,225		$	16,769		$	52,119
Charge-offs	(26		)	—			(32		)	(4		)	—			—			(6,012		)	(15,972		)	(22,046		)
Recoveries	644			—			13			42			—			—			2,187			2,208			5,094
Provision	(615		)	910			655			(56		)	(548		)	(1		)	2,982			14,546			17,873
Ending balance	$	1,979		$	15,415		$	7,007		$	461		$	2,242		$	3		$	8,382		$	17,551		$	53,040
September 30, 2019
Ending balance: individually evaluated for impairment	$	906		$	7		$	500		$	—		$	—		$	—		$	905		$	504		$	2,822
Ending balance: collectively evaluated for impairment	$	1,073		$	15,408		$	6,507		$	461		$	2,242		$	3		$	7,477		$	17,047		$	50,218
Financing Receivables:
Ending balance	$	2,183,888		$	810,971		$	1,079,262		$	15,095		$	76,382		$	10,104		$	638,213		$	269,741		$	5,083,656
Ending balance: individually evaluated for impairment	$	16,556		$	877		$	12,909		$	3,194		$	—		$	—		$	9,370		$	558		$	43,464
Ending balance: collectively evaluated for impairment	$	2,167,332		$	810,094		$	1,066,353		$	11,901		$	76,382		$	10,104		$	628,843		$	269,183		$	5,040,192
Nine months ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	2,902		$	15,796		$	7,522		$	896		$	4,671		$	12		$	10,851		$	10,987		$	53,637
Charge-offs	(31		)	—			(224		)	(18		)	—			—			(1,930		)	(12,628		)	(14,831		)
Recoveries	73			—			98			173			—			—			1,555			1,085			2,984
Provision	(623		)	(1,531		)	(418		)	(584		)	(411		)	(8		)	257			15,655			12,337
Ending balance	$	2,321		$	14,265		$	6,978		$	467		$	4,260		$	4		$	10,733		$	15,099		$	54,127
December 31, 2018
Ending balance: individually evaluated for impairment	$	876		$	7		$	701		$	6		$	—		$	—		$	628		$	4		$	2,222
Ending balance: collectively evaluated for impairment	$	1,100		$	14,498		$	5,670		$	473		$	2,790		$	4		$	8,597		$	16,765		$	49,897
Financing Receivables:
Ending balance	$	2,143,397		$	748,398		$	978,237		$	13,138		$	92,264		$	14,307		$	587,891		$	266,002		$	4,843,634
Ending balance: individually evaluated for impairment	$	16,494		$	915		$	14,800		$	2,059		$	—		$	—		$	5,340		$	89		$	39,697
Ending balance: collectively evaluated for impairment	$	2,126,903		$	747,483		$	963,437		$	11,079		$	92,264		$	14,307		$	582,551		$	265,913		$	4,803,937

Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful and Loss. The AQR is a function of the probability of default model rating, the loss given default and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.

The credit risk profile by internally assigned grade for loans was as follows:



	September 30, 2019								December 31, 2018
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total		Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	723,864	$	74,093	$	593,952	$	1,391,909	$	658,288	$	89,974	$	547,640	$	1,295,902
Special mention	18,038		—		25,822		43,860		32,871		—		11,598		44,469
Substandard	69,069		2,289		14,753		86,111		57,239		2,290		28,653		88,182
Doubtful	—		—		3,686		3,686		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	$	810,971	$	76,382	$	638,213	$	1,525,566	$	748,398	$	92,264	$	587,891	$	1,428,553

The credit risk profile based on payment activity for loans was as follows:



(in thousands)	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Current		Total financing receivables		Recorded investment> 90 days and accruing
September 30, 2019
Real estate:
Residential 1-4 family	$	2,162	$	807	$	2,452	$	5,421	$	2,178,467	$	2,183,888	$	—
Commercial real estate	347		—		—		347		810,624		810,971		—
Home equity line of credit	736		814		2,127		3,677		1,075,585		1,079,262		—
Residential land	—		—		25		25		15,070		15,095		—
Commercial construction	—		—		—		—		76,382		76,382		—
Residential construction	—		—		—		—		10,104		10,104		—
Commercial	359		174		1,280		1,813		636,400		638,213		—
Consumer	4,230		2,923		2,461		9,614		260,127		269,741		—
Total loans	$	7,834	$	4,718	$	8,345	$	20,897	$	5,062,759	$	5,083,656	$	—
December 31, 2018
Real estate:
Residential 1-4 family	$	3,757	$	2,773	$	2,339	$	8,869	$	2,134,528	$	2,143,397	$	—
Commercial real estate	—		—		—		—		748,398		748,398		—
Home equity line of credit	1,139		681		2,720		4,540		973,697		978,237		—
Residential land	9		—		319		328		12,810		13,138		—
Commercial construction	—		—		—		—		92,264		92,264		—
Residential construction	—		—		—		—		14,307		14,307		—
Commercial	315		281		548		1,144		586,747		587,891		—
Consumer	5,220		3,166		2,702		11,088		254,914		266,002		—
Total loans	$	10,440	$	6,901	$	8,628	$	25,969	$	4,817,665	$	4,843,634	$	—

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due and troubled debt restructuring (TDR) loans was as follows:



(in thousands)	September 30, 2019		December 31, 2018
Real estate:
Residential 1-4 family	$	12,076	$	12,037
Commercial real estate	—		—
Home equity line of credit	7,859		6,348
Residential land	457		436
Commercial construction	—		—
Residential construction	—		—
Commercial	7,004		4,278
Consumer	4,632		4,196
Total nonaccrual loans	$	32,028	$	27,295
Real estate:
Residential 1-4 family	$	—	$	—
Commercial real estate	—		—
Home equity line of credit	—		—
Residential land	—		—
Commercial construction	—		—
Residential construction	—		—
Commercial	—		—
Consumer	—		—
Total accruing loans 90 days or more past due	$	—	$	—
Real estate:
Residential 1-4 family	$	9,981	$	10,194
Commercial real estate	877		915
Home equity line of credit	10,686		11,597
Residential land	2,737		1,622
Commercial construction	—		—
Residential construction	—		—
Commercial	2,564		1,527
Consumer	58		62
Total troubled debt restructured loans not included above	$	26,903	$	25,917

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

The total carrying amount and the total unpaid principal balance of impaired loans were as follows:



	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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)



	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


*	Since loan was classified as impaired.

Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider.

All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for loan losses.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Loan modifications that occurred during the third quarters and first nine months of 2019 and 2018 were as follows:



Loans modified as a TDR	Three months ended September 30, 2019					Nine months ended September 30, 2019
(dollars in thousands)	Number of contracts	Outstanding recorded investment (as of period end)¹		Related allowance (as of period end)		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	$	324	$	—	10	$	1,563	$	165
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	—	—		—		3	429		85
Residential land	1	350		—		3	1,169		—
Commercial construction	—	—		—		—	—		—
Residential construction	—	—		—		—	—		—
Commercial	3	275		58		6	1,761		218
Consumer	—	—		—		—	—		—
	5	$	949	$	58	22	$	4,922	$	468

Loans modified as a TDR	Three months ended September 30, 2018					Nine months ended September 30, 2018
(dollars in thousands)	Number of contracts	Outstanding recorded investment (as of period end)¹		Related allowance (as of period end)		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	2	$	427	$	19	2	$	427	$	19
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	16	1,571		283		52	6,540		930
Residential land	2	1,343		—		2	1,343		—
Commercial construction	—	—		—		—	—		—
Residential construction	—	—		—		—	—		—
Commercial	6	255		174		13	2,381		218
Consumer	—	—		—		—	—		—
	26	$	3,596	$	476	69	$	10,691	$	1,167

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

There were no loans modified in TDRs that experienced a payment default of 90 days or more during the third quarter and first nine months of 2019. Loans modified in TDRs that experienced a payment default of 90 days or more during the third quarter and first nine months of 2018, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended September 30, 2018			Nine months ended September 30, 2018
(dollars in thousands)	Number of contracts	Outstanding recorded investment (as of period end)¹		Number of contracts	Outstanding recorded investment (as of period end)¹
TDRs that defaulted during the period within twelve months of their modification date
Real estate:
Residential 1-4 family	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		1	81
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		1	291
Consumer	—	—		—	—
	—	$	—	2	$	372


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.

If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled nil at September 30, 2019 and December 31, 2018.

The Company had $4.3 million and $4.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 2019 and December 31, 2018, respectively.

Mortgage servicing rights (MSRs). In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.

ASB received proceeds from the sale of residential mortgages of $87.8 million and $31.9 million for three months ended September 30, 2019 and 2018, respectively, and $177.3 million and $109.3 million for the nine months ended September 30, 2019 and 2018, respectively, and recognized gains on such sales of $1.5 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $3.1 million and $1.4 million for the nine months ended September 30, 2019 and 2018, respectively.

There were no repurchased mortgage loans for the three and nine months ended September 30, 2019 and 2018. The repurchase reserve was $0.1 million as of September 30, 2019 and 2018.

Mortgage servicing fees, a component of other income, net, were $0.8 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and were $2.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Changes in the carrying value of MSRs were as follows:



(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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Changes related to MSRs were as follows:



	Three months ended September 30,						Nine months ended September 30
(in thousands)	2019			2018			2019			2018
Mortgage servicing rights
Beginning balance	$	8,103		$	8,509		$	8,062		$	8,639
Amount capitalized	995			305			1,857			1,032
Amortization	(531		)	(388		)	(1,352		)	(1,245		)
Other-than-temporary impairment	—			—			—			—
Carrying amount before valuation allowance	8,567			8,426			8,567			8,426
Valuation allowance for mortgage servicing rights
Beginning balance	—			—			—			—
Provision (recovery)	—			—			—			—
Other-than-temporary impairment	—			—			—			—
Ending balance	—			—			—			—
Net carrying value of mortgage servicing rights	$	8,567		$	8,426		$	8,567		$	8,426

ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs.

ASB uses a present value cash flow model to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.

Key assumptions used in estimating the fair value of ASB’s MSRs used in the impairment analysis were as follows:



(dollars in thousands)	September 30, 2019			December 31, 2018
Unpaid principal balance	$	1,232,240		$	1,188,514
Weighted average note rate	3.99		%	3.98		%
Weighted average discount rate	9.3		%	10.0		%
Weighted average prepayment speed	12.8		%	6.5		%

The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions was as follows:



(dollars in thousands)	September 30, 2019			December 31, 2018
Prepayment rate:
25 basis points adverse rate change	$	(1,058	)	$	(250	)
50 basis points adverse rate change	(2,093		)	(566		)
Discount rate:
25 basis points adverse rate change	(90		)	(139		)
50 basis points adverse rate change	(180		)	(275		)

The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.

Other borrowings. As of September 30, 2019, ASB had $38.0 million FHLB advances outstanding. ASB was in compliance with all Advances, Pledge and Security Agreement requirements as of September 30, 2019.

Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the condensed consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for a conditional right of set-off in case of default by either party; however, ASB presents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:



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



	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		—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.

Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.

ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

The notional amount and fair value of ASB’s derivative financial instruments were as follows:



	September 30, 2019					December 31, 2018
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	42,073	$	470		$	10,180	$	91
Forward commitments	55,791		(76		)	10,132		(43		)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:



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

¹ Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.

The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB’s statements of income:



Derivative Financial Instruments Not Designated as Hedging Instruments	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	)

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $20.7 million and $18.1 million at September 30, 2019 and December 31, 2018, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of September 30, 2019, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.

Note 5 · Credit agreements

HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Credit Facilities), effective July 3, 2017, to amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility and $200 million Hawaiian Electric Facility both terminate on June 30, 2022. As of September 30, 2019 and December 31, 2018, no amounts were outstanding under the Credit Facilities.

The Credit Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be drawn on to meet each company’s respective working capital needs and general corporate purposes.

Changes in long-term debt. On May 13, 2019, the Utilities issued, through a private placement pursuant to separate Note Purchase Agreements (the Note Purchase Agreements), the following unsecured notes bearing taxable interest (the Unsecured Notes):



	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

The Unsecured Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the Note Purchase Agreements entered into by Hawaii Electric Light and Maui Electric. The Unsecured Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount,” as defined in the Note Purchase Agreements. On May 15, 2019, proceeds from the sale were applied to redeem the Utilities’ 2004 junior subordinated deferrable interest debentures at par

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

value:



	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

On July 18, 2019, the Department of Budget and Finance of the State of Hawaii (DBF) for the benefit of Hawaiian Electric and Hawaii Electric Light, issued, at par:



	Refunding Series 2019 Special Purpose Revenue Bonds
Aggregate principal amount	$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

On July 26, 2019, proceeds from the sale were applied to redeem at par, bonds previously issued by the DBF for the benefit of Hawaiian Electric and Hawaii Electric Light:



	Series 2009 Special Purpose Revenue Bonds Redeemed
Aggregate principal amount	$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

On October 10, 2019, the DBF for the benefit of Hawaiian Electric, Hawaii Electric Light and Maui Electric, issued, at par:



	Series 2019 Special Purpose Revenue Bonds
Aggregate principal amount	$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

Proceeds will be used to finance capital expenditures, including reimbursements to the Companies for previously incurred capital expenditures. For Series 2019 Special Purpose Revenue Bonds (SPRBs), funds on deposit with trustee represent the undrawn proceeds from the issuance of the SPRBs and earn interest at market rates. These funds are available only to pay (or to reimburse) the Utilities for their capital expenditures.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 6 · Leases

The Company adopted ASU No. 2016-02 and related amendments on January 1, 2019, and used the effective date as the date of initial application. The Company elected the practical expedient package under which the Company did not reassess its prior conclusions about whether any expired or existing contracts are or contain leases, whether there is a change in lease classification for any expired or existing leases under the new standard, or whether there were initial direct costs for any existing leases that would be treated differently under the new standard. The Company elected the short-term lease recognition exemption for all of its leases that qualify, and accordingly, does not recognize lease liabilities and ROU assets for all leases that have lease terms that are 12 months or less. The amounts related to short-term leases are not material. The Company elected the practical expedient to not separate lease and non-lease components for its real estate and equipment and fossil fuel and renewable energy PPAs. The Company elected the practical expedient to not assess all existing land easements that were not previously accounted for in accordance with ASC 840.

The Company leases certain real estate and equipment for various terms under long-term operating lease agreements. The agreements expire at various dates through 2054 and provide for renewal options up to 10 years. The periods associated with the renewal options are excluded for the purpose of determining the lease term unless the exercise of the renewable option is reasonably certain. In the normal course of business, it is expected that many of these agreements will be replaced by similar agreements. Certain real estate leases require the Company to pay for operating expenses such as common area maintenance, real estate taxes and insurance.

Additionally, the Utilities contract with independent power producers to supply energy under long-term power purchase agreements. Certain PPAs are treated as operating leases under the new standard because the Company elected the practical expedient package under which prior conclusions about lease identification were not reassessed. PPAs generally include variable lease payments (e.g., payments based on kWh), and several as-available PPAs have variable-only payment terms. For PPAs with no minimum lease payments, the Utilities do not recognize any lease liabilities or ROU assets, and the related costs are reported as variable lease costs.

In August 2019, Hawaiian Electric entered into a lease agreement for a total office space of approximately 195,000 square feet in downtown Honolulu to lower costs and bring together office workers in separate leased buildings. The lease consists of two different phases with expected commencement dates of January 2020 and January 2021, respectively, and is an operating lease for a term of 12 years with various options to extend up to 10 years. Annual rent expense for each phase will be approximately $1.9 million and $1.7 million, respectively.

The Utilities’ lease payments for each operating lease agreement were discounted using its estimated unsecured borrowing rates for the appropriate term, reduced for the estimated impact of collateral. ASB’s lease payments for each operating lease agreement were discounted using Federal Home Loan Bank of Des Moines (FHLB) fixed rate advance rates, which are collateralized, for the appropriate term. The FHLB is the bank’s primary wholesale funding source and can provide borrowing rates for various terms starting at overnight borrowings to 30-year borrowing terms.

Amounts related to the Company’s total lease cost and cash flows arising from lease transaction are as follows:



	HEI consolidated						Hawaiian Electric consolidated
Three months ended September 30, 2019 (in thousands)	Other leases		PPAs classified as leases		Total		Other leases		PPAs classified as leases		Total
Operating lease cost	$	2,892	$	15,478	$	18,370	$	1,542	$	15,478	$	17,020
Variable lease cost	3,577		57,912		61,489		2,836		57,912		60,748
Total lease cost	$	6,469	$	73,390	$	79,859	$	4,378	$	73,390	$	77,768
Other information
Cash paid for amounts included in the measurement of lease liabilities—Operating cash flows from operating leases	$	2,687	$	16,795	$	19,482	$	1,455	$	16,795	$	18,250

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)



	HEI consolidated									Hawaiian Electric consolidated
Nine months ended September 30, 2019 (dollars in thousands)	Other leases			PPAs classified as leases			Total			Other leases			PPAs classified as leases			Total
Operating lease cost	$	8,632		$	46,434		$	55,066		$	4,551		$	46,434		$	50,985
Variable lease cost	9,777			143,177			152,954			7,686			143,177			150,863
Total lease cost	$	18,409		$	189,611		$	208,020		$	12,237		$	189,611		$	201,848
Other information
Cash paid for amounts included in the measurement of lease liabilities—Operating cash flows from operating leases	$	7,867		$	46,162		$	54,029		$	4,263		$	46,162		$	50,425
Weighted-average remaining lease term—operating leases (in years)	6.5			3.0			3.7			4.7			3.0			3.2
Weighted-average discount rate—operating leases	3.55		%	4.08		%	3.98		%	4.17		%	4.08		%	4.09		%

The following table summarizes the maturity of our operating lease liabilities as of September 30, 2019:



	HEI consolidated									Hawaiian Electric consolidated
(in millions)	Other leases			PPAs classified as leases			Total			Other leases			PPAs classified as leases			Total
2019 (remaining months)	$	3		$	17		$	20		$	2		$	17		$	19
2020	11			63			74			6			63			69
2021	9			63			72			5			63			68
2022	6			42			48			2			42			44
2023	4			—			4			2			—			2
2024	3			—			3			1			—			1
Thereafter	9			—			9			2			—			2
Total lease payments	45			185			230			20			185			205
Less: Imputed interest	(6		)	(11		)	(17		)	(2		)	(11		)	(13		)
Total present value of lease payments	$	39		$	174		$	213		$	18		$	174		$	192

The future minimum lease obligations under operating leases in effect as of December 31, 2018, having a term in excess of one year as determined prior to the adoption of ASC 842 are as follows:



	HEI consolidated						Hawaiian Electric consolidated
(in millions)	Other leases		PPAs classified as leases		Total		Other leases		PPAs classified as leases		Total
2019	$	11	$	63	$	74	$	6	$	63	$	69
2020	9		63		72		6		63		69
2021	8		63		71		5		63		68
2022	5		42		47		2		42		44
2023	4		—		4		2		—		2
Thereafter	12		—		12		3		—		3
Total lease payments	$	49	$	231	$	280	$	24	$	231	$	255

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 7 · Shareholders’ equity

Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other comprehensive income/(loss) (AOCI) were as follows:



	HEI Consolidated												Hawaiian Electric Consolidated
(in thousands)	Net unrealized gains (losses) on securities			Unrealized gains (losses) on derivatives			Retirement benefit plans			AOCI			AOCI-Retirement benefit plans
Balance, December 31, 2018	$	(24,423	)	$	(436	)	$	(25,751	)	$	(50,610	)	$	99
Current period other comprehensive income (loss)	27,368			(1,663		)	532			26,237			73
Balance, September 30, 2019	$	2,945		$	(2,099	)	$	(25,219	)	$	(24,373	)	$	172
Balance, December 31, 2017	$	(14,951	)	$	—		$	(26,990	)	$	(41,941	)	$	(1,219	)
Current period other comprehensive income (loss)	(22,768		)	—			1,581			(21,187		)	85
Balance, September 30, 2018	$	(37,719	)	$	—		$	(25,409	)	$	(63,128	)	$	(1,134	)

Reclassifications out of AOCI were as follows:



	Amount reclassified from AOCI
	Three months ended September 30						Nine months ended September 30						Affected line item in the
(in thousands)	2019			2018			2019			2018			Statements of Income / Balance Sheets
HEI consolidated
Net realized gains on securities included in net income	$	(478	)	$	—		$	(478	)	$	—		Revenues-bank (gains on sale of investment securities, net)
Retirement benefit plans:
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost	2,615			5,259			7,621			15,755			See Note 9 for additional details
Impact of D&Os of the PUC included in regulatory assets	(2,493		)	(4,725		)	(7,089		)	(14,174		)	See Note 9 for additional details
Total reclassifications	$	(356	)	$	534		$	54		$	1,581
Hawaiian Electric consolidated
Retirement benefit plans:
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost	$	2,519		$	4,753		$	7,162		$	14,259		See Note 9 for additional details
Impact of D&Os of the PUC included in regulatory assets	(2,493		)	(4,725		)	(7,089		)	(14,174		)	See Note 9 for additional details
Total reclassifications	$	26		$	28		$	73		$	85

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 8 · Revenues

Revenue from contracts with customers. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:



	Three months ended September 30, 2019										Nine months ended September 30, 2019
(in thousands)	Electric utility			Bank		Other		Total			Electric utility			Bank		Other		Total
Revenues from contracts with customers
Electric energy sales - residential	$	230,051		$	—	$	—	$	230,051		$	601,664		$	—	$	—	$	601,664
Electric energy sales - commercial	230,411			—		—		230,411			635,097			—		—		635,097
Electric energy sales - large light and power	248,457			—		—		248,457			679,252			—		—		679,252
Electric energy sales - other	4,081			—		—		4,081			11,933			—		—		11,933
Bank fees	—			12,111		—		12,111			—			34,976		—		34,976
Total revenues from contracts with customers	713,000			12,111		—		725,111			1,927,946			34,976		—		1,962,922
Revenues from other sources
Regulatory revenue	(30,800		)	—		—		(30,800		)	(44,953		)	—		—		(44,953		)
Bank interest and dividend income	—			66,859		—		66,859			—			201,502		—		201,502
Other bank noninterest income	—			4,231		—		4,231			—			11,462		—		11,462
Other	6,130			—		4		6,134			17,616			—		86		17,702
Total revenues from other sources	(24,670		)	71,090		4		46,424			(27,337		)	212,964		86		185,713
Total revenues	$	688,330		$	83,201	$	4	$	771,535		$	1,900,609		$	247,940	$	86	$	2,148,635
Timing of revenue recognition
Services/goods transferred at a point in time	$	—		$	12,111	$	—	$	12,111		$	—		$	34,976	$	—	$	34,976
Services/goods transferred over time	713,000			—		—		713,000			1,927,946			—		—		1,927,946
Total revenues from contracts with customers	$	713,000		$	12,111	$	—	$	725,111		$	1,927,946		$	34,976	$	—	$	1,962,922



	Three months ended September 30, 2018										Nine months ended September 30, 2018
(in thousands)	Electric utility			Bank		Other		Total			Electric utility			Bank		Other		Total
Revenues from contracts with customers
Electric energy sales - residential	$	222,196		$	—	$	—	$	222,196		$	586,002		$	—	$	—	$	586,002
Electric energy sales - commercial	229,476			—		—		229,476			624,643			—		—		624,643
Electric energy sales - large light and power	242,457			—		—		242,457			649,454			—		—		649,454
Electric energy sales - other	4,296			—		—		4,296			12,324			—		—		12,324
Bank fees	—			11,743		—		11,743			—			34,797		—		34,797
Total revenues from contracts with customers	698,425			11,743		—		710,168			1,872,423			34,797		—		1,907,220
Revenues from other sources
Regulatory revenue	(13,572		)	—		—		(13,572		)	(13,465		)	—		—		(13,465		)
Bank interest and dividend income	—			65,185		—		65,185			—			190,448		—		190,448
Other bank noninterest income	—			3,568		—		3,568			—			7,774		—		7,774
Other	2,556			—		143		2,699			7,004			—		218		7,222
Total revenues from other sources	(11,016		)	68,753		143		57,880			(6,461		)	198,222		218		191,979
Total revenues	$	687,409		$	80,496	$	143	$	768,048		$	1,865,962		$	233,019	$	218	$	2,099,199
Timing of revenue recognition
Services/goods transferred at a point in time	$	832		$	11,743	$	—	$	12,575		$	2,380		$	34,797	$	—	$	37,177
Services/goods transferred over time	697,593			—		—		697,593			1,870,043			—		—		1,870,043
Total revenues from contracts with customers	$	698,425		$	11,743	$	—	$	710,168		$	1,872,423		$	34,797	$	—	$	1,907,220

There are no material contract assets or liabilities associated with revenues from contracts with customers existing at the beginning of the period or as of September 30, 2019. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

As of September 30, 2019, the Company had no material remaining performance obligations due to the nature of the Company’s contracts with its customers. For the Utilities, performance obligations are fulfilled as electricity is delivered to customers. For ASB, fees are recognized when a transaction is completed.

Note 9 · Retirement benefits

Defined benefit pension and other postretirement benefit plans information. For the first nine months of 2019, the Company contributed $36 million ($36 million by the Utilities) to its pension and other postretirement benefit plans, compared to $38 million ($37 million by the Utilities) in the first nine months of 2018. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 2019 is $49 million ($48 million by the Utilities, $1 million by HEI and nil by ASB), compared to $39 million ($38 million by the Utilities, $1 million by HEI and nil by ASB) in 2018. In addition, the Company expects to pay directly $3 million ($2 million by the Utilities) of benefits in 2019, compared to $2 million ($1 million by the Utilities) paid in 2018.

The components of net periodic pension costs (NPPC) and net periodic benefit costs (NPBC) for HEI consolidated and Hawaiian Electric consolidated were as follows:



	Three months ended September 30												Nine months ended September 30
	Pension benefits						Other benefits						Pension benefits						Other benefits
(in thousands)	2019			2018			2019			2018			2019			2018			2019			2018
HEI consolidated
Service cost	$	15,800		$	17,223		$	573		$	680		$	46,564		$	51,764		$	1,656		$	2,041
Interest cost	21,150			19,340			2,006			1,986			63,216			58,033			6,000			5,947
Expected return on plan assets	(27,991		)	(27,237		)	(3,101		)	(3,224		)	(83,988		)	(81,715		)	(9,273		)	(9,683		)
Amortization of net prior service gain	(10		)	(11		)	(451		)	(451		)	(32		)	(32		)	(1,355		)	(1,354		)
Amortization of net actuarial (gains) losses	3,989			7,527			(3		)	25			11,667			22,556			(10		)	71
Net periodic pension/benefit cost (return)	12,938			16,842			(976		)	(984		)	37,427			50,606			(2,982		)	(2,978		)
Impact of PUC D&Os	11,554			7,785			821			953			36,111			17,621			2,443			3,048
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)	$	24,492		$	24,627		$	(155	)	$	(31	)	$	73,538		$	68,227		$	(539	)	$	70
Hawaiian Electric consolidated
Service cost	$	15,344		$	16,840		$	568		$	676		$	45,346		$	50,520		$	1,643		$	2,028
Interest cost	19,560			17,824			1,920			1,907			58,388			53,471			5,755			5,721
Expected return on plan assets	(26,146		)	(25,593		)	(3,064		)	(3,178		)	(78,474		)	(76,777		)	(9,135		)	(9,534		)
Amortization of net prior service (gain) cost	2			2			(451		)	(451		)	6			6			(1,353		)	(1,353		)
Amortization of net actuarial loss	3,841			6,826			—			25			10,993			20,477			—			74
Net periodic pension/benefit cost (return)	12,601			15,899			(1,027		)	(1,021		)	36,259			47,697			(3,090		)	(3,064		)
Impact of PUC D&Os	11,554			7,785			821			953			36,111			17,621			2,443			3,048
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)	$	24,155		$	23,684		$	(206	)	$	(68	)	$	72,370		$	65,318		$	(647	)	$	(16	)

HEI consolidated recorded retirement benefits expense of $44 million ($43 million by the Utilities) and $43 million ($40 million by the Utilities) in the first nine months of 2019 and 2018, respectively, and charged the remaining net periodic benefit cost primarily to electric utility plant.

The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, these retirement benefit costs that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will be amortized over 5 years beginning with the issuance of the PUC’s D&O in the respective utility’s next rate case.

Defined contribution plans information. For the first nine months of 2019 and 2018, the Company’s expenses for its defined contribution pension plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $5.1 million and $4.8 million, respectively, and cash contributions were $6.0 million and $5.9 million, respectively. For the first nine months of 2019 and 2018, the Utilities’ expenses for its defined contribution pension plan under the HEIRSP were $1.9 million and $1.7 million, respectively, and cash contributions were $1.9 million and $1.7 million, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 10 · Share-based compensation

Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares were added to the shares available for issuance under these programs.

As of September 30, 2019, approximately 3.2 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an estimated 0.8 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved at maximum levels).

Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. On June 26, 2019, an additional 300,000 shares were made available for issuance under the 2011 Director Plan. As of September 30, 2019, there were 311,027 shares remaining available for future issuance under the 2011 Director Plan.

Share-based compensation expense and the related income tax benefit were as follows:



	Three months ended September 30				Nine months ended September 30
(in millions)	2019		2018		2019		2018
HEI consolidated
Share-based compensation expense ¹	$	2.3	$	1.5	$	8.1	$	5.9
Income tax benefit	0.3		0.2		1.2		0.9
Hawaiian Electric consolidated
Share-based compensation expense ¹	0.8		0.6		2.6		2.1
Income tax benefit	0.1		0.1		0.5		0.4


¹	For the three and nine months ended September 30, 2019 and 2018, the Company has not capitalized any share-based compensation.

Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows:



	Three months ended September 30				Nine months ended September 30
(dollars in millions)	2019		2018		2019		2018
Shares granted	—		—		35,580		38,821
Fair value	$	—	$	—	$	1.5	$	1.3
Income tax benefit	—		—		0.4		0.3

The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI Common Stock on the grant date.

Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:



	Three months ended September 30										Nine months ended September 30
	2019					2018					2019					2018
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	208,625			$	35.28	200,856			$	33.03	200,358			$	33.05	197,047			$	31.53
Granted	1,006			44.16		1,789			35.61		95,565			37.75		93,853			34.12
Vested	(101		)	36.27		—			—		(76,813		)	32.61		(75,683		)	30.56
Forfeited	(2,889		)	35.44		(2,287		)	32.83		(12,469		)	34.20		(14,859		)	32.35
Outstanding, end of period	206,641			$	35.32	200,358			$	33.05	206,641			$	35.32	200,358			$	33.05
Total weighted-average grant-date fair value of shares granted (in millions)	$	—				$	0.1				$	3.6				$	3.2


(1)	Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.

For the first nine months of 2019 and 2018, total restricted stock units and related dividends that vested had a fair value of $3.2 million and $2.7 million, respectively, and the related tax benefits were $0.5 million and $0.4 million, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

As of September 30, 2019, there was $5.4 million of total unrecognized compensation cost related to the nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.7 years.

Long-term incentive plan payable in stock. The 2017-2019, 2018-2020 and 2019-2021 long-term incentive plans (LTIP) provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals, including a market condition goal. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are made, subject to the achievement of specified performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target shares, depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR) compared to the Edison Electric Institute Index over the relevant three-year period. The other performance condition goals relate to earnings per share (EPS) growth, return on average common equity, Hawaiian Electric’s net income and ASB’s efficiency ratio.

LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:



	Three months ended September 30										Nine months ended September 30
	2019					2018					2019					2018
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	98,311			$	39.61	66,177			$	38.82	65,578			$	38.81	32,904			$	39.51
Granted	568			41.07		878			38.20		35,215			41.07		37,819			38.21
Vested (issued or unissued and cancelled)	—			—		—			—		—			—		—			—
Forfeited	(2,477		)	39.64		(1,490		)	38.85		(4,391		)	39.19		(5,158		)	38.84
Outstanding, end of period	96,402			$	39.62	65,565			$	38.81	96,402			$	39.62	65,565			$	38.81
Total weighted-average grant-date fair value of shares granted (in millions)	$	—				$	—				$	1.4				$	1.4


(1)	Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.

The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and estimated future stock volatility and dividends of HEI and its peers over the remaining three-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-year historic stock volatility, and the annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same three-year historical period.

The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TSR and the resulting fair value of LTIP awards granted:



	2019		2018
Risk-free interest rate	2.48	%	2.29	%
Expected life in years	3		3
Expected volatility	15.8	%	17.0	%
Range of expected volatility for Peer Group	15.0% to 73.2%		15.1% to 26.2%
Grant date fair value (per share)	$41.07		$38.20

As of September 30, 2019, there was $1.7 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of 1.3 years.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:



	Three months ended September 30										Nine months ended September 30
	2019					2018					2019					2018
	Shares			(1)		Shares			(1)		Shares			(1)		Shares			(1)
Outstanding, beginning of period	407,090			$	35.12	264,707			$	33.79	276,169			$	33.80	131,616			$	33.47
Granted	2,275			44.05		3,511			35.58		140,855			37.78		151,277			34.12
Vested	—			—		—			—		—			—		—			—
Increase above target	11,131			33.49		—			—		11,131			33.49		—			—
Forfeited	(9,911		)	35.24		(5,958		)	33.80		(17,570		)	34.66		(20,633		)	33.80
Outstanding, end of period	410,585			$	35.12	262,260			$	33.82	410,585			$	35.12	262,260			$	33.82
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions)	$	0.1				$	0.1				$	5.3				$	5.2


(1)	Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.

As of September 30, 2019, there was $6.1 million of total unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TSR. The cost is expected to be recognized over a weighted-average period of 1.2 years.

Note 11 · Income taxes

The Company’s and the Utilities’ effective tax rates (combined federal and state income tax rates) were 19% and 20%, respectively, for the nine months ended September 30, 2019. These rates differed from the combined statutory rates, due primarily to the Utilities’ amortization of excess deferred income taxes related to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%, the non-taxability of the bank-owned life insurance income and the tax benefits derived from the low income housing tax credit investments. The Company’s and the Utilities’ effective tax rates were both 19% for the nine months ended September 30, 2018.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Note 12 · Cash flows



Nine months ended September 30	2019		2018
(in millions)
Supplemental disclosures of cash flow information
HEI consolidated
Interest paid to non-affiliates, net of amounts capitalized	$	75	$	67
Income taxes paid (including refundable credits)	55		50
Income taxes refunded (including refundable credits)	4		—
Hawaiian Electric consolidated
Interest paid to non-affiliates	45		44
Income taxes paid (including refundable credits)	55		47
Income taxes refunded (including refundable credits)	4		—
Supplemental disclosures of noncash activities
HEI consolidated
Property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)	7		6
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)	37		42
Common stock issued (gross) for director and executive/management compensation (financing)¹	5		4
Real estate transferred from property, plant and equipment to other assets held-for-sale (investing)	9		—
Obligations to fund low income housing investments (investing)	6		12
Transfer of retail repurchase agreements to deposit liabilities (financing)	—		102
Hawaiian Electric consolidated
Electric utility property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)	7		6
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)	34		28

¹ The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.

Note 13 · Fair value measurements

Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value:

Short-term borrowings—other than bank. The carrying amount of short-term borrowings approximated fair value because of the short maturity of these instruments.

Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that fall under Level 2 of ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds, and other observable market factors.

To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker.

The fair value of the mortgage revenue bonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the valuation hierarchy.

Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates and the underlying interest rate of the portfolio. This information is input into the valuation models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These assumptions are derived from internal and third party sources. Since the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.

Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is determined primarily by using an income, cost or market approach and is normally provided through appraisals. Impaired loans carried at fair value generally receive specific allocations within the allowance for loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Generally, impaired loans are evaluated quarterly for additional impairment and adjusted accordingly.

Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair value of collateral-dependent loans and real estate owned using the sales comparison approach.

Mortgage servicing rights. MSRs are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and their own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate.

Deposit liabilities. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for FHLB advances of similar remaining maturities. Deposit liabilities are classified in Level 2 of the valuation hierarchy.

Other borrowings. For advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources, including broker market transactions and third party pricing services.

Long-term debt—other than bank. Fair value of long-term debt of HEI and the Utilities was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar risks, terms, and remaining maturities. Long-term debt-other than bank is classified in Level 2 of the valuation hierarchy.

Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.

Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

The following table presents the carrying or notional amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments. For stock in Federal Home Loan Bank, the carrying amount is a reasonable estimate of fair value because it can only be redeemed at par.



			Estimated fair value
	Carrying or notional amount		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
(in thousands)			(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2019
Financial assets
HEI consolidated
Available-for-sale investment securities	$	1,210,748	$	—	$	1,182,289	$	28,459	$	1,210,748
Held-to-maturity investment securities	132,704		—		137,497		—		137,497
Stock in Federal Home Loan Bank	9,953		—		9,953		—		9,953
Loans, net	5,048,411		—		17,164		5,121,275		5,138,439
Mortgage servicing rights	8,567		—		—		11,485		11,485
Derivative assets	58,473		2		484		—		486
Financial liabilities
HEI consolidated
Deposit liabilities	783,308		—		779,370		—		779,370
Short-term borrowings—other than bank	163,836		—		163,836		—		163,836
Other bank borrowings	129,190		—		129,187		—		129,187
Long-term debt, net—other than bank	1,885,454		—		2,085,217		—		2,085,217
Derivative liabilities	63,391		18		2,901		—		2,919
Hawaiian Electric consolidated
Short-term borrowings	112,353		—		112,353		—		112,353
Long-term debt, net	1,418,220		—		1,594,271		—		1,594,271
December 31, 2018
Financial assets
HEI consolidated
Available-for-sale investment securities	1,388,533		—		1,364,897		23,636		1,388,533
Held-to-maturity investment securities	141,875		—		142,057		—		142,057
Stock in Federal Home Loan Bank	9,958		—		9,958		—		9,958
Loans, net	4,792,707		—		1,809		4,800,244		4,802,053
Mortgage servicing rights	8,062		—		—		13,618		13,618
Derivative assets	10,180		—		91		—		91
Financial liabilities
HEI consolidated
Deposit liabilities	827,841		—		817,667		—		817,667
Short-term borrowings—other than bank	73,992		—		73,992		—		73,992
Other bank borrowings	110,040		—		110,037		—		110,037
Long-term debt, net—other than bank	1,879,641		—		1,904,261		—		1,904,261
Derivative liabilities	34,132		34		596		—		630
Hawaiian Electric consolidated
Short-term borrowings	25,000		—		25,000		—		25,000
Long-term debt, net	1,418,802		—		1,443,968		—		1,443,968

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as follows:



	September 30, 2019						December 31, 2018
	Fair value measurements using						Fair value measurements using
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Available-for-sale investment securities (bank segment)
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	—	$	1,019,305	$	—	$	—	$	1,161,416	$	—
U.S. Treasury and federal agency obligations	—		126,708		—		—		154,349		—
Corporate bonds	—		36,276		—		—		49,132		—
Mortgage revenue bonds	—		—		28,459		—		—		23,636
	$	—	$	1,182,289	$	28,459	$	—	$	1,364,897	$	23,636
Derivative assets
Interest rate lock commitments (bank segment)¹	$	—	$	477	$	—	$	—	$	91	$	—
Forward commitments (bank segment)¹	2		7		—		—		—		—
	$	2	$	484	$	—	$	—	$	91	$	—
Derivative liabilities
Interest rate lock commitments (bank segment)¹	$	—	$	7	$	—	$	—	$	—	$	—
Forward commitments (bank segment)¹	18		67		—		34		9		—
Interest rate swap (Other segment)²	—		2,827		—		—		587		—
	$	18	$	2,901	$	—	$	34	$	596	$	—

¹ Derivatives are carried at fair value in other assets or other liabilities in the balance sheets with changes in value included in mortgage banking income.

² Derivatives are included in other liabilities in the balance sheets.

There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2019.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:



	Three months ended September 30				Nine months ended September 30
Mortgage revenue bonds	2019		2018		2019		2018
(in thousands)
Beginning balance	$	28,166	$	15,427	$	23,636	$	15,427
Principal payments received	—		—		—		—
Purchases	293		3,657		4,823		3,657
Unrealized gain (loss) included in other comprehensive income	—		—		—		—
Ending balance	$	28,459	$	19,084	$	28,459	$	19,084

ASB holds two mortgage revenue bonds issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of September 30, 2019, the weighted average discount rate was 3.66%, which was derived by incorporating a credit spread over the one month LIBOR rate. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)

Fair value measurements on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of cost or fair value or from impairment of individual assets. The carrying value of assets measured at fair value on a nonrecurring basis were as follows:



			Fair value measurements
(in thousands)	Balance		Level 1		Level 2		Level 3
September 30, 2019
Loans	$	3,911	$	—	$	—	$	3,911
December 31, 2018
Loans	77		—		—		77
Real estate acquired in settlement of loans	186		—		—		186

For nine months ended September 30, 2019 and 2018, there were no adjustments to fair value for ASB’s loans held for sale.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis:

Significant unobservable

input value ⁽¹⁾

($ in thousands)

Fair value

Valuation technique

Significant unobservable input

Range

Weighted

Average

September 30, 2019

Home equity line of credit

199

Fair value of property or collateral

Appraised value less 7% selling cost

N/A (2)

Residential land

Fair value of property or collateral

Appraised value less 7% selling cost

N/A (2)

Commercial

3,687

Discounted cash flow

Expected cash flows

3.9%-6.8%

4.6%

Total loans

3,911

December 31, 2018

Home equity line of credit

Fair value of property or collateral

Appraised value less 7% selling cost

N/A (2)

Total loans

Real estate acquired in settlement of loans

186

Fair value of property or collateral

Appraised value less 7% selling cost

N/A (2)

(1) Represent percent of outstanding principal balance.

(2) N/A - Not applicable. There is one asset in each fair value measurement type.

Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion updates “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in HEI’s and Hawaiian Electric’s 2018 Form 10-K and should be read in conjunction with such discussion and the 2018 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 2018 Form 10-K, as well as the quarterly (as of and for the three and nine months ended September 30, 2019) condensed consolidated financial statements and notes thereto included in this Form 10-Q.

HEI consolidated

RESULTS OF OPERATIONS



	Three months ended September 30, 2019				%
(in thousands)	2019		2018		change		Primary reason(s)*
Revenues	$	771,535	$	768,048	—		Increases for the electric utility and bank segments
Operating income	97,308		98,064		(1	)	Decrease for electric utility segment, partly offset by an increase for the bank segment
Net income for common stock	63,419		65,900		(4	)	Lower net income at electric utility segment and higher net losses at the “other” segment, partly offset by higher net income at the bank segment. See below for effective tax rate explanation.



	Nine months ended September 30, 2019				%
(in thousands)	2019		2018		change	Primary reason(s)*
Revenues	$	2,148,635	$	2,099,199	2	Increases for the electric utility and bank segments
Operating income	247,879		248,752		—	Decrease for bank segment and higher operating losses for the “other” segment, partly offset by an increase for the electric utility segment
Net income for common stock	151,619		152,201		—	Higher net losses at the “other” segment, partly offset by higher net income at the electric utility segment. Bank segment was comparable between periods.


*	Also, see segment discussions which follow.

The Company’s effective tax rates for the third quarters of 2019 and 2018 were 19% and 14%, respectively. The Company’s effective tax rates for the first nine months of 2019 and 2018 were 19% for each period. The effective tax rate was higher in the third quarter of 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.

Economic conditions.

Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization, U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers).

Through the first eight months of 2019, Hawaii’s tourism industry, a significant driver of Hawaii’s economy, showed an increase in visitor arrivals and decrease in visitor spending. Visitor arrivals increased 5.5% and expenditures at -0.1% is relatively similar compared to the same period in 2018. Looking ahead, the Hawaii Tourism Authority expects scheduled nonstop seats to Hawaii to increase as the year progresses, driven primarily by an increase in seats from West Coast, East Coast and Asia. While visitor arrivals numbers are still impressive, UHERO foresees a weakening of the growth in tourism due to lower activity from the international markets and from the enforcement of new regulations governing home vacation rentals.

Hawaii’s unemployment rate declined slightly to 2.7% for September 2019, which was higher than the rate for September 2018, but lower than the national unemployment rate of 3.5%.

Hawaii real estate activity, as indicated by the home resale market, experienced a decline in median sales prices for single family homes and condominiums for the year-to-date period ended September 30, 2019. Median sales prices for single family residential homes on Oahu through September 2019 were lower by -0.5% and for condominiums were lower by -1% over the same time period in 2018. The number of closed sales were up by 0.8% for single family residential homes and were down by -6.7% for condominiums through September of 2019 compared to same time period in 2018.

Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Although the price of crude oil fluctuates month to month, the price has been decreasing over the last few months.

At its October 2019 meeting, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate to 1-1/2% to 1-3/4% in light of implications of global developments for the economic outlook as well as muted inflation pressures. This action supports the FOMC’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the FOMC’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.

In its state forecast released in September 2019, the University of Hawaii Economic Research Organization stated that economic growth in the islands has been slowing for several years. The main contributing factors are two years of population decline that have reduced demand in many sectors and a decline in visitor spending. Construction remains a bright spot in the economy. The State’s Department of Business, Economic Development & Tourism in its third quarter 2019 Outlook for the Economy report has a more positive outlook and stated that Hawaii’s economy is expected to continue positive growth in 2019 and 2020 based on recent developments in the national and global economies, performance in the tourism industry, labor market conditions and growth in personal income and tax revenues. They are projecting the Hawaii economy, as measured by real GDP, to show an increase of 1.1% in 2019, followed by 1.2% in 2020. Both organizations have indicated that Hawaii’s economy depends significantly on the U.S. and key global economies as there is a direct relationship to the visitor industry and labor market conditions.

“Other” segment.



	Three months ended September 30,						Nine months ended September 30
(in thousands)	2019			2018			2019			2018			Primary reason(s)
Revenues	$	4		$	143		$	86		$	218
Operating loss	(3,446		)	(3,236		)	(12,503		)	(10,865		)	The third quarters of 2019 and 2018 include $1.0 million and $0.7 million, respectively, of operating income from Pacific Current¹. Third quarter 2019 corporate expense was flat compared to the third quarter of 2018. The nine months ended September 30, 2019 and 2018 include $2.3 million and $3.0 million, respectively, of operating income from Pacific Current¹. The lower Pacific Current operating income was primarily due to the hiring of Pacific Current employees. Corporate expense for the nine months ended September 30, 2019 was $1.0 million higher than the same period in 2018, primarily due to higher professional fees, partly offset by lower incentive compensation expense.
Net loss	(6,248		)	(5,033		)	(20,603		)	(16,897		)	The net loss for the third quarter and first nine months of 2019 was higher than the net loss for the third quarter and first nine months of 2018 due to higher interest expense (as a result of higher interest rates and balances at corporate), higher HEI corporate expenses, and lower Pacific Current net income, partially offset by a higher income tax benefit.


¹	Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.

The “other” business segment (loss)/income includes results of the stand-alone corporate operations of HEI and ASB Hawaii, Inc. (ASBH), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current’s indirect subsidiary, Hamakua Energy, which owns a 60-MW combined cycle power plant; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is currently constructing a 8.6 MW solar-plus-storage project; and The Old Oahu Tug Service, Inc., a subsidiary that ceased operations in 1999; as well as eliminations of intercompany transactions.

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’s receipt 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.

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 are expected to sign a number of

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

¹Includes 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.



(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

As of September 30, 2019, ASB was one of Hawaii’s largest financial institutions based on assets of $7.1 billion and deposits of $6.2 billion.

As of September 30, 2019, ASB’s unused FHLB borrowing capacity was approximately $2.2 billion. As of September 30, 2019, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.9 billion, of which commitments 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 months ended September 30, 2019, net cash provided by ASB’s operating activities was $71 million. Net cash used during the same period by ASB’s investing activities was $65 million, primarily due to a net increase in loans of $258 million, additions to premises and equipment of $22 million, purchases of available-for-sale securities of $5 million, contributions to low income housing investments of $6 million and purchase of bank owned life insurance of $4 million, partly offset by the receipt of repayments from available-for-sale investment securities of $195 million, proceeds from the sale of investment securities 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 million. Net cash provided by financing activities during this period was $5 million, primarily due to increases in deposit liabilities of $37 million and a net increase in retail repurchase agreements of $26 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 million in common stock dividends to HEI (through ASB Hawaii).

For the nine months ended September 30, 2018, net cash provided by ASB’s operating activities was $76 million. Net cash used during the same period by ASB’s investing activities was $230 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 million, proceeds from the sale of commercial loans of $7 million and receipts of repayments from held-to-maturity investment securities of $4 million. Net cash provided by financing activities during this period was $79 million, primarily due to increases in deposit liabilities of $137 million and a net increase in retail repurchase agreements of $33 million, partly offset by a net decrease in FHLB advances of $50 million and $36 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, ASB was well-capitalized (minimum 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% (10.0%) and a Tier-1 leverage ratio of 8.8% (5.0%). As of December 31, 2018, ASB was well-capitalized with a common equity Tier-1 ratio of 12.8%, Tier-1 capital ratio of 12.8%, a Total capital ratio of 13.9% and a Tier-1 leverage ratio of 8.7%. 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 Form 10-K (pages 68 to 70).

ASB’s interest-rate risk sensitivity measures as of September 30, 2019 and December 31, 2018 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)
(basis points)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
+300	3.4	%	2.5	%	18.6	%	10.0	%
+200	2.6		1.9		14.7		8.1
+100	1.5		1.1		9.0		5.1
-100	(2.3	)	(2.3	)	(15.2	)	(11.0	)

ASB’s net interest income (NII) sensitivity profile was more asset sensitive as of September 30, 2019 compared to December 31, 2018. The decrease in long term market rates increased prepayment expectations, resulting in higher reinvestment into lower yielding fixed-rate mortgage and mortgage-backed investment portfolios, resulting in lower NII. The increased prepayment expectations also drove higher premium amortization on existing mortgage-backed securities, further reducing NII. Lastly, mix shifts from fixed rate loans to variable rate loans also resulted in increased asset sensitivity.

Economic value of equity (EVE) sensitivity increased as of September 30, 2019 compared to December 31, 2018 as the duration of assets shortened while the duration of liabilities lengthened. The downward shift in the yield curve led to faster prepayment expectations and shortened the durations of the fixed-rate mortgage and mortgage-backed investment portfolios, while lengthening core deposit duration.

The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indications of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet and management’s responses to the changes in interest rates.

Item 4. Controls and Procedures

HEI:

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Hawaiian Electric:

Disclosure Controls and Procedures

Hawaiian Electric maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by Hawaiian Electric in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to Hawaiian Electric’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of Hawaiian Electric’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Hawaiian Electric’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including Hawaiian Electric’s Chief Executive Officer and Chief Financial Officer, concluded that Hawaiian Electric’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The descriptions of legal proceedings (including judicial proceedings and proceedings before the PUC and environmental and other administrative agencies) in HEI’s and Hawaiian Electric’s 2018 Form 10-K (see “Part I. Item 3. Legal Proceedings” and proceedings referred to therein) and this Form 10-Q (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 3 and 4 of the Condensed Consolidated Financial Statements) are incorporated by reference in this Item 1. With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts typically maintained in confidence unless and until a resolution is achieved. Certain HEI subsidiaries (including Hawaiian Electric and its subsidiaries, ASB and Pacific Current and its subsidiaries) may also be involved in ordinary routine PUC proceedings, environmental proceedings and litigation incidental to their respective businesses.

Item 1A. Risk Factors

For information about Risk Factors, see pages 17 to 27 of HEI’s and Hawaiian Electric’s 2018 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” and the Condensed Consolidated Financial Statements herein. Also, see “Cautionary Note Regarding Forward-Looking Statements” on pages iv and v herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of HEI common shares were made on the open market during the third quarter of 2019 to satisfy the requirements of certain plans as follows:

ISSUER PURCHASES OF EQUITY SECURITIES



Period*	Total Number of Shares Purchased **	Average Price Paid per Share **	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 to 31, 2019	26,449	$44.29	—	NA
August 1 to 31, 2019	21,415	$44.39	—	NA
September 1 to 30, 2019	160,356	$44.60	—	NA

NA Not applicable.

* Trades (total number of shares purchased) are reflected in the month in which the order is placed.

** The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the DRIP, the HEIRSP and the ASB 401(k) Plan. Of the “Total number of shares purchased,” 20,709 of the 26,449 shares, 14,654 of the 21,415 shares and 138,551 of the 160,356 shares were purchased for the DRIP; 4,342 of the 26,449 shares, 5,934 of the 21,415 shares and 18,266 of the 160,356 shares were purchased for the HEIRSP; and the remainder was purchased for the ASB 401(k) Plan. The repurchased shares were issued for the accounts of the participants under registration statements registering the shares issued under these plans.

Item 6. Exhibits



HEI Exhibit 4.1		Amendment 2019-1 to the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries, effective as of August 1, 2019

HEI Exhibit 4.2		Amendment 2019- 2 to the Hawaiian Electric Industries Retirement Savings Plan, effective as of August 1, 2019

HEI Exhibit 31.1		Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer)

HEI Exhibit 31.2		Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer)

HEI Exhibit 32.1		HEI Certification Pursuant to 18 U.S.C. Section 1350

HEI Exhibit 101.INS		XBRL Instance Document - the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

HEI Exhibit 101.SCH		Inline XBRL Taxonomy Extension Schema Document

HEI Exhibit 101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

HEI Exhibit 101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

HEI Exhibit 101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

HEI Exhibit 101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

HEI Exhibit 104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Hawaiian Electric Exhibit 31.3		Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Alan M. Oshima (Hawaiian Electric Chief Executive Officer)

Hawaiian Electric Exhibit 31.4		Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer)

Hawaiian Electric Exhibit 32.2		Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.



HAWAIIAN ELECTRIC INDUSTRIES, INC.		HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant)		(Registrant)


By	/s/ Constance H. Lau	By	/s/ Alan M. Oshima
	Constance H. Lau		Alan M. Oshima
	President and Chief Executive Officer		President and Chief Executive Officer
	(Principal Executive Officer of HEI)		(Principal Executive Officer of Hawaiian Electric)


By	/s/ Gregory C. Hazelton	By	/s/ Tayne S. Y. Sekimura
	Gregory C. Hazelton		Tayne S. Y. Sekimura
	Executive Vice President, Chief Financial		Senior Vice President
	Officer and Treasurer		and Chief Financial Officer
	(Principal Financial Officer of HEI)		(Principal Financial Officer of Hawaiian Electric)


Date: November 1, 2019		Date: November 1, 2019