Leases

9 Months Ended

Sep. 30, 2019

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



	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