Leases

12 Months Ended

Dec. 31, 2020

Note 8 · Leases

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

The Company leases certain real estate and equipment for various terms under long-term operating lease agreements. The agreements expire at various dates through 2054 and provide for renewal options up to 10 years. The periods associated with the renewal options are excluded for the purpose of determining the lease term unless the exercise of the renewable option is reasonably certain. In the normal course of business, it is expected that many of these agreements will be replaced by similar agreements. Certain real estate leases require the Company to pay for operating expenses such as common area maintenance, real estate taxes and insurance, which are recognized as variable lease expense when incurred and are not included in the measurement of the lease liability.

Additionally, the Utilities contract with independent power producers to supply energy under long-term power purchase agreements. Certain PPAs are treated as operating leases under the new standard because the Company elected the practical expedient package under which prior conclusions about lease identification were not reassessed. The fixed capacity payments under the PPAs are included in the lease liability, while the variable lease payments (e.g., payments based on kWh) are excluded from the lease liability. Several as-available PPAs have variable-only payment terms based on production. For PPAs with no minimum lease payments, the Utilities do not recognize any lease liabilities or ROU assets, and the related costs are reported as variable lease costs. In the fourth quarter of 2020, PGV returned to service at a level providing limited output without firm capacity. Until PGV is fully operational, Hawaii Electric Light is not required to make any fixed capacity payments and is only obligated to make variable lease payments. Therefore, as of December 31, 2020, Hawaii Electric Light did not recognize any lease liability or ROU asset for the PGV PPA.

In August 2019, Hawaiian Electric entered into a lease agreement for a total office space of approximately 195,000 square feet in downtown Honolulu to lower costs and bring together office workers currently in separate leased buildings. The lease consists of two different phases with commencement dates of January 2020 and January 2021, respectively, and is an operating

lease for a term of 12 years with various options to extend up to 10 years. Annual base rent expense for each phase is approximately $1.9 million and $1.7 million, respectively, and the operating lease liability recorded upon commencement of each phase was $21 million and $19 million, respectively. In addition to the annual base rent payments that are included in the lease liability, there are additional payments for operating expenses, which are recognized as variable lease cost when incurred. These payments are related to operating expenses, such as common area maintenance, various taxes and insurance. Under the terms of the lease, Hawaiian Electric is entitled to receive up to $5.0 million and $4.6 million in reimbursements for various office improvements for each phase, respectively. The amounts are to be included as a reduction to the initial measurement of the ROU asset on each respective commencement date, and will be subsequently adjusted if the actual reimbursements are different from the initial amounts previously recognized. As of December 31, 2020 and 2019, total amount of office improvements to be reimbursed by the lessor for each phase was $2.6 million and nil, respectively.

In December 31, 2020, Hawaiian Electric entered into an agreement with an unrelated party to sublease out approximately 64,000 square feet of the downtown Honolulu office space commencing in January 2021. The sublease is an operating lease for six and a half years with an option to extend the term for an additional two years. Estimated base rent revenue is approximately $8.3 million for the entire lease term. In addition to the base rent, Hawaiian Electric will also collect from the sublessee its proportionate share of all operating expenses, utilities, and taxes, which will be recognized as an additional rent revenue.

The Utilities’ lease payments for each operating lease agreement were discounted using its estimated unsecured borrowing rates for the appropriate term, reduced for the estimated impact of collateral, which is a reduction of approximately 25 basis points. ASB’s lease payments for each operating lease agreement were discounted using Federal Home Loan Bank of Des Moines (FHLB) fixed rate advance rates, which are collateralized, for the appropriate term. The FHLB is ASB’s primary wholesale funding source and can provide collateralized borrowing rates for various terms starting at overnight borrowings to 30-year borrowing terms.

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


	HEI consolidated									Hawaiian Electric consolidated
Year ended December 31, 2020	Other leases			PPAs classified as leases			Total			Other leases			PPAs classified as leases			Total
(dollars in thousands)
Operating lease cost	$	11,201		$	63,319		$	74,520		$	6,022		$	63,319		$	69,341

Variable lease cost	12,765			217,173			229,938			9,842			217,173			227,015
Total lease cost	$	23,966		$	280,492		$	304,458		$	15,864		$	280,492		$	296,356
Other information
Cash paid for amounts included in the measurement of lease liabilities—Operating cash flows from operating leases	$	10,783		$	60,801		$	71,584		$	6,223		$	60,801		$	67,024
Weighted-average remaining lease term—operating leases (in years)	8.9			1.8			4.4			10.1			1.8			3.8
Weighted-average discount rate—operating leases	2.87		%	4.08		%	3.61		%	3.20		%	4.08		%	3.84		%


	HEI consolidated									Hawaiian Electric consolidated
Year ended December 31, 2019	Other leases			PPAs classified as leases			Total			Other leases			PPAs classified as leases			Total
(dollars in thousands)
Operating lease cost	$	10,265		$	63,319		$	73,584		$	4,955		$	63,319		$	68,274

Variable lease cost	13,034			192,138			205,172			10,272			192,138			202,410
Total lease cost	$	23,299		$	255,457		$	278,756		$	15,227		$	255,457		$	270,684
Other information
Cash paid for amounts included in the measurement of lease liabilities—Operating cash flows from operating leases	$	10,447		$	62,594		$	73,041		$	5,768		$	62,594		$	68,362
Weighted-average remaining lease term—operating leases (in years)	6.5			2.8			3.5			4.5			2.8			2.9
Weighted-average discount rate—operating leases	3.50		%	4.08		%	3.96		%	4.11		%	4.08		%	4.08		%

The following table summarizes the maturity of our operating lease liabilities as of December 31, 2020:


	HEI consolidated						Hawaiian Electric consolidated
(in millions)	Other leases		PPAs classified as leases		Total		Other leases		PPAs classified as leases		Total
2021	$	11	$	63	$	74	$	6	$	63	$	69
2022	9		42		51		4		42		46
2023	8		—		8		4		—		4
2024	7		—		7		3		—		3
2025	5		—		5		3		—		3
Thereafter	27		—		27		19		—		19
Total lease payments	67		105		172		39		105		144
Less: Imputed interest	(8)		(4)		(12)		(6)		(4)		(10)
Total present value of lease payments1	$	59	$	101	$	160	$	33	$	101	$	134

1The fixed capacity payment related to the existing PPA with PGV, which will expire on December 31, 2027, is not included as a lease liability as of December 31, 2020. While the facility returned to service in the fourth quarter of 2020, it has been operating at a level providing only limited output, which does not provide firm capacity and does not obligate the Utility to make firm capacity payments. The contractual annual capacity payment is approximately $7 million. The lease liability will be remeasured when PGV returns to operating with firm capacity, at which time contractual firm capacity payments are reestablished.